In the ongoing battle between the various counties and the Online Travel Companies (OTC's) over the Tourist Development Tax, the OTC's won a major battle in Leon County on April 26, 2012. Specifically, a Leon County Trial Court concluded that tax was not due on the marked-up amount the OTC's, such as Expedia, Orbitz, and Travelocity, charge to their customers for hotel room rentals.
Under section 125.0104, Florida Statutes ("F.S."), the Tourist Development Tax (a type of "bed tax") is due on the consideration paid for room occupancy within the county and a particular county may charge an additional amount in its discretion. The controversy at issue is whether the "consideration" the law speaks of is the total amount paid by the customer or the discounted amount charged to the OTC and passed through to the customer? The counties have successfully asserted in previous controversy that the "consideration" is the higher amount because that is what is charged to the customer for the room, whereas, the OTC's counters that they are mere "market facilitators" or "intermediaries" and the up-charge is for the OTC's services. While the small difference on a per room basis seems insignificant, the issue has put millions of dollars in tax revenue in jeopardy for the counties.
The issue can be more clearly explained using the following two examples:
- Scenario 1: Suppose a customer books a room directly from a hotel for $100. At a typical 13% tax rate for various local taxes the customer pays $113. The hotel receives its $100 and the state collects $13 on the transaction. Of the $13 approximately half goes to the county under the Tourist Development Tax regime.
- Scenario 2: Using the same example, an OTC purchases the same room from the hotel for $80. At a 13% rate, it pays tax of $10.40, for a total cost of $90.40. The OTC then charges the customer the same $100, which includes a reimbursement for the $10.40 in tax and a $9.60 profit. On virtually the same transaction the state and local government collects $10.40 instead of the $13
In this case, the judge ruled for the OTC's and opined that the Legislative intent of the statute was not aimed at charging tax on this type of transaction. Further, he stated that the online travel industry has significantly evolved in the past years and the current law was not drafted with this in mind.
This case marks an important victory for the OTC's because the counties have been overwhelmingly successful in recent ligation throughout the state. In February, Palm Beach County settled with the OTC's for around $1.9 million in Tourist Development Tax. For a more in depth analysis of Tourist Development Tax, CLICK HERE. There is also current controversy in Broward County and another case is currently pending in Leon County. Of late, the counties have also been largely successful in collecting the tax on the higher, final customer price in various courts across the nation.
Mary Ellen Klas, of the Miami Herald, reported that attorneys for both sides intend to appeal the ruling. Once again, this is one of dozens of cases that is begging the Legislature to act and provide guidance in a grey area of the law. Up to this point, the law has been brought before the Legislature, but it has been unable to resolve the issue and take a position.
About the author: Mr. Donnini is a Florida Attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., in Fort Lauderdale, Florida. Mr. Donnini's primary practice is Florida tax controversy. Mr. Donnini worked as an accountant for a public REIT prior going to law school and is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact the firm by phone or email via the links at the top of the page.
Leon County v Expedia et al, Fla. 2nd Cir., Case No. 2009 CA 4319 (May 8, 2012) - Final Summary Judgement