Illinois ~ Sales and Use Tax: Federal Court Addresses Local Hotel Occupancy Taxes

CCH Tax Day Report

A federal district court held that various online travel companies (OTCs) owed the village of Lombard hotel occupancy taxes, but did not owe hotel occupancy taxes to 12 other Illinois municipalities. The OTCs sell hotel rooms using the “merchant business model,” contracting with hotels to purchase hotel rooms at wholesale rates, then selling room reservations to customers at retail rates. Numerous municipalities sought to collect tax from the OTCs’ on their receipts attributable to the difference between the wholesale rate paid by the OTCs and the retail rate charged by the OTCs. The OTCs were liable for the Lombard tax because the Lombard tax ordinance provides for a tax on “all persons engaged in the business of renting, leasing or letting rooms in a hotel.” Lombard’s tax is imposed with proper statutory authorization as the Illinois statute allows municipalities to “impose a tax upon all persons engaged in such municipality in the business of renting, leasing or letting rooms in a hotel.” In addition, Lombard’s tax does not violate the uniformity clause of the Illinois Constitution. The ordinance language reasonably taxes all persons involved in the hotel business even if they do not own, operate, or manage hotels themselves, and does not broaden Lombard’s tax authority. Finally, the ordinance does not violate the U.S. Constitution’s commerce clause because both paying to rent a room in Lombard and engaging in the business of renting a room in Lombard are activities with a substantial nexus to Illinois.

The ordinances in several other municipalities place the duty to collect tax on the “owner and operator of each hotel.” The OTCs, however, were not owners and operators. The words “owner” and “operator” are undefined by the municipalities’ ordinances The court noted that operation of a hotel involves more than taking reservations, ensuring reservations are honored, handling complaints, and serving as the primary contact for customers before they stay in rented hotel rooms. Also, hotel owners have the right to possess, use, and convey their hotels, while the OTCs had no such rights with regard to the hotels.

The remaining municipalities’ ordinances imposed the tax on rental receipts. The OTCs’ receipts attributable to the difference between the wholesale rate and the retail rate are not rental receipts. The retail rate includes both the cost of the room rental and the cost of other services provided by the OTCs as evidenced by OTCs’ terms of service.

Village of Bedford Park v. Expedia, Inc., U.S. District Court, N.D. Illinois, No. 13 C 5633, June 20, 2016, ¶403-109

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