Travelocity.com, L.P. v. Dir. of Taxation

• Decision Date: 17 March 2015
• Docket Number: No. SCAP–13–0002896.,SCAP–13–0002896.
• Parties: In the Matter of the Tax Appeal of TRAVELOCITY.COM, L.P., Petitioners and Respondents/Appellees–Cross–Appellants, v. DIRECTOR OF TAXATION, State of Hawai‘i, Respondent and Petitioner/Appellant–Cross–Appellee.
• Court: Hawaii Supreme Court

135 Hawai'i 88

346 P.3d 157

In the Matter of the Tax Appeal of TRAVELOCITY.COM, L.P., Petitioners and Respondents/Appellees–Cross–Appellants,

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

No. SCAP–13–0002896.

Supreme Court of Hawai‘i.

March 17, 2015.

Paul Alston, Tina L. Colman, Pamela W. Bunn, Ronald I. Heller, Honolulu, for Travelocity.com, L.P., et al.

Hugh R. Jones, Girard D. Lau, Kimberly Tsumoto Guidry, Honolulu, Warren Price III, Kenneth T. Okamoto, Robert A. Marks, Gary Cruciani, Steven D. Wolens, for Director of Taxation, State of Hawai‘i.

RECKTENWALD, C.J., NAKAYAMA, McKENNA, and POLLACK, JJ., and Circuit Judge LEE, in place of ACOBA, J., recused.

Opinion of the Court by POLLACK, J.

I. INTRODUCTION

This case considers whether the General Excise Tax (GET) and the Transient Accommodations Tax (TAT) are assessable on the relevant income of commercial entities operating under business models that were not expressly considered by the legislature when the applicable GET and TAT statutes were originally enacted. The Director of Taxation, State of Hawai‘i (Director) retroactively assessed ten online travel companies for unpaid GET and TAT for periods beginning between 1999 and 2001 and continuing until 2011, plus applicable penalties.

The online travel companies appealed the assessments to the Tax Appeal Court (tax court), and the assessments were consolidated into the present case. Both the online travel companies and the Director moved for summary judgment. The tax court ruled in favor of the Director with regard to the assessment of the GET (GET Assessments), with penalties and interest, but ruled in favor of the online travel companies with regard to the assessment of the TAT (TAT Assessments).¹ That disposition was reflected in the tax court's Final Judgment Disposing of All Issues and Claims of All Parties (Final Judgment), from which the online travel companies and the Director seek review.

We affirm the Final Judgment in part and vacate in part in regard to the GET Assessments, affirm in regard to the TAT Assessments, and remand the case to the tax court for further proceedings consistent with this opinion.

II. BACKGROUND

In early 2011 and 2012, the Director made multiple retroactive assessments against Expedia, Inc.; Hotels.com, L.P.; Hotwire, Inc.; Travelocity.com LP; Site59.COM, LLC; Orbitz, LLC; Trip Network, Inc.; Internetwork Publishing Corp.; priceline.com, Inc.; and Travelweb LLC (collectively the Online Travel Companies or OTCs, sometimes individually OTC). The OTCs appealed the 2011 and 2012 assessments to the tax court and the appeals were consolidated. All the non-dismissed assessments are consolidated in the present case, and the amounts that would be subject to the GET and TAT Assessments are stipulated.²

As noted, the Director and the OTCs both moved for summary judgment, resulting in the Final Judgment. The Final Judgment was filed "pursuant to and consistent with" eight underlying orders.³ In the Director's appeal, the Director identifies as error the tax court's grant of summary judgment in favor of the OTCs in regard to the TAT Assessments, the denial of summary judgment in favor of the Director on the TAT Assessments, and the denial of the Director's motion for reconsideration.⁴

In their cross-appeal, the OTCs identify the following as error: the tax court's grant of summary judgment in favor of the Director in regard to the GET Assessments, the court's denial of reconsideration of that grant, and the court's affirmance of penalties on the GET Assessments.⁵

This opinion will first provide the factual background common to both appeals. Following the background, the discussion will then address the separate appeals: the cross-appeal by the OTCs in regard to the GET Assessments, followed by the appeal by the Director in regard to the TAT Assessments.

A. The Assessed Transactions

The OTCs are organizations doing business with Hawai‘i hotel guests (transients) and Hawai‘i hotels. They operate websites where transients can research their destinations, compare travel options, and make reservations with third-party travel suppliers such as airlines, car rental companies, and hotels. The OTCs do not own any hotels.

