U.S. 5th Circuit holds cities cannot use website service fee in calculating hotel occupancy taxes owed


City of San Antonio v Hotels.com 16-50479 (5th Cir, November 29, 2017).

This is a long and drawn out challenge by 173 municipalities as to the proper payment of hotel occupancy tax. For this appeal, the question was whether the service fee paid to an online hotel company (“OCT”), such as Travelocity, is included in the hotel occupancy tax calculation.

An OCT website allows a traveler to compare the rates for airlines, hotels, and rental-car companies, as well as request reservations. OCTs do not own, operate, or manage hotels; instead, they transmit information and payments between travelers and hotels. The hotel and the OCT enter into a contract by which the OTC agrees to display information about the hotel on the OCT’s website, and the hotel agrees to provide reservations at a discounted room rate.  Only the hotel can issue a reservation. When a traveler chooses to book a room through an OCT, it requests a reservation on the traveler’s behalf. If the hotel chooses not to make a reservation available, the OCT cannot make the reservation. If the hotel issues the reservation, it does so in the traveler’s name.  The OCT retains its service fee as compensation for its online services by deciding the total amount the traveler pays when booking. The hotel occupancy tax allows a municipality to “impose a tax on a person who . . . pays for the use or possession or for the right to the use or possession of a room that is in a hotel.”  When a traveler books a hotel through an OCT, they pay a higher amount than the discounted hotel room due to the OCT service fee. The original suit was broader in that it included a claim for the tax, which was initially denied by the hotels and OCTs. A jury awarded millions to the cities in unpaid taxes, but the hotels and OCTs appealed.

Sitting in diversity, the U.S. 5th Circuit held it must follow state law on the issue.  The 14th Court of Appeals previously determined the cost of occupancy [the scope of the tax base] is the amount for which three conditions are satisfied: (1) “the consideration at issue must have been paid or charged for the use or possession, or the right to use or possess, a hotel room”; (2) “the amount to be taxed must have been paid ‘by the occupant of such room’”, which includes “‘through the means, work, or operations of’ and ‘in behalf of’”; and (3) “the amount to be taxed must have been paid ‘to such hotel’”.  The rate paid by the OCT to the hotel and behalf of the customers qualifies, but the higher rate paid by the customer to the OCT (including the service fee) does not.  OCTs have websites and provide information, they do not own, manage, or operate hotels. The service fee paid is for the providing of that information, not for the room. Because the only amounts at issue for the appeal were the differences between calculations of using the fee for tax base calculations and not using the fee, the trial court order is reversed and judgment is rendered for the OCTs.

If you would like to read this opinion click here. Panel consists of Chief Barksdale, Dennis, and Justice Clement.  Memorandum Opinion by Justice Barksdale. The attorney listed for the Appellant is David E. Keltner. The attorney listed for the Appellee is Gary Cruciani.

Leave a Comment