Earlier this week, the Georgia Supreme Court ruled in favor of the City of Columbus and against hotels.com, an online travel company (“OTCs”) that charges customers one rate for booking a hotel room but pays local governments a lodging tax based on cheaper, wholesale room rates.  The Court’s finding mirrors its decision in a case decided in June against Expedia.com.  In both instances, the Court held that the tax for which the OTCs were liable should be based on the retail room rate paid by their customers.

OTCs contract with local hotels to provide rooms for a discounted or wholesale rate.  When a customer books a room online, the OTC charges the customer a “marked-up” rate along with taxes and service fees.  Under Georgia law, municipalities may impose hotel occupancy and excise taxes on the furnishing of any room, lodging, or accommodation.  The Court noted that state law allows cities to impose a tax on the lodging charges actually collected. 

The high court’s decisions are binding across Georgia, so the two Columbus cases could affect other suits filed by governments seeking to collect the proper amount of lodging taxes from OTCs.  The cases have been remanded to the lower courts to determine how much money the online services owe in back taxes and penalties. 

Importantly, numerous other cities – including Houston, San Antonio, and Miami have sued or initiated administrative proceedings against OTCs, asserting that they owe back taxes on their price mark-ups.  While many cases have yet to be fully adjudicated, one other recent case yielded much the same verdict as Columbus’ suit against hotels.com.  In February, multiple OTCs, including Orbitz and Travelocity, were ordered to pay the city of Anaheim, California, $21 million in back taxes, fees and penalties related to the payment of hotel occupancy taxes.

Rulings such as these have motivated OTCs to seek enactment of federal legislation that would ban state and local taxation of hotel room rentals when booked by such a company.  However, as these rulings demonstrate, there is no justification for limiting the base for such a tax to the wholesale price of a hotel room, let alone eliminating taxation altogether.  Hotel taxes are consumption taxes, which should be measured by the value of the consumption to the customer.  Therefore, the tax should be imposed on the retail amount.  For more on this subject and on the OTC’s push for federal legislation, see this helpful report from the Center on Budget and Policy Priorities.

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