Knowledge Center

Wednesday, June 22, 2016

HMB's Breen Schiller Quoted in Tax Notes Article Regarding OTC Markup Charges

"OTC Markup Charges Are Not Taxable, Federal District Court Holds"

Excerpt from Tax Notes, Wednesday, June 22, 2016

By Eric Yauch 

"In a case that focused on statutory language, a federal district court June 20 held that online travel companies (OTCs) have to collect and remit local hotel taxes to municipalities based on the net wholesale price they paid to hotels, not on the retail price they charged customers, with the exception of one locality...

Breen Schiller of  Horwood Marcus & Berk. said that what was interesting about the case is that in all of the situations at issue, the court acknowledged that the OTCs were following the merchant model, as opposed to the agency model.

Under the agency model, the OTCs are considered intermediaries between the hotels and end customers, whereas the merchant model looks at the transactions and treats OTCs as having received inventory from the hotels at a negotiated rate and then selling the marked-up rooms to customers.

A company following the merchant model was more likely to be considered a renter of the room and subject to tax on the retail price.

"Looking back at the case law, more often than not, when an OTC was acting under the merchant model, [it was] found to be within the scope of the ordinance," she said.

However, Schiller added, the ruling "may have taken the wind out of the sails of any future constitutional argument by an OTC."

"Specifically, the argument that if state or city tax policy targets out-of-state actors like OTCs for a discriminatory and excessive tax, this may run afoul of the federal commerce clause guaranteeing free flow of interstate commerce," Schiller said. "However, here the court made clear that the tax is applied to an activity that has nexus with the municipality, i.e., is connected to the municipality because it's taxing the renting of the room happening within the city or town, and that it is fairly apportioned because there is no risk of double taxation.""

Read the Full Article Here


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