The OTCs sell room accommodations using a business model that involves two different types of contracts: in the first, the hotel grants the OTC the right to sell occupancy of a hotel room to a transient, and in the second, the right to occupy the hotel room is sold to the transient by the OTC. The Director's GET and TAT Assessments are on transactions made under this business model (Assessed Transactions).⁶

1. The OTC-hotel contracts

In a contract between an OTC and a hotel, the hotel grants the OTC the right to offer room occupancy to the public out of the hotel's inventory. The hotel contractually delegates to the OTC numerous "day-to-day" responsibilities the hotel would otherwise perform itself, including the marketing, pricing, tax collecting, payment processing, legal contracting, accounting, and customer service functions. The OTCs maintain that they do not have the right or the ability to control or take possession of any hotel rooms; they do not buy, resell, or rent rooms or blocks of rooms; and they bear no risk if they fail to arrange room reservations at any hotel.

The OTC-hotel contract establishes the rate the hotel will charge the OTC for a room (net rate). The net rate is typically not a fixed amount, but floats, based on a discount from the hotel's "best available rate" offered to the public.

An OTC independently sets the price the transient is charged for the room based on the net rate under the OTC-hotel contract. That room price is made up of the net rate, plus two other elements set by the OTC: a "mark up" and a "service fee." The mark-up added to the net rate equals the "retail rate" the OTCs charge the transient for the room. In addition to the mark-up, the OTCs charge transients a service fee. The OTCs set the amount of the service fee.

2. The OTC-transient contracts

An OTC enters into a contract with a transient that reserves the transient's right to occupy a hotel room for a certain period of time.⁷ In the Assessed Transactions, transients obtain the right to occupy those hotel rooms by transacting with the OTCs rather than with the hotels themselves. The OTC-transient contract may also include terms and conditions of the hotel.⁸

The OTC controls significant aspects of the relationship with the transient from the time the transient logs on to the OTC's website until the transient checks in at the hotel. For instance, it is typical that prior to check-in, the only contact the transient has regarding the hotel reservation is with the OTC. Prior to check-in, the transient is considered to be solely the OTC's customer. Once the transient accepts the OTC's contract terms, the OTC processes the credit card transaction as the merchant of record. The transient pre-pays the OTC in full when the right to occupy a hotel room for a certain period of time is reserved. The transient owes nothing to the hotel at check-in.

The OTC does not disclose the individual amount of the net rate, mark-up, service fee, or tax to the transient. In the invoice to the transient, the OTC combines the taxes and service fees into a single line item called "taxes and fees." Similarly, the OTC never discloses to the hotel the amount of the mark-up, service fee, or total price paid by the transient. Only the OTC knows all the individual amounts comprising the total price paid by the transient, including the net rate, mark-up, service fee, and taxes.

Upon completing the reservation, the OTC sends an invoice or email confirmation to the transient. The hotel does not confirm the reservation directly with the transient. The OTC has its own cancellation policies the transient must accept when the booking occurs. If the transient changes or cancels a reservation, the OTC handles the change or cancellation. After booking the reservation, the OTC provides continuing customer support to the transient. The OTCs bear the risk of loss from credit card fraud or bad debt.

In the Assessed Transactions, the OTCs collect the room charge and taxes from the transients and control the monies paid by the transients. The hotels contractually delegate to the OTCs the responsibility to collect all amounts, including taxes, from the transients. The OTCs thus collect all amounts from the transient at the time the transient makes the reservation with the OTC.

The hotel invoices the OTC for the hotel stay, typically after the transient has checked out. Pursuant to the hotel's invoice, the OTC pays the hotel the net rate and the tax (TAT and GET) that has been collected from the transient on the net rate. The OTC is not an occupant and does not obtain a right of hotel room occupancy. The transient is the occupant and obtains a right to room occupancy, but the transient is not a party to the payment of the net rate by the OTC to the hotel.

B. Contact between the parties and actions of the parties prior to the 2011 Assessments

The parties dispute the import and extent of prior knowledge and prior contacts of the parties in regard to the OTCs' potential tax liability for the GET and TAT on the Assessed Transactions. The actions and contacts of the parties prior to the 2011 Assessments that can be garnered from the record are included here.

Attorney-client privilege logs in the record indicate some OTCs were in discussions with their counsel regarding "excise tax," "hotel occupancy taxes," and "state tax accrual" from 2001.

The record contains an email dated April 7, 2004, from an ostensible employee of the State of Hawai‘i to a person apparently involved in the state government of Florida that indicated that Hawai‘i could not "impose our TAT on an internet company's retained portion of payment for a hotel rental."⁹

In June 2006, the record indicates that members of the Department of Taxation ...