Travelocity.Com LP v. Wyo. Dep't of Revenue

329 P.3d 131

TRAVELOCITY.COM LP, Priceline.Com Incorporated, Hotels.Com, LP, Hotwire, Inc., Expedia, Inc., Orbitz, LLC, and Trip Network, Inc. (d/b/a Cheaptickets.Com), Appellants (Petitioners),

v.WYOMING DEPARTMENT OF REVENUE, Appellee (Respondent).

No. S–13–0078.

Supreme Court of Wyoming.

April 3, 2014.

Representing Appellants: Lawrence J. Wolfe, P.C., and Brynn A. Hvidston of Holland & Hart, LLP, Cheyenne, Wyoming; Jeffrey A. Rossman of McDermott Will & Emery LLP, Chicago, Illinois. Argument by Mr. Rossman.

Representing Appellee: Peter K. Michael, Wyoming Attorney General; Martin L. Hardsocg, Deputy Attorney General; Cathleen D. Parker, Senior Assistant Attorney General. Argument by Ms. Parker.

Before KITE, C.J., and HILL, VOIGT,^*BURKE, and DAVIS, JJ.

DAVIS, Justice.

[¶ 1] Appellee Wyoming Department of Revenue (Department) directed Appellants, which are on-line travel companies (OTCs), to collect and remit tax on the total amounts they collected from customers booking hotel rooms in Wyoming. Appellants appealed the order to the State Board of Equalization (SBOE), which upheld it. The OTCs petitioned the First Judicial District Court for review, and it certified the case to this Court, which accepted the certification.

[¶ 2] Appellants argue that Wyoming's sales tax statutes do not reach the markup they charge for a variety of reasons. They contend that application of Wyoming sales tax to them violates the Dormant Commerce Clause, the Equal Protection Clause, and the Due Process provisions of the United States Constitution. They also urge us to find that it violates the federal Internet Tax Freedom Act. We affirm the State Board of Equalization.

ISSUES

[¶ 3] Appellants raise the following issues, which we have rephrased and regrouped somewhat: ¹

1. Did the SBOE err in finding that the full amount paid to the OTCs for a reservation of a hotel room in Wyoming was taxable by the Department because:

a. It concluded that the OTCs are “vendors” of lodging services under Wyoming Statute § 39–15–101 et seq.? b. It concluded that the amount the OTCs consider to be “online reservation facilitation fees” were instead part of the sales price for “lodging services” under Wyoming's sales tax?

c. It concluded that the amount the OTCs believe to be a service fee is taxable in Wyoming?

2. Does the Department's imposition of sales tax on the full amount the OTCs collect violate the Dormant Commerce Clause of the United States Constitution?

3. Does imposition of the sales tax on the full amount the OTCs collect violate the Equal Protection Clause of the United States Constitution?

4. Does imposition of the sales tax on the full amount the OTCs collect violate the Due Process Clause of the United States Constitution?

5. Does imposition of the sales tax violate the Internet Tax Freedom Act?

[¶ 4] The Department generally identifies the same issues, although it frames them in the “deep issue” format recommended by one legal scholar.²

FACTS

[¶ 5] The facts of this case are not in dispute. The OTCs are on-line travel companies. They host travel websites through which the public may book hotel rooms, airline reservations, rental cars, and other travel-related services. This appeal involves only tax on the Wyoming hotel rooms reserved through their websites.

[¶ 6] The parties agree that none of the OTCs, their employees or their servers are located in Wyoming. They do not own or control any hotels in this state.

[¶ 7] Hotels typically employ revenue managers who set and adjust room rates and select the distribution channels necessary to secure reservations. If they anticipate a need to use intermediaries like the OTCs to fill rooms, they enter into agreements to allow them to market reservations for a certain number of rooms at a certain rate. The hotel controls the price and availability of rooms. Major hotel brands have a central reservation system through which the OTCs can determine the rates and available rooms they may offer to potential guests. Hotels without central reservation systems can use the OTCs' extranet service to upload this data. Hotels can increase or decrease the number of reservations available to OTCs or close them out entirely.

[¶ 8] The OTCs collect a wide variety of hotel information and publish it on their websites so that travelers can plan trips through one source. Customers can search for lodging using a variety of parameters. The customer must accept the OTCs' terms and conditions, as well as the OTC/hotel cancellation policies and other rules and restrictions.

