Com, Inc. v. Dir. Taxation (In re Priceline)

• Decision Date: 04 March 2019
• Docket Number: SCAP-17-0000367
• Citation: 436 P.3d 1155
• Parties: In the Matter of the Tax Appeal of PRICELINE.COM, INC., et al., Petitioners/Taxpayers-Appellants-Appellees-Cross-Appellants, v. DIRECTOR OF TAXATION, State of Hawai‘i, Petitioner/Appellee-Appellant-Cross-Appellee.
• Court: Hawaii Supreme Court

436 P.3d 1155

In the Matter of the Tax Appeal of PRICELINE.COM, INC., et al., Petitioners/Taxpayers-Appellants-Appellees-Cross-Appellants,

v.DIRECTOR OF TAXATION, State of Hawai‘i, Petitioner/Appellee-Appellant-Cross-Appellee.

SCAP-17-0000367

Supreme Court of Hawai‘i.

MARCH 4, 2019

Paul Alston, Ronald I. Heller, Honolulu, Pamela Bunn, for petitioners/taxpayers-appellants-appellees-cross-appellants

Gary Cruciani, pro hac vice, Steven D. Wolens, pro hac vice, Kenneth T. Okamoto, Robert A. Marks, Cynthia M. Johiro, Warren Price III, Hugh R. Jones, Honolulu, for petitioner/appellee-appellant-cross-appellee

Thomas Yamachika for amicus curiae Tax Foundation of Hawai‘i

RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.

OPINION OF THE COURT BY POLLACK, J.

This case is a consolidated appeal from twenty-nine General Excise Tax assessments levied by the Director of Taxation of the State of Hawai‘i against five online travel companies based on car rental transactions that took place in Hawai‘i between January 1, 2000, and December 31, 2013. The online travel companies contend that the majority of the assessments are barred because they have already litigated their General Excise Tax liability for the years in question to final judgment in a previous case. They further argue that the rental car transactions should qualify for a reduced General Excise Tax rate that is calculated based only on the portion of the proceeds that they retain because rental cars are "tourism related services" within the meaning of a statutory income-reducing provision. The Director of Taxation of the State of Hawai‘i responds that the State cannot be estopped from collecting taxes it is legally owed based on a previous litigation and that the rental car transactions must be taxed at the full rate because no income-reducing provision applies.

We hold on review that, because our precedent does not permit the actions of a specific government official to impede the fundamental sovereign power of taxation, the assessments are not barred and may be considered on the merits. We further hold that rental cars are tourism related services and the assessed transactions qualify for the reduced General Excise Tax rate based only on the portion of the proceeds that the online travel companies retained.

I. BACKGROUND

A. The OTCs’ Business Model

The taxpayers in this case are five online travel companies¹ (the "OTCs") that provide services similar to those of a traditional travel agent through their respective public websites.² The OTCs maintain databases of up-to-date information about travel-related services offered by third-party providers, including airline flights and car and hotel rentals. Travelers accessing the websites can view availability and price data for services associated with a destination and make reservations through the OTCs rather than contacting service providers directly. The OTCs negotiate and contract with service providers to secure reduced pricing in exchange for providing global marketing and supplying a mechanism for connecting customers with excess inventory.

In the transactions at issue in this case, the OTCs utilized a business method called the "merchant model."³ In a merchant model transaction, a customer makes a single payment to an OTC for all purchased services at the time of the reservation—typically as a credit card charge processed through the OTC’s website. The OTC appears as the merchant of record for the credit card transaction. This payment—called the "gross income" or "gross receipts"—includes at least two components: the base price for services set by contract between the OTCs and service providers,⁴ which the OTCs remit to the service providers, and an amount that the OTCs retain as compensation for facilitating the transaction.⁵ See Hawaii Revised Statutes (HRS) § 237-3 (2017) (defining "gross income"). Some of the transactions at issue in this case also included a "tax recovery" charge representing the estimated amount of taxes the service providers would pay on the transaction, which the OTCs also forwarded to the service providers.⁶ No component of the gross income is explicitly designated to satisfy the OTCs’ own tax obligations.

The OTCs do not disclose the total amount of gross income collected in each transaction to service providers and do not inform customers of the separate cost of each component of the payment. Consequently, only the OTCs know how much money they retain in each merchant model transaction.

