Mayor & City Council of Baltimore v. Priceline.com Inc.

• Decision Date: 23 July 2012
• Docket Number: CIVIL ACTION NO. MJG-08-3319
• Court: U.S. District Court — District of Maryland
• Parties: MAYOR & CITY COUNCIL OF BALTIMORE Plaintiff v. PRICELINE.COM INCORPORATED, et al. Defendants

MAYOR & CITY COUNCIL OF BALTIMORE Plaintiff

v.PRICELINE.COM INCORPORATED, et al. Defendants

CIVIL ACTION NO. MJG-08-3319

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

Dated: July 23, 2012

MEMORANDUM AND ORDER RE: REMAINING SUMMARY JUDGMENT ISSUES

The Court has before it the remaining issues presented by Plaintiff Mayor and City Council of Baltimore's Motion for Partial Summary Judgment [Document 107], the "Non-OTC" Defendants' Motion for Summary Judgment [Document 115] and Defendants' Motion for Summary Judgment [Document 117]. The Court has held a hearing and had the benefit of the arguments of counsel.

I. BACKGROUND

In this case, Plaintiff, the Mayor and City Council of Baltimore (the "City"), seeks to enforce upon Defendants¹ the transient occupancy tax (the "Occupancy Tax") imposed by each oftwo versions² of Article 28 of the Baltimore City Code ("the Ordinance") to transactions conducted by online travel companies ("OTCs").

The parties agree that the following hypothetical presents a representative scenario for purposes of the instant case:

1. A hotel in the City agrees that an OTC can allow a customer to use a hotel room in return for the OTC s paying the hotel a specified amount, assumed for hypothetical purposes to be $100.

2. A customer gets on the OTC website and pays the OTC a hypothetical total of $220 for the use of the room. The statement provided to the customer indicates that there was a payment for $200 for the room and $20 for "taxes and fees."

3. The OTC - either before or after actual room occupancy - pays the hotel $108, of which $8³ is treated as Occupancy Tax and remitted to the City.

See Summ. J. Hr'g, May 18, 2011, 6:20-8:21.

In the Memorandum and Order Re: Motions for Summary Judgment [Document 167] , the Court resolved the "liability issues" presented in:

1. The City's Motion for Partial Summary Judgment [Document 107],

2. The "Non-OTC" Defendants' Motion for Summary Judgment [Document 115], and3. Defendants' Motion for Summary Judgment [Document l17].

Consequently, the case is in the following procedural posture:

A. The City has been granted partial summary judgment establishing that the remaining defendants are liable for the Occupancy Tax under the current version of the Ordinance.

B. The Defendants have been granted partial summary judgment establishing that:

a. No Defendant is liable for the Occupancy Tax under the prior version of the Ordinance.

b. No Defendant is liable for the City's common law claims.

C. The non-OTC Defendants⁴ are not liable for the Occupancy Tax under the current version of the Ordinance and, therefore, have no claims remaining pending against them.

There remains for resolution herein:

1. The determination of the taxable base to use for imposing the Occupancy Tax, and

2. Defendants' request for summary judgment on their affirmative defenses.

II. SUMMARY JUDGMENT STANDARD

A motion for summary judgment shall be granted if the pleadings and supporting documents "show that there is no genuineissue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c)(2).

The well-established principles pertinent to summary judgment motions can be distilled to a simple statement: The Court may look at the evidence presented in regard to a motion for summary judgment through the non-movant's rose-colored glasses, but must view it realistically. After so doing, the essential question is whether the movant would, at trial, be entitled to judgment as a matter of law. See, e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Celotex Corp.' v. Catrett, 477 U.S. 317, 323 (1986); Shealy v. Winston, 929 F.2d 1009, 1012 (4th Cir. 1991).

"A defendant relying on an affirmative defense may prevail on its summary judgment motion *when it has produced credible evidence . . . that would entitle it to a directed verdict if not controverted at trial.'" Kephart v. Cherokee County, 229 F.3d 1142 (4th Cir. 2000) (unpublished) (quoting Brinkley v. Harbour Recreation Club, 180 F.3d 598, 614 (4th Cir. 1999)). "After the defendant has produced such evidence, the burden shifts to the plaintiff to come forward with evidence showing there is a genuine issue of material fact." Id.

III. DISCUSSION

A. Taxable Base Issue

The parties have agreed on the taxable base issue. See Defs.' Submission [Document 172]; Pl.'s Submission [Document 173]; Defs.' Resp. to Pl.'s Submission [Document 174].

The parties have agreed that, in terms of the foregoing representative scenario:

The total tax due is computed upon the total amount paid to the OTC reduced by the amount of Occupancy Tax that had already been in regard to the room rental.

