Online Travel Companies found to owe back sales taxes to D.C.
Online travel companies (OTCs) faced another setback last month as the District of Columbia’s highest court held Expedia and its competitors owed back sales taxes dating to 1998 on their “retail margins” for hotel rooms sold in the district. Washington, D.C. assesses a 14.5% sales tax on the “gross receipts” charged for the sale of lodgings to “furnished to transients.” The term “gross receipts” refers to the “sales price” of the hotel room, which is “the total amount paid by a purchaser to a vendor as consideration for a retail sale.”
OTCs typically function as middlemen. A traveler books a room through an online travel website and pays the OTC for the room. The OTC then remits a lower rate back to the hotel. The difference is the OTC’s “retail margin” or profit.
The OTC also assesses a separate “tax recovery charge” to the traveler. This recovery charge includes both the OTC’s service fees and the local sales tax owed by the hotel on its portion of the sales price. For example, let’s say a traveler books a hotel room in Washington through an OTC for $150 per night. If the hotel receives $100 of that, the OTC’s tax recovery charge would include $14.50 to cover the District’s sales tax, plus any additional service fees.
D.C. argued it was entitled to sales tax on the entire price paid by the traveler, including the OTC’s retail margin. The OTCs disagreed, maintaining they did not “furnish” hotel rooms, as required by D.C.’s sales tax law at the time. In 2011, D.C. amended its laws to expressly extend the sales tax to OTCs, so the dispute here is only whether the companies owe back sales taxes for pre-2011 sales.
The D.C. Court of Appeals found that the OTCs must pay thirteen years’ worth of back sales taxes
The D.C. Court of Appeals sided with the district. In a July 23 opinion, a three-judge panel held “the structure and purpose of the District’s sales tax law evince Congress’s intent to tax the full amount that customers pay for hotel rooms in the District of Columbia.” (Although the district is self-governing, Congress retains constitutional authority to legislate for the city.) And while the original district sales tax law – adopted in 1949 – could not have imagined a world where travelers purchased rooms over the internet, Congress “did know what a middleman was,” and the legislative history demonstrated legislators always intended to tax the full price paid by travelers, not just the portion remitted to the hotel.
The court did, however, side with the OTCs on one issue. D.C. argued it was also entitled to sales tax on the OTC’s recovery charges – that is, the reimbursements paid to the hotel for its share of the sales tax. D.C. argued this charge was subject to tax because the OTC did not separately state the sales tax paid to its customers. Instead, the recovery fee combined the sales tax paid and the OTC’s own service charges. The court said the district was nitpicking here, and the OTCs were “substantially compliant” with the law’s separate-statement requirements.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info