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Paul Zimmerman
pzimmerman@mrllp.com
310.299.5500

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OTAs and the Back-Tax Parade

On Wednesday, August 13, 2015, the Montana Supreme Court issued a ruling in Department of Revenue v. Priceline, holding that online travel agencies (“OTAs”)—including Priceline, Expedia, Travelocity, Orbitz, Hotels.com and others—are responsible for paying the state’s sales tax on any fees collected from customers. The court agreed with the OTAs arguments, however, that they are not responsible for paying the state’s 4% lodging tax. The court came to this conclusion because the OTAs are not owners or operators of a facility and, as such, the OTA fees are not taxable accommodation charges. More troubling for the OTAs, the court’s ruling is retroactive and requires payment of back taxes to November 2010. While the OTAs argued that applying the ruling retroactively was unfair, the court reasoned that they were officially on notice of the Department’s intent to collect such taxes beginning on November 8, 2010, the official date the lawsuit was filed.

The Montana court’s ruling reflects a clear trend that OTAs are now being held responsible for unpaid taxes in connection with their booking activities. In March 2015, the Hawaii Supreme Court ruled that OTAs were liable for paying tens of millions of dollars in back-owing transient accommodation taxes (“TAT”) and general excise taxes (similar to sales tax) in the booking of Hawaii hotel rooms; and applied the ruling retroactively to 2000. The Hawaii high court observed that, despite not having a physical presence in Hawaii, the OTAs “were not passive sellers of services to Hawaii consumers.” Similarly, in July 2015, a District of Columbia appellate court ruled that OTAs were obligated to pay the city’s 14.5% sales tax because they were engaging in the “sale or charge” of hotel rooms; a liability expected to reach in excess of $60 million. OTAs are also currently litigating over whether they are liable for paying back-due hotel taxes (dating to 1999) claimed by the government-owned Puerto Rico Tourism Company. 

It remains to be seen what impact such massive liabilities will have on the OTA industry, and whether consumer-use of those services will change.  In any event, OTAs are clearly under attack, and given the recent rulings, they likely can expect even more lawsuits. 

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.