Vill. of Bedford Park v. Expedia, Inc.

• Decision Date: 22 November 2017
• Docket Number: Nos. 16-3932 & 16-3944,s. 16-3932 & 16-3944
• Citation: 876 F.3d 296
• Parties: VILLAGE OF BEDFORD PARK, et al., Plaintiffs-Appellants, and Village of Lombard, Plaintiff-Cross-Appellee, v. EXPEDIA, INC., et al., Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

876 F.3d 296

VILLAGE OF BEDFORD PARK, et al., Plaintiffs-Appellants,andVillage of Lombard, Plaintiff-Cross-Appellee,

v.EXPEDIA, INC., et al., Defendants-Appellees, Cross-Appellants.

Nos. 16-3932 & 16-3944

United States Court of Appeals, Seventh Circuit.

Argued October 23, 2017

Decided November 22, 2017

William Q. Bird, Alexandria Seay, Paul I. Hotchkiss, Attorneys, Bird Law Group, P.C., John W. Crongeyer, Attorney, Crongeyer Law Firm, PC, Atlanta, GA, Robert K. Finnell, Attorney, Finnell Firm, Rome, GA, Michael S. Kzrak, Attorney, Clifford Law Offices, P.C., Dominick L. Lanzito, Paul O'Grady, Attorneys, Peterson, Johnson & Murray-Chicago LLC, Chicago, IL, for Plaintiffs-Appellants in No. 16-3932.

Allyson Newton Ho, Attorney, Morgan, Lewis & Bockius LLP, Dallas, TX, Mark Jacob Altschul, Elizabeth Brooke Herrington, Attorneys, Morgan, Lewis & Bockius LLP, Chicago, IL, Judd Edward Stone, II, Attorney, Morgan, Lewis & Bockius LLP, Washington, DC, for Expedia, Inc. and Trip Network, Inc. in Nos. 16-3932 & 16-3944.

Albert L. Hogan, III, Marcella Louise Lape, Attorneys, Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, IL, Jennifer J. McGahey, Anne Marie Seibel, Attorneys, Bradley Arant Boult Cummings LLP, Birmingham, AL, for priceline.com Incorporated in No. 16-3932 and priceline.com LLC in No. 16-3944.

Brian S. Stagner, Attorney, Kelly, Hart & Hallman, Fort Worth, TX, for Travelocity.com LP in Nos. 16-3932 & 16-3944.

Randolph K. Herndon, Attorney, Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, DE, Albert L. Hogan, III, Marcella Louise Lape, Attorneys, Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, IL, Jennifer J. McGahey, Anne Marie Seibel, Attorneys, Bradley Arant Boult Cummings LLP, Birmingham, AL, for priceline.com LLC in No. 16-3932.

William Q. Bird, Alexandria Seay, Paul I. Hotchkiss, Attorneys, Bird Law Group, P.C., Atlanta, GA, for Plaintiff-Appellant in No. 16-3944.

Before Bauer and Hamilton, Circuit Judges, and Darrow, District Judge.^*

Darrow, District Judge.

Thirteen Illinois municipalities ("the municipalities") assert that the Appellees-Cross-Appellants, which are online travel agencies ("OTAs"), have withheld money owed to them under their local hotel tax ordinances. The OTAs operate their online travel websites under the "merchant model"; customers pay an OTA directly to reserve rooms at hotels the OTA has contracted with. The participating hotels set a room rental rate. The OTA charges the customer a price that includes that rate, the estimated tax owed to the municipality, and additional charges for the OTA's services. After the customer's stay, the hotel invoices the OTA for the room rate and taxes, and remits the taxes collected to the municipality. The municipalities argue that they have been shorted tax revenue over the years because the OTAs do not remit taxes on the full price that customers pay. To illustrate, assume a 5 percent tax. If a customer books a room directly with a hotel for $100 a night, the hotel collects $5 for taxes and remits that to the municipality. But if a customer books a room through an OTA for $100 and the hotel's room rental rate is only $60, the OTA pays the hotel $63 and the hotel remits $3 to the municipality. The municipalities seek to collect the additional $2 from the OTAs. But none of the municipal ordinances place a duty on the OTAs to collect or remit the taxes, so the municipalities have no recourse against the OTAs. The OTAs are entitled to summary judgment against all of the municipalities.

I. Factual Background

The facts of this case are not highly disputed, but their legal significance is. At issue is how the OTAs in this case—Expedia, Priceline, Travelocity, and Orbitz¹ —function and the thirteen municipal tax ordinances.

a. Online Travel Agencies' Practices

The OTAs enter into contracts with hotels, under which the hotels agree to make rooms available for the OTAs. The OTAs then market those rooms and allow customers to reserve them through their websites.

The OTAs do not pre-pay for rooms and re-rent them to customers and they do not bear any loss if the rooms are not reserved. And the hotels can cease offering rooms through the OTAs at any time.