[¶ 9] There are five “models” by which hotel rooms are rented. The first three are not at issue in this appeal. First, the hotel may simply rent the room itself, and the entire transaction is taxed at a maximum of 10% under current rates.³ Second, a travel agent may book the room for a traveler. In that kind of transaction, called the “agency model,” the hotel charges the traveler for the room and pays tax on the entire room rental, but remits a commission to the travel agent. The amount of the agent's commission is therefore taxed, because it is paid from the total room rate. The modified merchant model, the third variant, is similar to the agency model. In it, the customer pays the OTC to occupy a room with a credit card, and the OTC also collects tax on the full amount of the rental. The OTC then remits all of the funds received to the hotel, which pays the OTC a commission, and the hotel pays tax on the entire amount paid by the customer to the OTC.

[¶ 10] The controversy in this case involves the merchant model, which comprises the majority of the OTCs' business. In it, the OTC collects the net rate the hotel has agreed upon, the amount of tax estimated on the net rate, and what the OTCs call a “service” or “facilitation” fee.⁴ The putative service fee is a markup from the net rate the hotel has agreed to plus the tax on that base rate. The parties sharply disagree as to what this difference should be called because it may affect the outcome, and in an effort to use neutral terminology, we will refer to it as “the markup.” If the guest utilizes the reservation, the hotel bills the OTC, and the OTC pays it the net rate plus the estimated tax. The OTC retains but does not pay Wyoming sales tax on the markup. The hotel pays the state or local taxing authority (in this case Wyoming) the tax due on its net rate.

[¶ 11] Under the merchant model, the hotel is not informed of the total amount paid to the OTC by the customer for a reservation. The customer is not informed of the net rate the hotel has agreed upon or the amount of tax collected upon it. Without conducting an audit, state and local taxing authorities, including the Wyoming Department of Revenue, cannot determine the basis for the tax collected on each transaction. Only the OTC knows how much its markup is.

[¶ 12] The “opaque” model is also used by certain of the OTCs. This is a variant of the merchant model. In it, the customer does not learn the identity of the hotel until the reservation is made and payment is received. Reservations cannot generally be cancelled and it is nearly impossible to obtain a refund. The OTC remits the net rate and the estimated tax on that amount before the date of the traveler's stay. The OTC has the exclusive right to make exceptions to the no-refund policy. The OTCs retain the markup and do not pay sales tax on it, so the tax issues are the same as with the merchant model, and they will not be discussed separately.

[¶ 13] The following chart illustrates the Department's view of the five models, utilizing a hypothetical net rate of $80.00, tax rate of ten percent, and a hypothetical difference between net rate and what the customer actually pays.

Gross Amount

Net Rate

Model

Paid by Customer

Charged by Hotel

Taxes

Direct Rental by Hotel

$100

$100

$10

Agency (Travel Agent or OTC)

$100

$80

$10

Modified Merchant

$100

$80

$10

Merchant and Opaque

$100

$80

$8

In this example, the OTCs would receive $20.00 in untaxed revenue, resulting in a $2.00 difference in tax paid from that paid under the other models.

[¶ 14] The parties agree that although the hotel is obligated by its contract with the OTC to provide a room of a certain type and quality, the hotel assigns the room and charges for any services not included in the rate, including meals, health club access, etc. The OTC has no voice in the room assignment. The parties also agree that the customer can only obtain a refund from the OTC under the merchant model—the hotel cannot grant a refund.

[¶ 15] The OTCs have been very successful, and their success has not gone unnoticed by state and local taxing authorities. See, e.g., Scott M. Susko and Lucia Cucu, State and Local Governments Turn to Online Business for Tax Revenue in an Attempt to Remedy Budget Shortfalls, 19 J. Multistate Taxation and Incentives (Sept. 2009). As will be addressed in further detail, the taxing authorities generally argue that tax should be paid to them based on the gross amount the customer pays for a room, while the OTCs contend that the markup is not taxable by the state or local government entity in which the hotels are located because it is a service fee.

[¶ 16] The Administrator of the Wyoming Department of Revenue's Excise Tax Division met with Natrona County officials, several interest groups, and representatives of Appellees Orbitz and Travelocity in February of 2010. The OTCs explained the merchant business model and expressed their view that Wyoming could not tax what they call the service fee on a hotel transaction. The Department thereafter directed a number of OTCs to license with Wyoming as vendors and to collect and remit taxes on the full amount paid by customers who reserve rooms in Wyoming.

[¶ 17] The OTCs appealed the Department's decision to the SBOE. The parties were able to stipulate to some of the facts and to the record to be considered by the SBOE, and therefore simply argued the case rather than presenting live...