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Municipalities' Tax of Online Travel Companies Upheld
by John C. (Jack) Shafer, III

October 3, 2018 - The Arizona Court of Appeals (Div. 1) recently held that online travel companies ("OTCs") are subject to municipal privilege taxes on their mark up of hotel room costs billed to the OTCs' customers. Specifically, the court addressed whether the OTCs are statutory "brokers" under the Model City Tax Code ("MCTC") for hotels physically existing within each taxing jurisdiction* despite not owning the hotel real property. The court's holding is composed of three parts.
      1. The Court determined that OTCs do act as brokers for the benefit of the hotels, and OTCs are therefore statutory "persons" subject to tax on their gross receipts of renting hotel rooms to the extent taxes are not already paid by the hotel on the same transactions. This portion of the decision upheld the ruling from the Tax Court.

      2. The Court determined that OTCs are not subject to the additional tax on transient lodging (commonly referred to as 'bed tax') under MCTC Sec. -447.** Applying established standards of tax statutory construction, the Court determined that the cities' use of the word "hotel" limited the tax to statutory hotels engaged in that business classification, versus the use of the word "person" in other privilege tax classifications. This portion of the decision reversed the ruling from the Tax Court, which had included it in the OTCs' tax base without separate analysis when finding the OTCs to be brokers.

      3. The Court determined that the cities' assessments of privilege tax for taxable periods starting in 2002 was not a new interpretation of the MCTC requiring prospective-only application.
As of the date of this Alert, the deadline to appeal has not passed. To date, neither side has petitioned the Arizona Supreme Court for review, or asked for an extension to do so. Should this case not be further appealed, all municipalities that have a hotel both (a) physically located within their jurisdiction, and (b) retains brokerage services from the OTCs need to require the OTCs to pay local privilege tax. These municipalities should also consider opening an audit for back taxes.

*The plaintiff cities are Phoenix, Apache Junction, Chandler, Flagstaff, Glendale, Mesa, Nogales, Phoenix, Scottsdale, Tempe, and Tucson.

**Not all plaintiffs had adopted MCTC Sec. -447 at the time of their assessments. This alert does not address the imposition of bed taxes imposed outside the MCTC.

For more information, or if you have questions, please contact one of Gust Rosenfeld's Public Law attorneys:
James T. Giel | 602.257.7495 | jgiel@gustlaw.com
Susan D. Goodwin | 602.257.7671 | sgoodwin@gustlaw.com
Nicholle Harris | 602.257.7451 | nharris@gustlaw.com
Andrew J. McGuire | 602.257.7664 | amcguire@gustlaw.com
Fred H. Rosenfeld | 602.257.7413 | rosenfeld@gustlaw.com
Zach Sakas | 602.257.7439 | zsakas@gustlaw.com
Shiela B. Schmidt | 602.257.7990 | sschmidt@gustlaw.com
Timothy A. Stratton | 602.257.7465 | tstratton@gustlaw.com
John C. (Jack) Shafer, III |602.257.7986 | jshafer@gustlaw.com
Dustin S. Cammack | 602.257.7977 | dcammack@gustlaw.com
Shelby M. Exposito |602.257.7498 | smexposito@gustlaw.com
Whitney M. Harvey | 602.257.7473 | wharvey@gustlaw.com
Trish Stuhan | 602.257.7471 | tstuhan@gustlaw.com

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