When a customer reserves a room through an OTA, he pays the OTA directly—the OTA serves as the merchant of record on the customer's credit card bill. The OTAs present the price in two line items: first, a charge for the room and second, a charge for taxes and fees. The charge for the room includes the room rate as set by the hotel, plus additional charges set by the OTAs. The customer never sees the hotel's room rate, but must agree to the OTA's terms and conditions, which state that the price charged includes the cost of the hotel plus consideration for the OTA's services. The taxes and fees charge includes the estimated taxes the hotel will owe on the rental plus additional fees as set by the OTA. If the customer incurs additional charges during his stay, he pays those to the hotel directly. After the customer checks out, the hotel invoices the OTA—or charges a virtual credit card provided by the OTA—for the room rate plus applicable taxes.

Although representatives from the OTAs, and statements made to the Securities and Exchange Commission, indicate that the OTAs "sell" hotel rooms to customers, the OTAs assert that this is merely industry jargon. See, e.g. , Priceline Rep. Dep. 231:3–9, Pls.'s Statement of Undisputed Facts Ex. 19, ECF No. 256-5² ("I want to be careful to point out that [the terms purchase and sale are] commonly used in the context of customers making reservations with hotels whose rates and inventory were made available to us.... We are not in the business of buying and selling hotel rooms."). Contracts between hotels and the OTAs confirm that the OTAs do not actually buy, and never acquire the right to enter or grant possession of, hotel rooms. Instead, the OTAs take reservation requests from customers and transmit those to the hotels. The contracts require the hotels to honor those requests, but the customer does not obtain the right to occupy the room until he checks in at the hotel.

The OTAs do provide additional services to customers between payment and check in at the hotel. In fact, a customer will likely only deal with the OTA prior to checking in because OTAs handle reservation modifications, cancellations, and refunds. The OTAs generally enforce a hotel's cancellation policies, but sometimes set their own policies and charge their own cancellation fees. The OTAs also often provide customer service support, but some contracts specify that the OTAs will refer hotel-specific questions to the hotels.

b. Municipal Ordinances

Though each of the thirteen ordinances has unique aspects, all fall into one of three general categories: those that place the duty to collect and remit the tax on owners, operators, and managers of hotels or hotel rooms; those that apply to all persons engaged in the business of renting hotel rooms; and those that incorporate elements of both.³

i. Owners, Operators, and Managers

Seven municipalities—Arlington Heights, Bedford Park, Oak Lawn, Orland Park, Orland Hills, Schaumburg, and Tinley Park—have ordinances that impose a tax on the use and privilege of renting, leasing, or letting hotel and motel rooms. While a hotel guest ultimately bears responsibility for the tax, the ordinances generally place the duty of collecting the tax from the renter and paying it to the municipality on the owner, operator, or manager of hotels. Some of the ordinances place the duty on owners, operators, and managers of hotel accommodations, which are defined as "[a] room or rooms in any building or structure kept, used or maintained as or advertised or held out to the public to be an inn, motel, hotel" or a similar facility. Orland Hills Ordinance, Br. Appellants Sep. App. 170; Orland Park Ordinance, id. at 355–56 (same); Tinley Park Ordinance, id. at 369 (same).

ii. Engaged in Renting Hotel Rooms

Three of the municipalities—Rockford,⁴ Willowbrook, and Lombard—impose a tax on persons engaged in the business of renting, leasing, or letting rooms in a hotel. In Willowbrook and Rockford, the tax rate is a percentage of gross rental receipts from renting, leasing, or letting rooms in a hotel. Lombard's ordinance requires the tax "to be stated separately as an additional charge on individual billings," id. at 338, but does not specify what amount the tax rate applies to.

iii. Hybrids

The last three municipalities have ordinances encompassing elements of both types of taxes. For example, Des Plaines taxes all "persons engaged in the business of renting, leasing or letting rooms in a hotel or motel."Id. at 302. But the tax ordinance places a duty on operators of hotels or motels to keep records and on owners of hotels to file monthly tax returns reflecting the tax received. The ordinance also requires the owner to pay the taxes due at the time of filing. Warrenville's ordinance is similar in relevant respects. Burr Ridge taxes "the use and privilege of engaging in the business of renting, leasing or letting of room(s) in a motel or hotel." Id. at 274. But the ordinance places the duty to pay the tax on "[t]he owner, manager or operator of each hotel or motel." Id. at 275.

c. Procedural History

The municipalities filed a putative class action against the OTAs in state court alleging that they had failed to remit taxes owed to the named municipalities and others similarly situated in Illinois. Vill. of Bedford Park v. Expedia, Inc. (WA) , 193 F.Supp.3d 911, 917 (N.D. Ill. 2016). It was removed to the Northern District of Illinois under the removal provision of the Class Action Fairness Act of 2005, 28 U.S.C. § 1453(b). Id. The district court denied class certification, but retained jurisdiction. Id. After discovery, both sets of parties moved for summary judgment. Id. The district court granted the OTAs summary judgment against all but one municipality, Lombard. Id. at 939. In turn, the court granted...