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FL tax controversy ALERT – HUGE VICTORY for Online Travel Companies

Over the past year or so, there has been significant controversy in Florida involving the Online Travel Companies (OTC's) challenging the Tourist Development Tax. In an unusual path for state tax controversy, the state (in this case, the Florida Department of Revenue) decided to sit on the sidelines. Instead, numerous Florida counties decided to take up the cause in an effort to receive a windfall in local tax revenue. Following several losses at the trial court level, the Counties such as Alachua, Charlotte, Escambia, Hillsborough, Lee, Leon, Manatee, Nassau, Okaloosa, Pasco, Pinellas, Pol, Seminole, St. John's, Wakulla, and Walton Counties in the 1st District Court of Appeal ("DCA") wanted to roll the dice by appealing the trial court's decisions. With a court consisting of a three judge panel, the taxpayer won by a narrow 2 to1 split decision. This case marks a huge victory for the OTC's and the online reservation providers in Florida. Specifically, the court concluded that tax was not due on the marked-up amount (over the amount received by the hotel) the OTC's, such as Expedia, Orbitz, and Travelocity, charge to their customers for hotel room rentals. [A copy of the order granting summary judgment in favor of the taxpayer is downloadable at the end of this article.]

For the uninformed, Florida levied a Local Option Development Tax in 1977. 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 this additional bed tax at the county's discretion. Since the inception of the local bed taxes, the counties in Florida have been recklessly aggressive in going after their share of the tax. 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 by the hotel and passed through to the customer. The counties contend that the taxable base is the total amount because that is the amount paid by the hotel guest for the room, whereas, the OTC's counter that they are mere "market facilitators" or "intermediaries" and the difference in the amount paid by the customer and the amount received by the hotel is merely a charge for the OTC's reservation services, which is not subject to the tax.

The issue can be more clearly explained using the following two examples:

Scenario 1: Suppose a guest books a room directly from a hotel for $100. At a typical 13% tax rate for various state and 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.

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. In this case, the judge ruled in favor of the OTC's and stated the TDT is not due on the differential.

In Judge Thomas' opinion, the court started at the inception of the TDT tax enactment in 1977. He looked to whether the tax is attempting to capture hotels renting a room to a tourist or a tourist renting a room from a hotel. In other words, was the tax originally designed to apply to the amount received by the hotel for occupancy or was the tax designed to be imposed on the amount paid by the customer for occupancy. As spelled out in his analysis, Judge Thomas first looked to the language of the statute and concluded the duty to charge, collect, and remit the tax is on the hotels based on the amount received by the hotel.

The counties countered by citing Miami Dolphins Ltd. v. Metropolitan Dade County. However, Judge Thomas correctly caught that Miami Dolphins Ltd. stands for the proposition that a TDT does not violate equal protection, which is different issue altogether.

For a second argument, the counties stated that the local tax is due on the consideration for occupancy. Judge Thomas dealt with that argument by stating that tax statutes must be construed "in favor of the taxpayers where an ambiguity may exist" and looked to the plain meaning of the statute. Under the statute, the tax is borne on the person providing occupancy, which are the hotels not the OTC. Further, the OTC's are mere conduits through which consumers can search for rooms and book reservations.

Judge Padovano, the lone dissenter, took more of a simplistic approach and would have ruled that the tax is on the amount of money paid for the room. In his extended 11-page dissent , he looked to Miami Dolphins and read it to mean that TDT is a tax paid by the tourist. Even if one agrees with his logic, he even concedes that the issue in Miami Dolphins and the instant case are different. Therefore, Miami Dolphins should not control.

Judge Padovano's main argument seems to be the argument at issue what does "renting" a room to a transient mean? He goes on to cite 3 different dictionary's for multiple definitions of "rent" and "lease." As an aside, it always strikes me as odd to find dictionary definition as reliance for a judicial opinion. It seems jurisprudence is something more than looking up words in a dictionary, it is also understanding the meaning behind a law. IN any event, Judge Padovano gets around the argument by stating the obvious; the statute just defines the transaction subject to tax, not the party that bears the burden of it. In his world, the total amount paid by a tourist for the room would be the taxable base.

He also gets around the argument that an ambiguous statute must go in favor of a Taxpayer by just saying the statute isn't ambiguous. What could be possibly more ambiguous if every county in Florida and every OTC disagrees over what the tax is based on? Further if 3 out of 3 appellate court judges are not in total agreement of a decision, isn't a statute ambiguous per se? He also seems to think the form of a transaction tax should not control despite the form driven nature of any transaction tax. He closes by looking to Supreme Courts in other states (which he admits have very different statutory language) and hanging his hat on a slippery slope argument. Basically, in his view, what is stopping a hotel from creating a subsidiary and effectively eliminating the TDT altogether? My response would be what is stopping the Legislature from amending the law if they clearly wanted OTC's to be taxable, just as other states have done?

Congratulations once again to Mark E. Holcomb of Madsen Goldman & Holcomb, LLP, a state and local tax focused firm in Tallahassee, FL for another great taxpayer victory in the Online Travel Case industry. For your convenience, please find the court documents related to this case available for download at the end of this article. If you have any questions about this case or other sales tax or Tourist Development Tax matter, then please do not hesitate to contact any of our attorneys for a free initial consultation by any of the means at the top of this page.

florida tax attorney, florida tax audit, florida sales tax, Jerry Donnini, Florida Tax HelpAbout 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 sales tax and state corporate income tax controversy. Mr. Donnini also does extensive work in the petroleum industry, both at the wholesale and retail levels. Mr. Donnini also handles matters in the areas of motor fuel tax, tobacco tax, and tourist development tax. 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.


ALACHUA COUNTY, ET AL vs EXPEDIA, INC, ET AL, 1st DCA FL, Case No. 1D12-2421, Feb 28, 2013

MIAMI DOLPHINS LTD vs METROPOLITAN DADE COUNTY (court opinion will be added shortly.)

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