Online travel companies continue to battle over sales tax collection
Hotel occupancy taxes ruled not due on online markups in North Carolina
Online travel companies (OTCs) won another important sales tax victory last month in North Carolina, where a state appeals court rejected efforts by four counties to assess occupancy taxes on the fees collected for Internet-based reservations of hotel rooms. The OTCs obtain rooms for the hotels at a discount and sell them to customers at a higher rate. The counties argued the OTCs should then pay occupancy taxes on their higher rate. The courts disagreed.
The North Carolina legislature allows counties to assess occupancy taxes through local ordinance. But the counties may only tax those transactions already subject to the state’s sales tax. The four counties in this case all impose occupancy taxes: 6% in Wake County, 5% in Dare County, 4% in Buncombe County and 8% in Mecklenburg County. All four counties filed separate lawsuits against a number of OTCs seeking judgments the companies were required to collect and remit occupancy taxes. The four lawsuits were eventually consolidated and heard before a state superior court judge, who granted the defendants’ motion to dismiss in 2011.
In a decision issued August 19th of this year, a three-judge panel of the North Carolina Court of Appeals upheld the superior court’s dismissal. Judge Wanda Bryant, writing for the panel, said sales and occupancy taxes only applied to “retailers” or a “similar type business.” The counties conceded the OTCs were not retailers. Therefore, the question was whether they constituted “similar type” businesses. Bryant said they were not. In this context, the “type” of business was anyone who operated “hotels, motels, tourist homes, or tourist camps,” not companies that merely “arrange” the rental of such facilities via the Internet. The counties argued the court should read the definition of “similar” business more “broadly,” but Bryant said that would “ignore” the clear language of the state’s sales tax law.
The appeals court also rejected the argument, principally raised in Mecklenburg County’s complaint, that the OTCs had a duty under their contracts with individual hotels to collect and remit sales tax on the marked-up prices charged to online customers. Bryant said the trial court properly granted summary judgment to the OTCs on this point, noting the counties failed to identify any North Carolina statute or binding case law on this point. Unlike other states, Bryant said, North Carolina does not recognize a general duty to remit sales tax based on “contractual undertaking.”
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.