In a defeat for the tax collector, a sharply divided Maryland high court has ruled that the hotel and rental car booking website Travelocity.com does not owe state sales and use taxes for the years before Maryland’s tax law changed in 2015 to include accommodations intermediaries.
The Court of Appeals’ 4-3 split on Travelocity’s taxability was marked by the judges’ different perspectives on the online booking service, with the majority seeing it as an agent of the hotels and rental car businesses and the minority viewing it as a service for customers.
Judge Michele D. Hotten, writing for the majority, stated that Travelocity was not a taxable “vendor” of hotel rooms and rental cars but a mere message carrier between hotels or agencies and potential customers, alerting them to discounted prices. The hotels and rental car agencies retained the rights to their rates, rooms and cars, the high court held.
“In this regard, Travelocity can be compared to a postal carrier who delivered, for a fee, items from a seller to a buyer while at the same time collecting payment from the buyer to return to the seller,” Hotten wrote. “At no time did Travelocity, as the ‘postal carrier’ for the transactions between the agencies and the customers, obtain or transfer title of the hotel rooms and rental vehicles to be liable for the sales and use tax.”
But dissenting Judge Shirley M. Watts wrote that Travelocity was certainly a vendor in the sense that customers using the online service dealt exclusively with it, from booking their reservations to paying for their stays and rental vehicles. Customer payments were made to Travelocity, not to the hotels or rental agencies, Watts added.
In ruling for Travelocity, the divided court overturned decisions by the Maryland Tax Court and Anne Arundel County Circuit Court, which had both held that Travelocity owed sales and use taxes for the audited years 2003 through 2011.
The tax and circuit courts placed that tax bill at $295,434.38 plus interest from Dec. 18, 2017, the date of the tax court’s decision, according to the high court’s opinion. The Maryland comptroller had sought $6.4 million, including penalties and interest, the high court added.
The tax and circuit courts said no penalty was owed because Travelocity’s refusal to pay and its 2012 appeal were based on its “good faith” argument that it did not owe the sales and use tax.
Both Travelocity and the comptroller appealed the circuit court’s decision directly to the high court, which ruled last month that the online company’s argument was correct.
Maryland Comptroller Peter Franchot’s office said in a statement Friday that it is reviewing the Court of Appeals’ decision.
Dallas-based Travelocity’s attorney, Scott R. Wiehle, did not immediately return email and telephone messages Friday seeking comment on the ruling. Wiehle is with Kelly Hart & Hallman LLP in Fort Worth, Texas.
In its decision, the Court of Appeals said Travelocity’s contractual obligation with hotels and rental car agencies was to broaden public awareness of their availability, which the online service achieved via access to their reservation databases and discount rates. Travelocity had no ownership or operational control of the hotel rooms or rental cars, the court added.
Travelocity was merely “a facilitator of reservations,” Hotten wrote. “In sum, Travelocity facilitated the right to occupy a hotel room or rent a vehicle during the audit period, but did not acquire ‘title or possession’ as required for a ‘sale’ under the Tax Code Section 11-101(i), and is therefore not liable for the tax.”
The high court said Travelocity’s freedom from the tax between 2003 and 2011 was bolstered by a 2015 amendment to the Tax Code that added “accommodations intermediary” – one who facilitates the use of an accommodation for a fee — to the list of vendors liable for the sale and use tax.
“The consequent addition of ‘accommodations intermediary’ to the statute is an indication that prior to the amendment an accommodations intermediary such as Travelocity was not included in the statutory definition of a vendor liable for the tax,” Hotten wrote.
“The clarified amendment the intent of the General Assembly to expand the definition of a vendor liable for the sales and use tax to include an accommodations intermediary,” Hotten added. “However, prior to the 2015 amendment, an accommodations intermediary was not included.”
Hotten was joined in the opinion by Judges Joseph M. Getty, Brynja M. Booth and Jonathan Biran.
Watts, in dissent, said the amendment did not change the Tax Code but merely made clear amid Travelocity’s legal challenge that accommodations intermediaries had always been regarded as vendors liable for the sales and use tax.
“In other words, the General Assembly was essentially closing a door that Travelocity had attempted to open,” Watts wrote. “Travelocity should not be given the benefit of so-called ‘ambiguity’ in the definition of the word ‘vendor’ in (the Tax Code) where Travelocity itself manufactured the alleged ambiguity by failing to pay the sales and use tax and starting a legal dispute about the word.”
Watts added that Travelocity was clearly a “vendor” for consumers before the 2015 amendment.
“Indeed, when a customer used Travelocity’s website to reserve a hotel room or rental car, the role of the hotel or rental car company was entirely passive,” Watts wrote.
“Until the customer arrived to use the hotel room or rental car, the hotel or rental car company had no contact whatsoever with the customer,” Watts added. “The circumstance that Travelocity did not immediately transfer possession of the hotel room or rental car to the customer does not change the fact that Travelocity immediately accepted consideration from the customer, and immediately transferred to the customer the grant of a license to use a hotel room or rental car.”
Chief Judge Mary Ellen Barbera and Judge Robert N. McDonald joined Watts’ dissent.
The Court of Appeals rendered its decision in Travelocity.com LP n/k/a TVL LP v. Comptroller of Maryland, No. 14, September Term 2020.