Travelscape Llc v. South Carolina Dep't of Revenue

Decision Date18 January 2011
Docket NumberNo. 26913.,26913.
Citation391 S.C. 89,705 S.E.2d 28
PartiesTRAVELSCAPE, LLC, Appellant,v.SOUTH CAROLINA DEPARTMENT OF REVENUE, Respondent.
CourtSouth Carolina Supreme Court

OPINION TEXT STARTS HERE

James P. Karen, David Cowling, and Lily H. Shanks, all of Jones Day, of Dallas, TX, John M. Allan, of Jones Day, of Atlanta, GA, Stephen P. Groves, Sr., Thomas S. Tisdale, Jr. and Burnet R. Maybank, III, all of Nexsen Pruet, LLC, all of Charleston, for Appellant.Milton Gary Kimpson, Andrew L. Richardson, Jr., Caroline Raines, and Ronald W. Urban, all of S.C. Department of Revenue, of Columbia, for Respondents.Frances Isaac Cantwell, of Regan and Cantwell, LLC, of Charleston, and Robert E. Lyon, Jr., of Columbia, for Amicus Curiae SC Association of Counties.Justice HEARN.

The Administrative Law Court (“ALC”) found Travelscape, LLC was required to remit sales tax on the gross proceeds it received from providing hotel reservations in South Carolina. Additionally, the ALC found the sales tax did not violate the Dormant Commerce Clause. We agree with the ALC's findings and affirm.

FACTUAL/PROCEDURAL BACKGROUND

Travelscape is an online travel company offering hotel reservations at locations across the country through the website Expedia.com (“Expedia”). 1 Although Travelscape neither owns nor operates hotels, it enters into contracts with hotels whereby the hotels agree to accept a discounted rate from those offered to the general public (“net rate”) for reservations made on Expedia.2 Travelscape then adds a facilitation fee, service fee, and tax recovery charge to the net rate of the room. The facilitation and service fees are retained by Travelscape as compensation for its role in the transaction. The tax recovery charge, which is based on the net room rate, corresponds with the sales tax owed by the hotel. The sum of the net room rate, facilitation fee, service fee, and tax recovery charge is the actual price listed for the room on Expedia.

If a customer books a hotel reservation on Expedia, Travelscape charges the customer's credit card for the transaction. Unless the customer purchases additional guests services while staying at the hotel ( i.e. room service, movie rentals, or valet parking), the customer pays no money to the hotel for her stay. After the customer checks out of the hotel, the hotel invoices Travelscape for the net room rate as well as sales tax owed by the hotel. Travelscape then remits the net room rate and tax recovery charge to the hotel. Travelscape retains the facilitation and service fees and does not pay sales tax on these fees.

The Department of Revenue (Department) conducted an audit of Travelscape's records for the period of July 1, 2001 through June 30, 2006. The Department determined Travelscape was required to pay a sales tax of seven percent on the gross proceeds received from furnishing hotel accommodations in South Carolina. 3 Thereafter, the Department issued Travelscape an assessment and penalty in the amount of $6,376,454.71. Travelscape filed a timely request for a contested case hearing before the ALC in accordance with section 12–60–460 of the South Carolina Code (Supp.2009). Following a two-day hearing, the ALC issued a final order, finding Travelscape was required to pay the tax but not required to pay the penalties imposed by the Department. 4 This appeal followed.

STANDARD OF REVIEW

This Court's standard of review is set forth in section 1–23–610(B) of the South Carolina Code (Supp.2009). That section provides:

The review of the administrative law judge's order must be confined to the record. The court may not substitute its judgment for the judgment of the administrative law judge as to the weight of the evidence on questions of fact. The court ... may affirm the decision or remand the case for further proceedings; or it may reverse or modify the decision if the substantive rights of the petitioner have been prejudiced because the finding, conclusion, or decision is:

(a) in violation of constitutional or statutory provisions;

(b) in excess of the statutory authority of the agency;

(c) made upon unlawful procedure;

(d) affected by other error of law;

(e) clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record; or

(f) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.

Id.

LAW/ANALYSIS

I. APPLICABILITY OF ACCOMMODATIONS TAX

We begin our analysis in this case by focusing on the statutory scheme of section 12–36–920. Both parties agree, and the ALC found, that section 12–36–920 is divided into two relevant parts. Section 12–36–920(A) sets forth what is subject to the tax—“the gross proceeds derived from the rental or charges for any rooms ... or sleeping accommodations furnished to transients by any hotel ... or any place in which rooms, lodgings, or sleeping accommodations are furnished to transients for a consideration.” (emphasis added). In turn, section 12–36–920(E) establishes who is subject to the tax—“every person engaged ... in the business of furnishing accommodations to transients for consideration.” (emphasis added). Therefore, the task before us is to harmonize these two provisions and determine whether the service and facilitation fees are gross proceeds derived from the furnishing of sleeping accommodations and, if so, whether Travelscape is engaged in the business of furnishing these accommodations.

