Court Rules the Tax Base for the Local Hotel Tax Includes the Online Travel Companies Fees
The U.S. District Court for the Northern District of Illinois held that a 7% hotel tax imposed by the Village of Rosemont, Illinois, on the full room rental fees charged by online travel companies (OTCs) is a valid use tax, and it does not violate the dormant Commerce Clause of the U.S. Constitution. [The Village of Rosement v. Priceline.com, Inc., U.S. District Court, N.D. Illinois, No. 09 C 4438, October 14, 2011]
We are reporting this Illinois case in the Michigan State and Local Tax Blog because this same issue is being litigated in Michigan. In Michigan, the ordinance establishing the room tax imposes the tax on the "person" providing the room accommodation. The tax is not imposed on the customer.
The court first found that the OTCs were "owners" for purposes of the local hotel tax ordinance because customers could not access their hotel rooms until paying the room charge to the OTCs, not the hotels. An "owner" includes a person who receives consideration for the rental of a hotel or motel room.
The court then held that the full rental fees paid by the customers to the OTCs, not just the charges paid by the OTCs to the hotels, were taxable. OTCs charged Rosemont customers a room rental fee that included (1) the amounts that the hotels charged the OTCs, and (2) the OTCs' markup on the hotels' charges. The ordinance intended to tax the amount paid by customers to occupy a hotel room in Rosemont. OTCs' customers paid the OTCs' charges for the right to occupy hotel rooms in Rosemont.
The court held that the OTCs' facilitation of travel-related services was incidental to the rental of hotel rooms, and that the hotel tax was a use tax. Illinois law establishes that a tax on hotel room rentals is a use tax, not an impermissible sales (occupation) tax. Services generally are not subject to sales tax.
In response to an argument made by the OTCs, the court found that the hotel tax did not violate the dormant Commerce Clause. First, the OTCs had nexus with Illinois because (1) the tax was levied for the right to use a hotel room in Illinois, (2) the tax was paid by the person who uses the room, and (3) the OTCs entered into contracts with hotels in Illinois for the right to market, facilitate, and book reservations and they profit from such reservations. Second, the tax was fairly apportioned because it is imposed on a use that can occur in only one place. Third, the tax does not discriminate against interstate commerce as it is applied at the same rate to every hotel reservation in Rosemont. Finally, the tax is related to Illinois services because the renting person has the advantage of the state's police and fire protection, for example, while staying in Illinois. The court addressed several other federal and state claims made by the OTCs, holding in favor of the village.