Dove Mountain Hotelco v. Ariz. Dep't of Revenue

549 P.3d 192

DOVE MOUNTAIN HOTELCO, LLC, et al., Plaintiffs/Appellants,

v.ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.

No. CV-23-0176-PR

Supreme Court of Arizona.

Filed June 7, 2024

Appeal from the Arizona Tax Court, The Honorable M. Scott McCoy, Judge, No. TX2019-000448. AFFIRMED

Opinion of the Court of Appeals, Division One, 255 Ariz. 324 (App. 2023). VACATED

David P. Domer (argued), Reed Smith LLP, Chicago; and Barbara J. Dawson, Edward J. Hermes, Snell & Wilmer L.L.P., Phoenix, Attorneys for Dove Mountain Hotelco, LLC and HSL Cottonwood RC Hotel, LLC

Kristin K. Mayes, Arizona Attorney General, Scot G. Teasdale (argued), Assistant Attorney General, Phoenix, Attorneys for Arizona Department of Revenue

JUSTICE MONTGOMERY authored the Opinion of the Court, in which VICE CHIEF JUSTICE TIMMER, and JUSTICES BOLICK, LOPEZ, BEENE, KING, and PELANDER (Ret.) joined.^*

JUSTICE MONTGOMERY, Opinion of the Court:

¶1 We must determine whether monies paid to reimburse a hotel for the cost of a loyalty program member’s complimentary stay constitute gross income for purposes of Arizona’s transaction privilege tax ("TPT"). In making this determination, we consider the degree to which State Tax Commission v. Consumers Market, Inc., 87 Ariz. 376, 351 P.2d 654 (1960), applies to our analysis. We hold that, pursuant to Arizona’s TPT stat- utes, reimbursements paid to a hotel for a loyalty program member’s complimentary stay are gross income, and Consumers Market is not applicable.

I. FACTUAL AND PROCEDURAL BACKGROUND

¶2 We begin with an overview of the program in question and the applicable TPT statutes.

A. Marriott Rewards Program

¶3 The Ritz-Carlton Dove Mountain Hotel and Spa ("Dove Mountain")¹ participates in the Marriott Rewards Program (the "Rewards Program") pursuant to the Amended and Restated Rewards Program Participation Agreement effective September 1, 2010 (the "Participation Agreement"). The Rewards Program "serves as a marketing and promotional tool designed to increase customer loyalty and patronage of hotels branded by or otherwise affiliated with" Marriott International, Inc. ("Marriott"). The marketing and loyalty program is operated and administered by Marriott Rewards, LLC ("Marriott Rewards"). As required by the Participation Agreement, Dove Mountain and other lodging participants fund the Rewards Program’s marketing efforts by paying a percentage of room revenues, and also providing rooms for complimentary stays to Rewards Program Members ("Members"). Airline, credit card, rental car, and travel companies (collectively "Affiliate Partners") may also participate.

¶4 Members can earn and accumulate "Marriott Points" ("Points") in four ways: (1) through stays at participating hotels; (2) by spending money with Affiliate Partners; (3) by directly purchasing Points from Marriott; or (4) from receiving Points as a gift. In the case of a stay at a hotel like Dove Mountain, a Member earns Points based on the amount of qualifying expenses on the hotel bill. Following a Member’s stay in which points are earned, not redeemed, Dove Mountain then remits a percentage of the bill ("Remittance") to purchase Points from Marriott Rewards on the Member’s behalf. For the tax period in question, a Remittance, as calculated by Marriott Rewards, was 4.5% of room revenue, or 2.25% if it was a stay in which the Member first enrolled in the Rewards Program. Marriott Rewards then credits the Member’s Rewards account with the purchased Points and holds the funds for the benefit of the Rewards Program.

¶5 Members may subsequently redeem accumulated Points for an award certificate. In turn, the certificate can be exchanged for various rewards, such as a complimentary stay at Dove Mountain or another participating hotel, merchandise, airline miles, car rentals, or gift cards. Should a Member exchange an award certificate for a complimentary stay at Dove Mountain, Marriott Rewards subsequently issues a reimbursement payment ("Reimbursement"). The amount of a Reimbursement is calculated pursuant to a formula that factors in the hotel’s room occupancy rate—whether above or below 89%— and applies a standard cost amount that reflects "the direct and incremental costs of having a [Member] occupy a room when redeeming [an awards] certificate." The Reimbursement amount does not always cover the full cost of the Member’s stay. Because Members can earn Points separate from a stay at a participating hotel and then redeem Points at any participating hotel or for other rewards, in any given month a hotel may pay more in Remittances than it receives in Reimbursements, or vice versa.

