Tax News

CCH (cch.taxgroup.com) reports:

Online travel companies (OTCs) did not underpay North Carolina local occupancy taxes because they are not hotel operators for purposes of the state sales tax. The state sales tax is applicable only to operators of hotels and the local occupancy tax may be assessed only against gross receipts as determined from the standpoint of an operating hotel.
Pitt County levies an occupancy tax on the gross receipts derived from the rental in the county of any room, lodging or similar accommodation subject to sales tax under state law. State law, in turn, imposes its sales tax upon retailers for the privilege of selling, and operators of hotels and motels are considered "retailers" for purposes of the sales tax. The OTCs pay participating hotels a certain amount (a discount price) when they find people to rent rooms and consumers then reserve the rooms online for a marked-up price that includes applicable taxes. The OTCs, as trustees for the hotels, collect and pass on taxes to the hotels for remittance to the county. The OTCs, however, after collecting the taxes on the marked-up price, only pass on to the hotels the amount of taxes that are imposed on the discount price and they keep the difference. Pitt County and others brought a putative class action suit that alleged the companies had violated the occupancy tax by underpaying the tax due. The OTCs argued that the local occupancy tax is levied only upon hotel operators and that because they do not operate hotels, it does not require them to remit any more than they do. The county responded that the tax is levied not just on hotel operators but upon the gross receipts derived from all room rentals in the county, including those marked-up resales sold by the online travel companies.
The U.S. District Court, however, found that although the local occupancy tax is imposed upon certain amounts (gross receipts), the state sales tax is imposed upon certain classes of retailers, including operators of hotels and similar types of businesses. As such, the scope of the local occupancy tax is expressly circumscribed by the state sales tax. The Court noted that the state had not intervened in the action and had not asserted that the online travel companies should be considered operators for purposes of the state sales tax. The Court also noted that counties may only tax to the extent that the state allows them to do so. Had the occupancy tax extended to the conduct of the OTC's, the state sales tax provision that applies to operators of hotels must also have applied to the marked-up price charged by the companies. The Court observed that it was unlikely that the state had either not realized as much or had not collected the taxes.
In addition, the local occupancy tax applies only to the hotel's gross receipts (the room price charged by the hotels themselves). The OTCs are required to collect and remit taxes only on the discount price they charge the participating hotels and not the marked-up price that the consumers pay to the OTCs. Since the online travel companies had not underpaid their local occupancy taxes and there was no legal injury to the county, the county had no standing to file suit, the Court lacked jurisdiction over the county's claim and the county's suit was dismissed.
Pitt County v. Hotels.Com L.P. , United States District Court for the Eastern District of North Carolina, Eastern Division, No. 4:06-CV-30-BO, August 12, 2007, ¶202-384
Other References:
Explanations at ¶60-480