Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 12

Local Governments Attempt to Tax Online Travel Companies
A battle is raging across the United States between state and local governments and online retailers. The online retailers claim that because they do not have a physical presence in a state, they should not have to collect state and local taxes for the goods and services they sell. Although most states have laws that require their residents to report online purchases and pay taxes on them (so-called use taxes), few U.S. consumers comply with these laws.
Local Governments Sue Online Travel Companies
Travelocity, Priceline.com, Hotels.com, and Orbitz.com are online travel companies (OTCs) that offer, among other things, hotel booking services. In 2013, more than twenty cities, including Atlanta, Charleston, Philadelphia, and San Antonio, had filed suits claiming that the OTCs owed taxes on hotel reservations that they had booked. All of the cities involved in the suits impose a hotel occupancy tax, which is essentially a sales tax.
The issue is not whether the OTCs should pay the tax but rather how it should be assessed and collected. OTCs typically purchase blocks of hotel rooms at a wholesale rate and then resell the rooms to customers at a marked-up resale rate, keeping the difference as profit. The OTCs forward to the hotels an amount intended to cover the hotel occupancy tax based on the wholesale prices of the rooms sold. The hotels then remit to the city taxing authority the tax on the rooms sold by the OTCs.
The cities claim, however, that the OTCs should assess the occupancy tax rates on the retail prices that they charge, rather than on the wholesale prices of the rooms. Of course, the retail prices are higher, so the cities would collect more tax if the retail price is used as the base. The cities also want the OTCs to register with the local jurisdictions and to collect and remit the required taxes directly.
The Cities Are Losing in Court
When these lawsuits were first brought a few years ago, city governments generally obtained favorable rulings, both in federal district courts and in state courts. When some of the suits were retried or reviewed by higher courts, however, the OTCs prevailed.
In 2012, for example, the city of Goodlettsville, Tennessee, lost its continuing case against Priceline.com and nine other OTCs. In siding with the OTCs, the court said, "If the Tennessee legislature intends to permit its political subdivisions to tax the retail rate paid by the consumers to the OTCs for hotel bookings, the legislature may do so through appropriate statutory language."
In contrast, when the South Carolina Department of Revenue sued Travelscape, LLC, the Supreme Court of South Carolina held that the OTC had to remit taxes based on the retail price of the hotel rooms sold. d The South Carolina decision reflected a minority opinion, however. As of early 2012, the OTCs had prevailed in fifteen of nineteen cases nationwide.
Who might benefit if cities and states do not impose a sales tax on the difference between the wholesale price of rooms and the retail price of rooms sold by OTCs? How would they benefit?