The San Diego city council enacted a transient occupancy tax on rental transactions where the occupancy of “any structure or any portion of any structure” is for a period of less than one calendar month. The tax is calculated as a percentage of the rental amount and fees charged to the occupant by the lodging business. An exemption is provided for official government business travel by public officers and employees of agencies of the federal government and the State of California. Official travel by personnel of local governmental agencies and agencies of states other than California are not exempt from the tax. Travel by employees of non-profit companies is also not exempt.

After the city issued a tax assessment for transient occupancy taxes against certain online travel companies, the companies brought suit in the superior court challenging the applicability of the tax ordinance. The superior court determined based upon a review of the plain wording of the city’s ordinance that the tax did not apply to the markups and service charges billed to customers of online travel companies when making hotel room reservations online. The city appealed the ruling to the Second District California Court of Appeal.