Wake County has lost its eight-year legal battle to force online travel companies to pay millions of dollars in alleged back taxes.
Despite the county’s legal defeat, however, subsequent developments – most notably a change in state law enacted years after the county sued the online travel companies – have enabled Wake and other North Carolina counties to collect the disputed tax going forward.
“We’re satisfied that the issue is resolved,” said Scott Warren, the county attorney.
Charles Neely Jr., a Raleigh attorney with Williams Mullen who represented the online travel companies, including Expedia, Priceline.com and Travelocity, declined to comment on the case.
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On Tuesday the N.C. Court of Appeals upheld a lower court’s decision to grant a summary judgment that rejected the claims made by Wake County and three other counties – Buncombe, Dare and Mecklenburg. The counties had sought millions in back taxes from 11 online travel companies.
Wake County, which filed its lawsuit in 2006, and the other counties contended the fees paid to these online travel companies should be subject to the room occupancy tax the counties levy on the price of a hotel room – 6 percent in the case of Wake County. Those fees are invisible to consumers but are tacked on to the discounted rates that the online companies negotiate with hotels.
However, on Tuesday, a three-judge appellate panel unanimously rejected the counties’ contention, ruling that the online companies don’t qualify as “operators of hotels, motels, tourist homes, or tourist camps” that are required to pay the tax under state law. A trial court previously reached the same conclusion.
Warren said that the appellate court’s decision “was not unexpected” and that Wake County didn’t plan to appeal.
“It was a tough case,” he said. “At the end of the day, it’s a business decision. … At what point do you cut your losses and move on?”
The calculus not to appeal also took into account that the county began collecting the disputed tax earlier this year under an agreement it reached with the online travel companies.
“We have compliance for collection of these taxes now,” Warren said. “So we’re moving forward, and I think that’s an appropriate thing to do.”
Tax law change
The state legislature apparently set the stage for collecting the tax fours year ago when it amended North Carolina tax law so that the fees paid to online travel companies were included in the gross receipts that are subject to both the state’s sales tax and the counties’ room occupancy tax.
Soon after that law went into effect in 2011, a half-dozen online travel companies went to court arguing it was unconstitutional under both the North Carolina and U.S. constitutions. The suit named both the state Department of Revenue and Durham County, which collects the room occupancy tax, as defendants.
Last year, a trial court judge issued a split decision on the defendants’ motion to dismiss the case – the N.C. constitutional claims were allowed to proceed, but the U.S. constitutional claims were dismissed. Both sides appealed, but in December they reached a settlement.
Neely, who also represented the online travel companies in this case, declined to discuss the terms of the settlement. So did Trevor Johnson, a spokesman for the Revenue Department, who cited a state law that prohibits disclosure of tax information.
But all signs point to the agreement paving the way for the state and the counties to collect the disputed tax from the online travel companies.
Kim Simpson, Durham County’s tax administrator, confirmed that the county is now collecting the tax from the online travel companies.
“There is a form on a monthly basis that they submit to us with a payment of the taxes,” she said.
And the state’s current database of companies that collect and pay sales and occupancy taxes includes several of the online travel companies that challenged the law – Orbitz, Cheaptickets.com and Hotels.com.
Some online travel companies couldn’t be found by using the database’s search function, but such searches aren’t definitive. For example, a search for Hotels.com comes up empty; but a search for Hotels.com LP shows that the company is on the list of taxpayers.