In City of Anaheim v. The Superior Court of Los Angeles County, (— Cal.Rptr.3d —-, Cal.App. 2 Dist., November 24, 2009), a California Court of Appeal considered whether online travel companies were required to pay a transient occupancy tax assessed by a city before the companies could file a lawsuit against the city to challenge the tax. The Court of Appeal held the “pay first” rule did not apply to require the travel companies to pay the assessed tax before filing a lawsuit.
Facts
A transient occupancy tax has been assessed in the City of Anaheim (“City”) since 1977. In 2007, City decided online travel companies should be subject to the tax. City’s Transient Occupancy Code requires a transient, defined as “one who occupies a hotel room or similar facility for less than 30 days,” to pay a tax that is equal to 15 percent of the rent. The term “rent” is defined as the consideration charged by an operator of a hotel for accommodations. The term operator includes any person, entity, or business organization that is the operator of the hotel, or a managing agent if the operator performs its functions through such an agent.
Online travel companies facilitate the booking of hotel rooms but do not operate hotels or provide accommodations. These companies are compensated by retaining the difference between the amount that is collected for the rooms from the customer and the amount the companies pay the hotel for the rooms. In 2008, City issued estimated assessments to several online travel companies for transient occupancy taxes. These companies objected to the assessments and requested a hearing. After a hearing, a hearing officer issued a decision that found each of the following companies owed unpaid transient occupancy taxes: Expedia, Hotels.com, Hotwire, Orbitz, Cheaptickets.com. Lodging.com, Priceline, Site 59, and Travelocity.
The affected online travel companies filed lawsuits in the Superior Court of Orange County. City asked the court to dismiss the lawsuits on the ground that the travel companies failed to allege they had paid the assessed tax before filing suit against City. The court refused to dismiss the cases.
Decision
City asserts the travel companies had to follow the “pay first” rule before filing a lawsuit to challenge the tax. The reference to the “pay first” rule is grounded in article XIII, section 32 of the California Constitution, which provides the following: “No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature.” The Court of Appeal held the “pay first” rule contained in section 32 does not bar the travel companies’ lawsuit “because courts have limited this constitutional provision to actions against the state or an officer of the state.”
A local government, however, “is not precluded from inserting a ‘pay first’ requirement in a taxing statute as long as the statute comports with due process.” Due process requires the government must provide a procedure so that the taxpayer may contest the legality of the imposition of the tax. The taxpayer must be provided with an “adequate remedy at law to challenge the legality of a tax by seeking a refund of taxes already paid.” Courts have upheld “pay first” requirements in regard to “local taxes where the taxing authority has specifically provided for a refund procedure.”
The Court of Appeal concluded City could not rely on the local government “pay first” rule because its ordinance does not contain a “pay first” requirement or a refund procedure. The court further held City did not state a persuasive public policy argument for the imposition of a “pay first” rule under these circumstances. City has not come to rely on a predictable income stream from the tax it seeks to collect because City has never before collected the tax.
Questions
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Mona G. Ebrahimi | 916.321.4500