News and Insights

California Supreme Court Rules on San Diego Online Travel Company Case

Tax Development Dec 15, 2016

On December 12, 2016, the California Supreme Court provided a thorough analysis of San Diego’s ordinance governing the taxability of transient lodging as it relates to online travel companies (OTCs). Under San Diego’s ordinance, the obligation to collect the city’s transient tax rests with “operators” (e.g., hotel proprietors). In re Transient Occupancy Tax Cases1 centers around whether OTCs qualify as “operators” within the meaning of the ordinance and whether they are required to collect the transient occupancy tax on the markup retained by them above the wholesale amount they agreed to remit to the hotels. 

The court ruled that San Diego’s ordinance imposes tax on “the [lodging] Operator,” and subjects the operator alone to the assessment of tax. The court added that the ordinance did not appear to contemplate that the city could levy tax against an intermediary entity like an OTC.

The court identified the OTCs’ business under assessment as a “merchant model” transaction, so termed because the OTC takes the place of the merchant almost entirely. The operator of the hotel is liable for tax on the wholesale cost of the room, but the OTCs handle all financial transactions related to the hotel reservations and are even listed as the merchant on the customer’s credit card receipt. However, the court notes that at no time do OTCs “own, operate or manage hotels, maintain an inventory of rooms, or possess or obtain the right to occupy any rooms.”2 OTCs even collect the transient occupancy tax (on the wholesale price) and transfer the tax and lodging cost to the hotel, which remits the tax.

The court focuses on the language of the San Diego ordinance and reiterates its unwillingness to expand the tax base beyond a plain reading of the text. San Diego made the argument that the OTCs should be considered agents of the hotel operations and, therefore, liable for tax on their markup charges under an agency theory. The court found this unpersuasive: “That the OTCs act as hotels’ agents or intermediaries for the limited purpose of charging and collecting the rent, however, does not subject the OTCs to assessment as an operator.”3

Ultimately, San Diego’s various arguments were unsuccessful, and the court was not willing to move beyond the language of the ordinance placing the liability for tax on the operator and concluding that OTCs do not qualify as operators within the plain meaning of the ordinance.

1 In re Transient Occupancy Tax Cases, California Supreme Court, No. S218400 (December 12, 2016).
2 In re Transient Occupancy Tax Cases, California Supreme Court, No. S218400 (December 12, 2016).
3 In re Transient Occupancy Tax Cases, California Supreme Court, No. S218400 (December 12, 2016).