Online travel companies on the hook for local sales taxes in Arizona

Sep 12, 2019
Sep 12, 2019
0 min. read

On Sept. 9, 2019, the Arizona Supreme Court ruled that certain online travel companies (OTCs) must pay local transaction privilege taxes (sales taxes) on their service fees and mark-ups that customers pay when booking hotel rooms online. The court affirmed an earlier appellate court decision that held the mark-ups and fees must be included in the gross receipts used to determine the transaction privilege tax in Phoenix and several other Arizona cities.

OTCs enter into agreements with hotels to sell rooms at a discounted cost. The hotel receives more exposure through the OTC’s websites and the OTC collects a mark-up and service fee from the total charged to the customer. Generally, the OTC remits the hotel tax as applied to the discounted room cost, not on the total customer charges, including mark-ups and service fees. The court provided the following example to illustrate the difference in tax revenue:

...assume the OTC contracts with a hotel for a discounted net rental rate of $100 in a city with a combined 10% occupancy tax. The OTC then advertises the room for $150, plus an additional $15 for taxes and service fees. If a customer pays the hotel $165, the hotel keeps $100, remits $16.50 to the city, and pays the OTC the remaining $48.50. If a customer pays the OTC instead, the hotel invoices the OTC after the customer’s stay for $110, keeping $100 and remitting $10 to the city. The OTC keeps the remaining $55.

In that scenario, the city receives less hotel tax when customers book online. Whether the hotel tax even applies to OTCs and whether the mark-ups and service fees are included in the tax base are some of the hotel tax issues under litigation across the country.

The court held that the OTCs were critical to the hotel operations in the city and thus taxable under laws imposing taxes on operating a hotel. The majority opinion emphasized the following factors that gave rise to the local liabilities: advertising of available rooms, soliciting customers, processing payments, and confirming and cancelling reservations.

This is the latest in a long line of cases addressing whether OTCs are subject to hotel taxes and on what tax base. Many of the cases specifically address a local hotel and occupancy tax. In 2017, the Colorado Supreme Court upheld Denver’s imposition of hotel taxes on OTCs.


Virtually all states and local governments that impose taxes on hotels and lodging services have or will attempt to tax OTCs. State and local taxing authorities have generally been successful in litigating these issues. However, the OTCs have prevailed in some circumstances, such as where the tax is specifically imposed on the hotel or lodging operator. Businesses in the online travel industry should consult with a tax advisor for more information.


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