B. Applicable Arizona TPT Statutes

[1] ¶6 Arizona’s TPT statutes are set forth in A.R.S. title 42, chapter 5, and TPT is specifically defined in A.R.S. § 42-5008:

A. There is levied and there shall be collected by the department, for the purpose of raising public money, privilege taxes measured by the amount or volume of business transacted by persons on account of their business activities, and in the amounts to be determined by the applica- tion of rates against values, gross proceeds of sales or gross income ….

…

C. The tax levied by and collected pursuant to this article and article 2 of this chapter is designated the "transaction privilege tax."

The TPT therefore serves as "an excise tax on the privilege or right to engage in an occupation or business." State ex rel Ariz. Dept of Revenue v Tunkey, 254 Ariz. 432, 433 ¶ 2, 524 P.3d 812, 813 (2023) (quoting Ariz. Dep’t of Revenue v. Action Marine, Inc., 218 Ariz. 141, 142 ¶ 6, 181 P.3d 188, 189 (2008)).

¶7 The TPT rate applicable to a business is determined by its classification. A.R.S. § 42-5010(A). As a hotel, Dove Mountain carries the "transient lodging classification," § 42-5010(A)(2)(a), which "is comprised of the business of operating, for occupancy by transients, a hotel," A.R.S. § 42-5070(A). A "transient" is further defined as "any person who either at the person’s own expense or at the expense of another obtains lodging space or the use of lodging space for less than thirty consecutive days." § 42-5070(F).

[2, 3] ¶8 "[T]he gross proceeds of sales or gross income derived from the business," with certain exceptions not applicable here, comprises the tax base for this classification. § 42-5070(C). And "it is presumed that all gross proceeds of sales and gross income derived … from [transient lodging] business activity … comprise[s] the tax base for the business until the contrary is established." AR.S. § 42-5023. Gross income is defined by A.R.S. § 42-5001(4) as the "gross receipts of a taxpayer derived from trade, business, commerce or sales … without any deduction on account of losses." Gross receipts are "the total amount of the sale, lease or rental price … valued in money … including all receipts, cash, credits and property of every kind or nature." § 42-5001(7). TPT is thus properly understood as "a tax on a business’s gross receipts" and not a "sales tax." Tunkey, 254 Ariz. at 433 ¶ 2, 524 P.3d at 813. Furthermore, "[a]lthough liability for the TPT falls on the business, it may charge customers a separately itemized amount to cover the tax." Id. Lastly, a sale is "any transfer of title or possession, or both, exchange, barter, lease or rental … of tangible personal property or other activities taxable under this chapter, for a consideration." § 42-5001(18) (emphasis added).

C. Dove Mountain TPT Refund

¶9 On May 19, 2016, Dove Mountain requested a refund of $162,148.61 from the Arizona Department of Revenue ("ADOR") for TPT paid on certain Reimbursements between 2012 and 2016. Dove Mountain based its request, in part, on the argument that TPT was not due on the amount in question because Members did not pay any money when redeeming Points, the purchase of the complimentary stay was part of the original hotel price, and Reimbursements were not consideration for complimentary stays. Moreover, Dove Mountain noted that gross receipts from prior stays in which Members earned Points were subject to TPT. Notably, Dove Mountain did not seek a refund for TPT levied on Reimbursements in excess of Remittances paid in the same tax period. ADOR denied Dove Mountain’s refund request.

¶10 Dove Mountain appealed ADOR’s decision to the tax court, arguing that the Reimbursements in question were part of a rewards program not subject to TPT pursuant to this Court’s holding in Consumers Market. The court acknowledged that although there were some similarities between Consumers Market and this case, the respective customer loyalty programs were different. In particular, the court distinguished the two programs based on the different ways in which customers could earn and then redeem rewards. The court also found that the record did not support a conclusion that Dove Mountain was necessarily responsible for paying TPT on initial Points-earning transactions, "as opposed to some other entity." Following review of the parties’ motions for summary judgment on a largely stipulated record, the court concluded that Dove Mountain was not eligible for a refund and entered judgment for ADOR.

¶11 In the court of appeals, Dove Mountain again argued that, pursuant to Consumers Market, Reimbursements from Marriott Rewards should not be subject to TPT because "the underlying free stays were mere ‘redemptions of reward points from prior transactions on which tax was previously paid.’ " Dove Mountain Hotelco, LLC v. Ariz. Dep’t of Revenue, 255 Ariz. 324, 326 ¶ 7, 531 P.3d 386, 388 (App. 2023). Thus, according to Dove Mountain, the Reimbursements were not subject to TPT and any tax so levied constituted double taxation as stated in Consumers Market. Id.

¶12 The court of appeals found that, because the Reimbursements from the Rewards Program covered the cost of lodging provided for Members, "Dove Mountain derived the monies from a transient lodging business transaction." Id. at 327 ¶ 14, 531 P.3d at 389. Accordingly, the court held in a split...