San Diego Transient Occupancy Tax is Calculated by the Amount Received by Hotel Operators, Not Amount Received by Online Travel Companies, if Such Companies Contract Directly With the Public

Cities throughout California impose transient occupancy taxes ("TOT") on hotel occupancy.  In In re Transient Occupancy Tax Cases (2014) — Cal App 4th —-, the Court of Appeal held that San Diego's TOT ordinance is calculated by the rent received by hotel "operators".  Therefore, when online travel companies ("OTC") contract directly with the public and pay hotel operators a reduced wholesale price, the TOT is calculated based on the wholesale price and not the amount paid by the public.


OTCs, such as Expedia, Hotwire, and, operate several room-sale models.  The model at issue here involves the "merchant model", where the OTCs contract with hotels for the right to advertise and rent rooms to the general public.  Under the merchant model, a customer's payment is made to the OTC and the OTC provides customer service until the customer checks into the hotel.

Under the merchant model, the OTCs receive revenue by contracting with hotels at wholesale prices and renting the rooms to the public at retail prices.  The OTCs impose a "tax recovery charge" on the transaction based on the TOT calculated by the wholesale price.  After a customer pays the OTC, the hotel charges the OTC for the wholesale price and the TOT.  The OTC remits the charged amount and the hotel, in turn, remits the TOT to the city.  The OTC retains the difference. 

The merchant model results in reduced tax revenue because the TOT is calculated by the lower wholesale price received by the hotel and not the higher amount paid by the customer.  

In October 2007, the City of San Diego ("City") began TOT audits of OTCs and later issued TOT assessments against specific OTCs, which include Expedia, Hotwire, and The OTCs appealed the assessment to the City. The City's hearing officer found that the OTCs owed TOT on their retail price service charges in merchant model transactions, and the OTCs filed suit. 

The superior court agreed with the OTCs.  The superior court held that because the City's ordinance imposes a tax on rent "charged by the operator" and the OTCs were not "operators", the TOT was calculated properly based on the wholesale price received by the hotels.

The City appealed.


The Court of Appeal ("Court") affirmed the superior court's decision. The Court stated that under the plain language of the City's ordinance, TOT is calculated based on the "Rent charged by the Operator."  Since the ordinance defines "Operator" as "the Person who is the proprietor of the Hotel", OTCs are not operators.  Therefore, San Diego's TOT is properly calculated by the wholesale price received by the hotels from the OTCs and not the retail price paid by the customers to the OTCs.  The Court also noted that in other unpublished decisions involving the TOT ordinances of Anaheim and Santa Monica, courts employed similar reasoning to reach the same conclusion.

Finally, the Court noted that in "construing tax ordinances, we must find an express intent to impose a tax."  As the City's TOT ordinance provided no authority for the imposition of tax obligations or liability on any party other than a hotel or a transient, "there is simply no basis for the imposition of TOT liability on the OTC."

What This Means To You

This case is a lesson in the importance of precision when drafting ordinances. The result in this case might have been different had San Diego defined "Operator" in a way that included OTC's using the "merchant model" for room rental.  Furthermore, the case also highlights the difficulty cities face in imposing taxes in a rapidly evolving Internet-based marketplace.


If you have any questions or concerns regarding this Legal Alert, please contact one of the attorneys listed below or the attorney with whom you usually consult.

Jeffrey A. Mitchell, Maggie W. Stern or Anthony D. Bento | 916.321.4500