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Online Travel Companies Found Liable for D.C. Sales Tax, Again


 Online travel companies owe D.C. millions in back sales tax.

Online travel companies must pay the District of Columbia more than $60 million in back sales tax, plus interest. The D.C. Superior Court determined the online travel companies (OTCs) were liable for the unpaid sales tax in 2012, and yesterday, that judgment was affirmed by the D.C. Court of Appeals.

For years, online travel companies have maintained “that the only taxable transaction under the statute is the one that occurs between the customer and the hotel—one in which the OTC participates only indirectly—and therefore sales tax is not due on the retail margins the OTC retains for itself.” The District of Columbia considers OTCs to be “’vendors’ liable for sales tax” and therefore has been seeking “to collect tax on the gross receipts of the entire transaction that occurs between the OTC and its customer.”

Nearly three years ago, the Superior Court ruled in favor of the District, determining that the OTCs owed sales tax, and the OTCs appealed. The D.C. court of Appeals affirmed the earlier judgment that the OTCs are liable for sales tax and then moved on to determine “the extent of that tax liability:”

Are the OTCs “liable for the tax on the entire amount they collect from their customers, including the ‘sales tax reimbursement’ amount that the OTCs have been passing on to the hotels, which the hotels in turn, remit to the District as the sales tax due on the amount the hotels earn on the deal”?

Here, both the Superior Court (in 2012) and the Court of Appeals found in favor of the online travel companies: they are not liable for sales tax on the sales tax reimbursement.

Snapshot

As explained in the court opinion, a payment for typical OTC transaction proceeds as follows:

When charging the customer’s credit card, the OTC collects an amount that consists of the net room rate that it will later forward to the hotel, a tax recovery charge, and a retail margin that the OTC keeps as profit. The tax recovery charge—which represents the sales tax due on the net room rate received by the hotel—is also forwarded to the hotel, which then remits it to the District. The District thus receives the sales tax due on the net rate paid to the hotel, but does not receive sales tax on the OTCs’ retail margins—that is, on the difference between (1) the total charges that the customer pays to the OTC and (2) the lower, net rate that the OTC forwards to the hotel.

When it charges the customer, the OTC does not isolate the “sales tax” as a separate amount, but instead calls the sales tax a “tax recovery charge,” which it combines with a “service fee.” As a result, the customer does not know how much sales tax has been paid on the transaction.

Sales tax

Under D.C. law, a 14.5% sales tax applies to the gross receipts (defined as “the total amount of the sales price of the retail sales of vendors….”) of the following:

The sale or charge for any room or rooms, lodgings, or accommodations furnished to transients by any hotel, inn, tourist camp, tourist cabin, or any other place in which rooms, lodgings, or accommodations are regularly furnished to transients for a consideration. [D.C. Code § 47-2001 (n)(1)(C)]

Since this matter was brought to court, the D.C. Council has amended the law as follows:

The sale or charge, to include net charges and additional charges, for any room or rooms, lodgings, or accommodations furnished to transients by any hotel, room remarketer, inn, tourist camp, tourist cabin, or any other place in which rooms, lodgings, or accommodations are regularly furnished to transients for a consideration. [Emphasis added.]

The D.C. Council also amended tax provisions § 47- 2002 (a)(2)(B) and § 47-2002.02 (1)(B) in order to clarify the following:

If the occupancy of a room or rooms, lodgings, or accommodations is reserved, booked, or otherwise arranged for by a room remarketer, the tax imposed by this paragraph shall be determined based on the net charges and additional charges received by the room remarketer.

Conclusion

The opinion reads: “We hold that the OTCs, in their merchant model transactions, were engaging in ‘the sale or charge for any room . . . furnished to transients by any hotel’ within the meaning of D.C. Code § 47-2001 (n)(1)(C), and are therefore vendors liable for the District sales tax.”

Judge Corinne Beckwith wrote in the opinion, “The meaning of the statute is clear: by imposing tax on the ‘sale or charge . . . for any room . . . furnished to transients by any hotel,’ the sales tax statute is taxing the sales transaction by which a customer purchases a hotel room in the District of Columbia. The OTCs’ retail margins are a part of that sale” (Highlighted by the National Law Journal).

Yet since there is no provision for subjecting to additional taxation a tax amount that is collected but not separately stated, the Court of Appeals found “no basis for the District’s contention that the tax recovery charge should be included in the calculation of the ‘sales price.’”

Read the full opinion.

D.C. Attorney General Karl A. Racine issued the following statement regarding the ruling:

“This is a huge victory for the District’s taxpayers, and it ensures that online travel companies have to follow the same rules as everyone else.”

The final word

Lodging tax compliance is extremely complex. The easiest way to handle hotel taxes is to implement automated sales tax software. Learn more.

photo credit: Hotel e relax via photopin (license)


Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.