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Counties lose tax fight against online travel companies

Four counties in North Carolina have hit another roadblock in a multimillion-dollar tax fight against 11 major online hotel booking companies, including Expedia, Orbitz, Priceline, Travelocity and suitcase

The North Carolina Court of Appeals affirmed on Aug. 19 a lower court ruling that held the websites were not required to pay occupancy taxes to the counties of Buncombe, Dare, Mecklenburg and Wake under a now outdated version of the state’s tax laws.

Each of the counties claimed that it was owed more than $1 million in annual unpaid taxes. But the unanimous appellate court determined that the websites were not acting as hotel operators or retailers under the law that was in effect when the counties filed suit between 2006 and 2008.

In 2010, the legislature broadened the law’s definition of retailers to capture online booking and travel companies, requiring them to collect and hand over occupancy taxes to the counties where they operate. The change took effect in 2011.

The Washington-based Travel Technology Association, which represents some of the biggest players in the online travel industry, including those involved in the legal fight with the four counties, said the recent appellate decision “sends a resounding message.”

“This is a message that has been affirmed by dozens of courts across the nation over the last couple years,” said Philip Minardi, a spokesman for the Washington-based association. “Online travel companies don’t buy hotel rooms in bulk and then sell them off. They’re not retailers. They’re service providers and as such they shouldn’t be paying occupancy taxes.”

But they are paying. Last year, Orbitz and three other similar websites settled a suit against Durham and the state Department of Revenue over the constitutionality of the amendment that targeted online travel companies.

Details of the deal are confidential, according to attorneys for both sides. But Marie Inserra, an assistant attorney for Durham County, said the county is collecting occupancy taxes from the hotel booking websites.

“If you take a look at this [issue] jurisdictionally you’ll find that a lot of states have reached resolutions with these companies and they have achieved compliance with the occupancy tax,” she added.

No retailer, no tax

The four counties that sued for back taxes under the old version of the state’s tax law argued on appeal that online travel companies should have to pay occupancy taxes on the service fees that they charge.

The companies negotiate discount rates with hotels then charge consumers a higher price. The service fee accounts for the difference between the discount rate and what the consumer pays.

But appellate Judge Wanda Bryant affirmed an earlier opinion from state Business Court Judge Calvin Murphy, who determined that the websites were not acting as hotel operators and were exempt from paying taxes on room rentals.

The counties tried to convince the appellate court that the gross receipts that the travel websites collected for hotel booking services were subject to the counties’ occupancy tax.

While acknowledging that the websites were not hotel operators, the counties urged the appellate court to find that they were similar to hoteliers under a broad interpretation of the law.

Bryant rejected the counties’ argument, finding that “such an analysis would ignore the requirements [of the law] that defendants be operators of ‘similar type businesses.’ ”

She added later in the opinion, “Whether the gross receipts derived from the rentals in which defendants engage are subject to the occupancy tax hinges on whether defendants are ‘retailers’ within the meaning of” the law.

Because the websites do not qualify as retailers, they are not on the hook for occupancy taxes, Bryant concluded. Judges Linda McGee and Donna Stroud concurred with her opinion.

The ruling is a win, albeit a limited one, for the online travel industry, which views occupancy taxes as a major threat. Minardi, the travel tech group spokesman, said forcing websites such as Expedia and Orbitz to pay occupancy taxes also could backfire on the counties and states that want to collect the tax.

“These companies are, in a larger sense, marketers. They market hotels to the world,” he said. “If communities impose these taxes then these companies don’t have as much to spend on advertising to bring travelers and tourists to those communities.”

Follow Phillip Bantz on Twitter @NCLWBantz

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