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In re Transient Occupancy Tax Cases

California Court of Appeals, Second District, Second Division

March 27, 2014



APPEAL from a judgment of the Superior Court of Los Angeles County No. JCCP 4472. Elihu M. Berle, Judge.

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[Copyrighted Material Omitted]

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Kiesel Boucher Larson, William L. Larson; Baron & Budd, Laura J. Baughman, Thomas M. Sims; McKool Smith, Steven D. Wolens, Gary Cruciani; Daniel F. Bamberg and Jon E. Taylor, Deputy City Attorneys, for Plaintiff and Appellant City of San Diego.

Skadden, Arps, Slate, Meagher & Flom, Darrel J. Hieber, Stacy R. Horth-Neubert, and Daniel M. Rygorsky for Defendants and Respondents Incorporated and Travel web LLC.

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Jones Day, Brian D. Hershman and Erica L. Reilley for Defendants and Respondents Expedia, Inc., Hotwire, Inc.,, L.R, and GP, LLC.

K&L Gates and Nathaniel S. Currall for Defendants and Respondents, L.R, and, LLC.

McDermott Will & Emery and Jeffrey A. Rossman for Defendants and Respondents Orbitz, LLC, and



This action is one of the coordinated “Transient Occupancy Tax Cases, ” in which certain cities have sought to impose liability on online travel companies (OTCs) for transient occupancy tax (TOT).[1] The superior court ruled that under the plain language of appellant City of San Diego’s (City) TOT ordinance, the OTCs have no TOT obligations or liability. We affirm.


The City’s TOT ordinance

The City’s TOT ordinance imposes a “tax on Transients.” (San Diego Mun. Code, § 35.0101, subd. (a).)[2] The language of the tax imposition ordinance reads: “For the privilege of Occupancy in any Hotel located in The City of San Diego, each Transient is subject to and shall pay a tax in the amount of six percent (6%) of the Rent charged by the Operator.” (§ 35.0103.)[3]

A transient is defined as a person who “exercises Occupancy, or is entitled to Occupancy, ... for a period of less than one (1) month.” (§ 35.0102.)

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“Rent” is defined as: “[T]he total consideration charged to a Transient as shown on the guest receipt for the Occupancy of a room, or portion thereof, in a Hotel, or a space in a Recreational Vehicle Park or Campground. ‘Rent’ includes charges for utility and sewer hookups, equipment, (such as rollaway beds, cribs and television sets, and similar items), and in-room services (such as movies and other services not subject to California taxes), valued in money, whether received or to be received in money, goods, labor, or otherwise. ‘Rent’ includes all receipts, cash, credits, property, and services of any kind or nature without any deduction therefrom.” (§35.0102.)

“Operator” is defined as “the Person who is the proprietor of the Hotel... whether in the capacity of owner, lessee, sublessee, mortgagee in possession, licensee, or any other capacity. ‘Operator’ includes a managing agent, a resident manager, or a resident agent, of any type or character, other than an employee without management responsibility.” (§ 35.0102.)

Under the terms of the ordinance, the operator of the hotel is responsible for collecting the tax. Section 35.0112, subdivision (a) provides that “[e]ach Operator shall collect the tax imposed... to the same extent and at the same time as the Rent is collected from every Transient.” If the Operator fails to collect the tax for any reason, “the City shall require the Operator to pay the tax.” (§ 35.0112, subd. (b).) Thus the hotel operator is responsible not only for collecting the tax, but for paying any tax that it failed to collect.

The ordinance further makes it clear that the tax obligations are only imposed on transients and hotel operators. The TOT “constitutes a debt owed by each Transient to the City which is extinguished only by payment to the Operator or to the City.” (§ 35.0110, subd. (a).) There is no provision imposing any tax liability on any entity other than the hotel operator or the transient.

The OTCs

OTCs are companies that publish comparative information about airlines, hotels and rental car companies on their websites. They allow consumers to book reservations with these different travel providers. OTCs are not hotel operators. (See In re Transient Occupancy Tax Cases (Nov. 1, 2012, B230457) [nonpub. opn.].)[4]

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When facilitating hotel room sales, the OTCs employ several different room-sale models. At issue here is what the parties refer to as the “merchant model” or “merchant transactions.” Under the merchant model, the OTCs contract with hotels for the right to advertise and sell (or rent) rooms to the general public. “[T]he OTCs handle all financial transactions related to the hotel reservations, and... become the ‘merchant of record.’” “In the OTC-hotel relationship, the price charged to the OTCs for the rooms is... the ‘wholesale’ price.” The OTCs then offer the rooms to the public at retail prices, which are set by the OTCs and are higher than the wholesale prices. The OTC’s charge to a customer includes a “Tax Recovery Charge, ” which represents the OTC’s estimate of what the hotel will have to pay in TOT based on the wholesale price of the room as charged by the hotel to the OTC. The customer’s payment is made to the OTC, not the hotel.

Once the hotel reservation has been made and paid for, the OTC provides customer service up until the time that the consumer checks into the hotel. The OTC provides a receipt to the transient, which includes a room rate and separately delineated taxes and fees. The hotel then sends out a bill to the OTC for the wholesale price of the room and the TOT required to be paid by the hotel based on the wholesale price of the room. The OTC remits the charged amount to the hotel, and the hotel, in turn, remits the TOT to the City. The OTC retains its fees.


Audit proceedings and administrative hearing

In October 2007, the City began TOT audits of the OTCs and later issued TOT assessments against the OTCs, which each OTC timely appealed. The City selected a hearing officer to conduct a consolidated administrative hearing to determine whether each OTC had TOT obligations and liability, and if so, the amount of unpaid taxes and penalties owed. The hearing was held in early 2010, and in May 2010 the hearing officer issued a decision finding that the OTCs owed TOT on their service charges in merchant transactions.

The hearing officer explained that “with respect to [the] essential function of the TOT administrative process, the OTCs are the Operator, or they share Ordinance obligations with the Operator, or they are the agent for the

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Operator in providing the receipt which reflects the price of the room, the taxes being charged, and the OTC service fee.” The hearing officer concluded the OTCs are responsible under the ordinance ...

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