Mountain Law: Breckenridge loses effort (for now) to make online travel companies pay hotel taxes (column)
March 13, 2018
The Colorado Court of Appeals recently affirmed a trial court decision finding that online travel companies (OTCs) are not required to collect and remit taxes to the town of Breckenridge on hotel rooms they book through their websites. Back in 2016, Breckenridge filed a suit styled Town of Breckenridge v. Egencia, LLC, against 16 OTCs that included well-known names like Expedia, Hotels.com, Hotwire, Priceline and Orbitz. Breckenridge's suit was part of a nationwide trend where local governments in at least 34 states have filed suits against OTCs seeking to apply hotel taxes to OTC services. The cases have gone both ways, with the majority coming out in favor of OTCs. However, one notable bad result for OTCs was a decision of the Colorado Supreme Court last year in the case of City and County of Denver v. Expedia, Inc., requiring them to pay millions in back taxes to Denver.
The OTCs named in Breckenridge's suit follow the same business model. Each contracts with a hotel to offer rooms to the OTC at a discounted rate representing a fixed percentage of what the hotel would charge travelers for booking the rooms directly. The OTC then lists the hotel on its website and allows customers to book reservations for that hotel. While the OTC facilitates the transaction, it does not book rooms itself. Rather, each reservation is ultimately issued by the hotel after the OTC communicates with the hotel's central reservation system. If a hotel accepts a reservation, it provides the OTC with a reservation number that the OTC forwards to the customer and the OTC then processes the customer's payment. When a customer arrives at the hotel, the hotel registers the customer as a guest and assigns a room. After the customer concludes the stay, the OTC transfers payment to the hotel, which then pays tax to Breckenridge.
Breckenridge has a 3.4 percent accommodation tax plus a 2.5 percent sales tax. The issue is that the hotels only pay taxes on the discounted rate they receive from OTCs, not the full rate paid by customers. If taxes were paid on the higher rate, there would be a lot of back taxes owed. Breckenridge was trying to collect those substantial back taxes in the suit.
The courts did not decide the merits of the sales tax issue because they concluded that Breckenridge had failed to follow its own administrative procedures as a prerequisite to the suit. Breckenridge could theoretically jump through the right procedural hoops and file a new suit on that issue.
On the accommodation tax issue, Breckenridge's ordinance generally imposes the tax on anyone who furnishes accommodation for lease or rental. It does not define operative terms like "leasing," "renting" or "furnishing." The appeals court turned to the dictionary definitions of these terms to interpret the ordinance. It concluded that a person who rents or leases or furnishes for rent to another is one who has a possessory interest in the property and the legal ability to supply the property. However, the court found those definitions do not apply to the OTCs because they have no right to possess the hotel rooms. The court concluded that OTCs are essentially brokers who momentarily acquire the right to use a room as an intermediary, which is immediately passed along to the customer when the hotel confirms the reservation. The OTCs themselves do not supply the property and therefore have no obligation to pay the tax.
Breckenridge argued that the court should follow the recent Denver decision. However, the portion of that opinion relied on by Breckenridge was a non-binding concurring opinion by one of the justices. Moreover, the court here thought there were important differences between the Denver and Breckenridge ordinances such that they were apples and oranges.
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What will happen next? Perhaps Breckenridge will ask the Supreme Court to hear its case as well. Otherwise, Breckenridge could potentially amend its ordinance to specifically require the OTCs to collect and remit the taxes, make sure it follows all the correct procedures, and try again. This would probably only work to collect new tax, not back taxes. Breckenridge might try to convince other municipalities to adopt identical ordinances so they can band together in court. You can bet that OTCs are lobbying Congress for a federal statute that would prevent such local taxes.
Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.
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