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City of San Antonio, Texas v. Hotels.Com, L.P.

United States Court of Appeals, Fifth Circuit

November 29, 2017

CITY OF SAN ANTONIO, TEXAS, On Behalf Of Itself And All Other Similarly Situated Texas Municipalities, Plaintiff-Appellee Cross-Appellant

         Appeals from the United States District Court for the Western District of Texas

          Before BARKSDALE, DENNIS, and CLEMENT, Circuit Judges.


         In this class action pursued by 173 Texas municipalities, primarily at issue is whether the service fee an online travel company (OTC) charges for facilitating a hotel reservation is included in the "cost of occupancy", and, therefore, subject to the municipalities' hotel occupancy tax ordinances. The district court concluded the service fee is included. VACATED and RENDERED.


         An OTC website allows a traveler to compare the rates for airlines, hotels, and rental-car companies, as well as request reservations from them. Regarding the ordinances at issue, OTCs do not own, operate, or manage hotels; instead, they transmit information and payments between travelers and hotels.

         Hotels issue reservations through a number of means to maximize occupancy. They may issue them directly to consumers, or they may use third-party intermediaries, such as travel agents, tour operators, and OTCs.

         When facilitating hotel reservations, OTCs use the "merchant model". Under that model, the hotel and the OTC enter into a contract by which the OTC agrees to display information about the hotel on the OTC's website, and the hotel agrees to provide reservations at a discounted room rate through that website. A hotel decides when to make reservations available to the OTCs, how many reservations to provide, and the room rate the hotel will charge.

         Only the hotel can issue a reservation. When a traveler chooses to book a room through an OTC, it requests a reservation on the traveler's behalf. If the hotel chooses not to make a reservation available, the OTC cannot make the reservation. If the hotel issues the reservation, it does so in the traveler's name, and the OTC forwards a confirmation to the traveler.

         Reservations made under this model are prepaid. When a traveler makes a reservation, the OTC charges the traveler an amount that includes the discounted room rate, a tax-recovery charge, and a service fee. Again, the room rate is the discounted rate negotiated for, and specified in, the OTC-hotel contract. The OTC does not separately state this discounted room rate, but instead combines it with part of its service fee, in order to keep the negotiated room rate confidential from competitors. The tax-recovery charge covers the estimated taxes the hotel will owe on its discounted room rate.

         The OTC retains its service fee as compensation for its online services. Therefore, although the hotel determines the discounted room rate, an OTC decides the total amount the traveler pays when booking through the OTC's website. The OTC later forwards the amount of the discounted room rate and applicable taxes to the hotel, which remits the taxes to the taxing authority. The OTC is the merchant of record in the transaction with the traveler.

         In 1987, the Texas legislature authorized municipalities to "impose a tax on a person who . . . pays for the use or possession or for the right to the use or possession of a room that is in a hotel". Tex. Tax Code § 351.002(a). Pursuant to this enabling act, Texas municipalities enacted hotel occupancy tax ordinances. E.g., Dallas Code § 44-35; San Antonio Code § 31-68.

         Under the ordinances, "[e]very person owning, operating, managing, or controlling any hotel" must collect and pay the occupancy tax to the taxing authority. Dallas Code § 44-36; San Antonio Code § 31-69(a). (Again, OTCs do not own, operate, or manage a hotel. Therefore, the only remaining subset is whether they "control" it.) And, even though 173 municipalities make up the class in this action, the ordinances use one of two common methods for defining the tax base, as illustrated by the Dallas and San Antonio ordinances.

         Dallas-type ordinances tax "the consideration paid by the occupant of the room to the hotel". Dallas Code § 44-35(b). "Consideration" is defined as "the cost of a room in a hotel", but does not include "the cost of any food served or personal services rendered . . . not related to cleaning and readying the room or space for occupancy". Dallas Code § 44-34(1). San Antonio-type ordinances tax "the consideration paid for a sleeping room", or "the total price of a sleeping room or sleeping facility", including "all ...

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