With respect to vehicle rentals, merchant model transactions are further divided into package and stand-alone transactions. In package transactions, customers purchase multiple travel-related services simultaneously through the OTCs for a single payment. A customer may reserve an airline ticket or hotel room at the same time as a rental vehicle, for instance. The OTCs separate the base rate for each included service and forward that amount to the appropriate service provider. A stand-alone transaction, by contrast, involves only a rental vehicle reservation from a single service provider. All of the OTCs engaged in package transactions during the years at issue in this case, but only Priceline.com, Inc. and Hotwire, Inc. also offered stand-alone car rentals as a standard business practice.⁷

B. The 2015 Travelocity Case

Prior to 2011, the OTCs filed no tax returns with and paid no taxes to the State of Hawai‘i on merchant-model transactions that resulted in the purchase of services rendered within the State. See Travelocity.com, L.P. v. Dir. of Taxation, 135 Hawai‘i 88, 95-96, 346 P.3d 157, 164-65 (2015). In 2011 and 2012, the Director of Taxation of the State of Hawai‘i (the Director) issued two sets of "Notice[s] of Final Assessment of Additional General Excise And/Or Use Tax" to each OTC.⁸ See id. at 93, 346 P.3d at 162. The Director retroactively assessed the OTCs for unpaid General Excise Tax (GET)⁹ on the gross income from transactions from 1999 to 2011 that resulted in hotel room rentals within the State of Hawai‘i, as well as interest and penalties for failing to file and non-payment.¹⁰ Id. at 92, 346 P.3d at 161.

The OTCs appealed the assessments to the tax court, arguing, inter alia, that they were not subject to GET because their business activities did not take place in Hawai‘i as the authorizing statute required. Id. at 98-99, 116, 346 P.3d at 168-69, 185 (citing HRS § 237-13 (Supp. 1999)¹¹ ). On August 15, 2013, the tax court entered final judgment finding the OTCs liable for the full amount of the assessed GET. Id. at 92, 346 P.3d at 161. The Director and OTCs filed cross appeals, and this court granted transfer. Order, Travelocity.com, LP v. Dir. of Taxation, No. SCAP-13-0002896, 2013 WL 6822079 (Haw. Dec. 24, 2013).

On March 17, 2015, this court issued an opinion affirming in part and vacating in part the tax court’s final judgment. Travelocity, 135 Hawai‘i at 127, 346 P.3d at 196. The court first determined that the OTCs’ merchant hotel room transactions constituted "sufficient ‘business and other activities in the State’ to impose the GET" because the OTCs actively solicited and contracted with Hawai‘i hotels and Hawai‘i consumers to profit from the sale of occupancy rights that were wholly exercised in Hawai‘i. Id. at 105, 346 P.3d at 174 (quoting HRS § 237-13 ).

The court went on to hold, however, that the assessed transactions qualified for GET apportionment under a related statutory provision because the rented hotel rooms were "transient accommodations ... furnished through arrangements made by a travel agency ... at noncommissioned negotiated contract rates" for which the "gross income [was] divided between the operator of transient accommodations ... and the travel agency." Id. at 106, 113, 346 P.3d at 175, 182 (quoting HRS § 237-18(g) (1993) (emphasis omitted)).¹² Accordingly, the court held that the OTCs were liable for GET and associated interest and penalties based on only the amounts they retained from the assessed transactions and not the gross income. Id. at 113, 346 P.3d at 182.

The court therefore remanded the case to the tax court to make a final determination of each OTC’s GET liability under the ruling. Id. at 127, 346 P.3d at 196. The tax court entered a set of Stipulated Final Judgments on Remand on September 21, 2015, establishing each OTC’s GET liability.

C. The Present Case

On December 9, 2013, while the cross-appeals of the tax court’s initial judgment in Travelocity were pending, the Director issued a new set of "Notice[s] of Final Assessment of Additional General Excise And/Or Use Tax" based on the gross income from the OTCs’ merchant rental car transactions from 2000 to 2012.¹³ This was followed on July 18, 2014, by an additional set of GET assessments based on the gross income from the OTCs’ 2013 merchant rental car transactions.¹⁴

1. The Tax Court Proceedings

Upon receiving the merchant rental car GET assessments, the OTCs filed timely notices of appeal to the tax court. The appeals were consolidated, and prior to trial the Director and OTCs filed cross-motions for partial summary judgment.

a. The Director’s Motion for Partial Summary Judgment

On May 9, 2016, the Director filed a motion seeking a ruling that the OTCs were liable for GET on the gross income from all merchant rental car transactions in the State of Hawai‘i from 2000 to 2013, as well as interest and penalties for failing to file and non-payment. The Director first contended that, under our precedents, the assessment of taxes, penalties, and interest are presumed correct, making it the OTCs’ burden to disprove the accuracy of the challenged assessments. (Citing Travelocity, 135 Hawai‘i at 114-15, 346 P.3d at 183-84.) The Director then argued that Travelocity was dispositive as to the GET’s applicability to the OTCs’ merchant rental car transactions because the rentals constituted business and other activities in Hawai‘i under HRS § 237-13 in the same manner as the OTCs’ merchant hotel room rentals. (...