Online travel companies like Orbitz, Travelocity and Priceline have to pay Phoenix taxes on the portion of the reservation dollars that they keep, the Arizona Supreme Court ruled.
In a split decision, the justices concluded that these companies effectively are engaged in the business of operating a hotel.
And, given that the Model Cities Tax Code used by Phoenix and 10 other Valley cities involved in the lawsuit taxes hotel operations, that makes any money kept by these travel “brokers’’ subject to the levy.
That conclusion drew derision from Justice Ann Scott Timmer.
Writing for herself and Chief Justice Robert Brutinel, she wrote:
“Online travel companies neither put hotels into a functional or operative state nor keep them in that state,’’ she wrote. “Online travel companies do not own hotels, oversee hotel operations, or let hotel rooms.’’
But Justice John Lopez, writing for the majority, saw it differently, saying the services provided by these hotel brokers are “central’’ to keeping the hotels in operation.
The victory for Phoenix, however, was not absolute: The justices said it cannot collect taxes that were owed before 2013.
Central to the issue is how these online travel companies operate and how the tax is levied. Consider a $100-a-night room in a city with a 10 percent hotel tax, sold through a broker who has an arrangement to keep 20 percent.
The broker sells the room to the customer for $100, plus the 10 percent tax and any service fees. Then, after the stay, the hotel bills the broker for $80 plus the 10 percent tax of $8.
That $8 is sent by the hotel to the city; the broker keeps the remaining $22, remitting none of that to the cities in which the hotels were located.
“It would be illogical to conclude that the OTCs – which advertise available rooms, solicit potential customers, collect customers’ information, process payments, confirm reservations, provide customer service, and facilitate reservation modifications and cancellations -- are not actively engaged in ‘the business of operating a hotel,’ ‘ Lopez wrote.
Timme maintained that these companies perform only a limited number of the operations that actually keep a hotel in business.