City’s Suit Seeking To Recover Hotel Occupancy Taxes From Internet Travel Companies Is Not Ripe If The City Has Not Acted Administratively To Assess And Collect The Taxes

In City of Oakland v., (— F.3d —-, C.A.9 (Cal.), July 16, 2009), the United States Court of Appeals considered a lawsuit by a city aimed at collecting unpaid hotel occupancy taxes from internet travel companies, in which the city complained that the travel companies were required to calculate and pay all occupancy taxes to the city. The court ruled that because the city had never attempted to assess and collect the taxes itself, it had not exhausted its administrative remedies, and its lawsuit was therefore not ripe.


California Revenue and Taxation Code section 7280 (a) provides that cities may impose a tax on the occupancy of rooms in hotels or other establishments. The City of Oakland (“City”) enacted a Transient Occupancy Tax Ordinance (“Ordinance”), providing for a tax to be paid by the travel operator in the amount of 11 percent of the rent charged to the tenant.

Internet travel companies, including, that negotiated lower room rates with hotels and other establishments, collected taxes from users based on the retail rates of the room, but paid the City amounts based only on the lower negotiated rates. The internet travel companies kept the “tax” they collected on the difference between the negotiated rates and the retail rates.

The City sued, seeking an order requiring that the internet travel companies pay the City the full amount of the tax based on the retail value of the rooms. The district court dismissed the case, with prejudice, ruling that the City could not sue because it had not administratively assessed and tried to collect the tax.


“This is the classic case of jumping the gun,” the court began. The difficulty is that the City never assessed or imposed the tax, in clear violation of the exhaustion requirement. The plain language of the City’s ordinance imposed upon the City an initial obligation, namely that its tax administrator “shall obtain facts and information on which to base his or her estimate of the tax due,” that the administrator “shall assess” the tax, and that the administrator “shall give notice of the amount to be assessed.” The City did none of those things before suing, the court said.

The ordinance does allow the City to bring enforcement actions to collect amounts owed, but “With no assessment, however, there is nothing that the City is seeking to ‘enforce,'” the court ruled. Put simply, the tax cannot be owed until it is assessed, and in the absence of an assessment, the City has no valid collection of an amount owed to seek to enforce.

The district court’s dismissal of the City’s case was therefore correct. However, the court ruled that the dismissal should be without prejudice, rather than with prejudice, because a failure to exhaust administrative remedies is a curable defect.


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