A. Service and Facilitation Fees

Travelscape contends it is not required to pay sales tax on the service and facilitation fees it retains because such fees are “derived from” the services it provides, not from the rental charge for the hotel room. We disagree.

Section 12–36–920(A) of the South Carolina Code (Supp.2009) imposes a seven percent sales tax on the gross proceeds derived from the rental or charges for any rooms ... furnished to transients by any ... place in which rooms, lodgings, or sleeping accommodations are furnished to transients for consideration.” (emphasis added). In the definition section of the South Carolina Sales and Use Tax Act, the legislature defined the term “gross proceeds of sale” and “any similar term” as “the value proceeding or accruing from the sale, lease, or rental of tangible personal property ... without any deduction for ... the cost of materials, labor, or service.” S.C.Code Ann. § 12–36–90(1)(b)(ii) (emphasis added).5

“The cardinal rule of statutory construction is to ascertain and effectuate the intent of the legislature.” Hardee v. McDowell, 381 S.C. 445, 453, 673 S.E.2d 813, 817 (2009) (internal quotation omitted). Where the statute's language is plain, unambiguous, and conveys a clear, definite meaning, the rules of statutory interpretation are not needed and the court has no right to impose another meaning. Gay v. Ariail, 381 S.C. 341, 345, 673 S.E.2d 418, 420 (2009).

In our view, the fees charged by Travelscape for its services are subject to sales tax under the plain language of section 12–36–920(A) as gross proceeds. Section 12–36–920(A) imposes the tax on the gross proceeds derived from the rental or charges for any room.” (emphasis added). In section 12–36–90(1)(b), the legislature specifically stated the definition of “gross proceeds of sales” applies to any similar term as well. S.C.Code Ann. § 12–36–90(1)(b). We find the term gross proceeds as used in section 12–36–920(A) is a similar term to gross proceeds of sales. Therefore, the definition of gross proceeds of sales also applies to gross proceeds.6 Accordingly, “gross proceeds” under section 12–36–920(A) includes the value obtained from the rental of accommodations without deduction for the cost of services. S.C.Code Ann. § 12–36–90(1)(b)(ii). Because the cost of services is specifically included in the definition of gross proceeds of sales, we find the fees retained by Travelscape for its services are taxable as gross proceeds.

B. Application to Travelscape

Section 12–36–920(E) imposes the Accommodations Tax “on every person engaged or continuing within this State in the business of furnishing accommodations to transients for consideration.” Travelscape argues it is not subject to the Accommodations Tax because it: (A) is not engaged in the business of furnishing accommodations, and (B) does not conduct business within the State.

1. Furnishing Accommodations

Travelscape first asserts it is not engaged in the business of furnishing accommodations because it neither owns nor operates hotels. According to Travelscape, the ordinary and commonplace understanding of the term “furnish,” as well as the manner that the term is used throughout section 12–36–920, demonstrates that the term carries with it the connotation of physically providing sleeping accommodations to customers. Because Travelscape is only an intermediary providing hotel reservations to transients and does not physically provide sleeping accommodations, Travelscape contends it is not subject to the Accommodations Tax. We disagree.

“A statute as a whole must receive practical, reasonable, and fair interpretation consonant with the purpose, design, and policy of lawmakers.” Sloan v. S.C. Bd. of Physical Therapy Examiners, 370 S.C. 452, 468, 636 S.E.2d 598, 606 (2006). When faced with an undefined statutory term, the Court must interpret the term in accordance with its usual and customary meaning. Branch v. City of Myrtle Beach, 340 S.C. 405, 409–10, 532 S.E.2d 289, 292 (2000). Courts should consider not merely the language of the particular clause being construed, but the undefined word and its meaning in conjunction with the whole purpose of the statute and the policy of the law. Whitner v. State, 328 S.C. 1, 6, 492 S.E.2d 777, 779 (1997).

The United States District Court for the District of South Carolina considered a similar argument in City of Charleston, S.C. v. Hotels.com, 520 F.Supp.2d 757 (D.S.C.2007). In that case, the city of Charleston and town of Mount Pleasant passed...

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