Arizona Appellate Court Finds Online Travel Companies Not Subject to Tax on Hotel Operators

The BR State + Local Tax Spotlight

By Joshua M. Sivin

Last month, an Arizona appellate court found that online travel companies such as Orbitz and Expedia (“OTCs”) are not entities that operate hotels nor cause hotels to be operated and therefore are not subject to Tucson’s tax applicable to such entities. City of Tucson v. Orbitz Worldwide, Inc., et. al. (Ariz. Ct. Appeals, Division One, Jan. 11, 2024).

Facts: OTCs operate websites where travelers may book hotel rooms. In earlier litigation (“Prior Litigation”), several Arizona cities sought to impose tax on OTCs under sections 444 and 447 of Arizona’s Model City Tax Code (“MCTC”). Section 444 imposes a tax on “the gross income from the business activity upon every person engaging…in the business of operating a hotel.” Section 447 taxes “the gross income from the business activity of any hotel.” The MCTC defines “person” to include “broker[s].”

In the Prior Litigation, the Arizona Supreme Court held that OTCs were liable for tax under Section 444 as brokers but were not liable for tax under Section 447, reasoning that Section 444 imposes “tax liability on any ‘person’—not just a hotel owner or operator—that engages for profit in business activities that are central to keeping brick-and-mortar lodging places functional or in operation.” The Court held that Section 447 did not apply to brokers (such as OTCs) because it only taxed “the gross income from the business activity of any hotel.”

The statute at issue in the current litigation, Section 19-66, applies to “every person who operates” a hotel or “causes [a hotel] to be operated.” Tucson argued that because Section 19-66 and Section 444 both used the language “every person,” Section 19-66 should apply to OTCs. The superior court agreed and ruled in favor of Tucson.

Decision: The Appellate Court reversed, finding that Section 19-66 does not mirror Section 444, despite the fact that both statutes utilize the same “every person” language. The Court found “[a]s written, § 19-66 refers to only two taxpayer categories: ‘every person’ who operates hotels, and ‘every person’ who “cause[s] [hotels] to be operated.’ The absence of ‘business activity’ and ‘business of’ from § 19-66(a) eliminates all others as subjects of the tax. Thus, § 19-66 will apply only if OTCs like Expedia are hotel operators or if they cause hotels to be operated.”

The Court went on to determine that OTCs are not hotel operators because OTCs are not proprietors of a hotel nor a non-employee managing agent who performs the proprietor’s functions. OTCs are brokers. The Court further determined that OTCs do not cause hotels to be operated because the language in Section 19-66 “shows the tax is directed at hotel operations, not adjacent business activities.”

In analyzing the language of Section 19-66 and comparing it to Sections 444 and 447, the Court found:

The text therefore deviates from the restrictive formulation of [Section] 447, which only imposes a tax on “any hotel.” But it also departs from the broader language of [Section] 444 which taxes “the gross income from the business activity [of] every person engaging in or continuing in the business of operating a hotel.” The omission of any reference to “business activity” and “business of” operating hotels is significant.

Takeaway: Words in a statute matter, and statutes must be analyzed individually, even where similar language is used. In this case, because Section 19-66 applied only to “every person who operates” a hotel or “causes [a hotel] to be operated,” and not to the “business activity upon every person engaging…in the business of operating a hotel,” like the tax in Section 444, OTCs which neither operate hotels nor cause hotels to be operated were not subject to tax.

This update is one in a series of updates written for the February 2024 edition of The BR State + Local Tax Spotlight.

© 2024 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.