This is illustrated, in terms of the agreed scenario as follows:

1. The tax base is $212.00, consisting of the $220.00 total paid the OTC less the $8.00 that was paid to the City,

2. The total tax on the transaction is $16.96 (8% of $212.00),

3. The tax due is $8.96 ($16.96 minus $8 .00).

B. Affirmative Defenses

Defendants present four affirmative defenses to their tax liability under the Ordinance. They argue that the Ordinance violates the dormant aspect of the Commerce Clause, the Internet Tax Freedom Act, Defendants' due process and equal protection rights, and is an impermissible new sales tax that is prohibited by the Maryland Tax Code.

Defendants seek summary judgment establishing the validity of their affirmative defenses. While there appear to be no genuine issues of material fact as to most of the affirmative defenses, the City has not filed a cross-motion for summary judgment.

1. Commerce Clause

Defendants contend that the Baltimore Ordinance imposes a tax that is prohibited by the dormant aspect of the Commerce Clause, U.S. Const. Art. I, § 8, cl.3, which "denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce." Oregon Waste Sys., Inc. v. Dep't of Envt'l Quality, 511 U.S. 93, 98 (1994).

To be constitutionally valid, a state tax must (1) be "applied to an activity with a substantial nexus with the taxing State," (2) be "fairly apportioned," (3) "not discriminate against interstate commerce," and (4) be "fairly related to the services provided by the State." Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). The party raising a Commerce Clause challenge carries the burden of persuasion. See Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 164 (1983).

Defendants claim that the City's interpretation of the Ordinance violates all four prongs of the Complete Auto test.Consistently with every court that has considered this issue in this context,⁵ the Court disagrees.

As discussed herein, the Court holds that Defendants are not entitled to summary judgment with regard to their Commerce Clause affirmative defense. The Court will address the prongs of the Complete Auto test in turn.

a. Substantial Nexus

The focus of the "substantial nexus" inquiry is on the activity being taxed. Complete Auto, 430 U.S. at 279; see also Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 184 (1995) (holding that "*there is 'nexus' aplenty'" where state sought to impose tax on bus tickets sold in-state for service originating there) (quoting D.H. Holmes Co. v. McNamara, 486 U.S. 24, 33 (1988)); Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 778 (1992) (in the context of state taxation of multistate income of a nondomicilary corporation, "there must be a connection to the activity itself, rather than a connection only to the actor the State seeks to tax"); Tyler Pipe Indus., Inc. v. Washington State Dept. of Revenue, 483 U.S. 232, 251(1987) (holding that the activities of sales representatives in state "adequately supported the State's jurisdiction to impose its wholesale tax" on defendant).

The Supreme Court, in the context of sales and use taxes, has also preserved a physical presence requirement. In Quill Corp. v. North Dakota By & Through Heitkamp, 504 U.S. 298 (1992), the Court harmonized National Bellas Hess, Inc. v. Department of Revenue of State of Illinois, 386 U.S. 753 (1967), which had held that a state had no power to impose a use tax on a mail order company with no physical presence in the taxing state, with the subsequent Complete Auto decision. 504 U.S. at 311. The Court concluded that "[a] vendor whose only contacts with the taxing State are by mail or common carrier lacks the 'substantial nexus' required by the Commerce Clause." Id.

Defendants "made the strategic decision not to contest whether they have sufficient presence in the City to constitute nexus over the taxpayer." Defs.' Reply 22, n.29. Instead, Defendants seek to transmogrify the "substantial nexus" requirement of Complete Auto to be a "transactional nexus" requirement. See, e.g. Defs.' Mot. 44 ("The Supreme Court has broken the substantial nexus requirement into two components, both of which are required to pass constitutional muster: (1) nexus with the transaction and (2) nexus with the taxpayer.") (citing no authority). Defendants then argue that there areactually two distinct transactions when a customer makes a hotel booking through an OTC: first, there are "monies paid by consumers (via the OTCs) to hotels for the use of hotel rooms," and second, "monies paid by consumers to the OTCs for the provision of the OTCs travel facilitation services" for which taxes were not paid.⁶ Defs.' Mot. 47.

Accordingly, Defendants argue, the purported second transaction - the provision of online travel facilitation services for travel to the City of Baltimore - does not have a substantial nexus with the City of Baltimore. According to Defendants, "[t]he City does not have the requisite connection to tax receipts earned by the OTCs for providing travel facilitation services from remote offices, call centers and computer servers to remote customers," because "[a]ll of these services are performed outside of Baltimore."

Even if the Court were to view what is, to the...