Many California cities have enacted transient occupancy taxes applicable to hotel occupancy and other short-term rental transactions occurring within city limits. In the case of In re Transient Occupancy Tax Cases, the Second District California Court of Appeal determined that San Diego may not impose a transient occupancy tax on the service charges and markup costs paid by customers of online travel companies when booking hotel rooms online. The appeal was part of a coordinated effort by five California cities – Anaheim, Los Angeles, San Diego, San Francisco and Santa Monica – seeking to impose liability for local transient occupancy taxes on commissions and fees charged by online travel companies.

Background and procedural history

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.

The decision by the Second District

The Second District upheld the ruling by the superior court. The court decided that the city ordinance only applied to rental charges by hotel operators. The law requires that “operators” collect the tax from transients. Online travel companies are not considered “operators,” said the appeals court, as they are not the owner of the structure being rented, nor a person with management responsibility, such as a managing agent, resident manager, or resident agent. Therefore, the markups and service charges charged by online travel companies are not considered to be rent subject to the transient occupancy tax.

Similar rulings were issued in previous appeals involving transient occupancy taxes imposed by city ordinances in Anaheim and Santa Monica. The California Supreme Court has accepted the case for review.

Contact an attorney

Taxpayers are urged to consult with an experienced attorney or other tax professional that is current in the particular field of tax law to ensure that their rights are fully protected.