A popular travel and booking website will not have to pay the state more than $200,000 in back taxes after the Indiana Tax Court held that the website is not considered a retail merchant.
During the time between Jan. 1, 2004, and Dec. 31, 2006, an Orbitz LLC regional market manager traveled to Indiana to build relationships with Hoosier hoteliers, who subsequently executed contracts with Orbitz that allowed the travel company to provide its services for hotels in Allen, Clark, Floyd, Harrison, Jefferson, Marion, Scott and Shelby counties.
As part of those contracts, the hoteliers delegated some of their responsibilities to Orbitz, including marketing, tax collecting, payment processing, reservations and customer service functions. The hoteliers also established wholesale rates for their hotel rooms, but agreed to allow Orbitz to charge customers at higher rates when it facilitated pre-paid reservations. Orbitz, in turn, agreed to, among other things, collect sales and innkeeper’s taxes for customers based on the wholesale rate of the hotel rooms alone.
In December 2007, the Indiana Department of Revenue issued sales and innkeeper’s tax investigations reports to Orbitz, showing that the travel company owed more than $200,000 in sales tax, innkeeper’s tax and interest for the period between Jan. 1, 2004, and Dec. 31, 2006, because it should have collected taxes based on the retail rate of the rooms, not just the wholesale rate.
After the revenue department denied Orbitz’s protest filing and request for rehearing, Orbitz appealed in Orbitz, LLC v. Indiana Department of State Revenue, 49T10-0903-TA-10, in March 2009, and both parties moved for summary judgment in August 2013.
Indiana Tax Court Judge Martha Blood Wentworth granted Orbitz’s motion for summary judgment Tuesday, writing that the travel company was not considered a “retail merchant” under Indiana tax law.
To be a retail merchant, state statute requires Orbitz to “rent” or “furnish” rooms to others for less than 30 days at a time. Although Orbitz’ agreement with the hoteliers gave the company the rights to market, sell or rent hotel rooms, Wentworth wrote that the agreement “merely provided Orbitz with the right to confirm a pre-paid reservation for a hotel room, while the hoteliers themselves…were alone able to transfer possession or control.”
The tax court judge based that opinion on the case of 2625 Building Corp. v. Deutsch, 385 N.E.2d 1189 (Ind. Ct. App. 1979), which held that a hotel’s obligation to transfer possession of its hotel rooms to customers who make pre-paid reservations with the hotel or a third party remains executory until the customer checks in or cancels.
“The facts in this case establish that the hoteliers, not Orbitz … delivered or transferred possession and control of hotel rooms to customer during the check-in process,” Wentworth wrote.
Further, she held that the fact that Orbitz is not a retail merchant relieves the travel company of liability for sales or innkeeper’s taxes “regardless of the statutory proclamation that each rental or furnishing of a hotel room is a unitary transaction.”