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Local Transient Room Tax Inapplicable to Online Travel Companies


In Louisville/Jefferson County Metro Government v. et al., No. 3:06-CV-480-R (W.D. Ky. Sept. 26, 2008), the United States District Court for the Western District of Kentucky (“Court”) held that local ordinances that imposed a Kentucky transient room tax on the rental of hotel rooms were inapplicable to online travel companies as they did not have ownership or physical control of the rooms they offered for rent.

The Court described the Defendants as “internet travel companies whose businesses assist online customers with the rental of hotel rooms across the world, including Louisville, Kentucky.” They paid local hotels a fixed price per room if they were able to find persons to rent the hotel rooms (“wholesale price”). Customers then booked rooms online for a rate that is higher than the wholesale price and paid Defendants that rate, plus applicable taxes and a service fee (“retail price”). Defendants paid hotels the wholesale price plus taxes that were due on that amount, and kept the rest.

Louisville/Jefferson County Metro Government (“Louisville”) filed a lawsuit that sought to recover unpaid transient room taxes that it claimed were due to it pursuant to Chapter 121 of the Louisville/Jefferson County Code of Ordinances (“Metro Ordinances”). That Ordinance imposed transient room taxes of 7.5% on the rent of rooms “charged by all persons, companies, corporations, or other like or similar persons, groups or organizations doing business as motor courts, motels, hotels, inns or like or similar accommodations businesses.” Louisville claimed that travel companies should have paid tax on the higher retail price.

Defendants asked the Court to dismiss Louisville’s claims for failure to state a cause of action upon which relief may be granted. Their substantive arguments were that the Metro Ordinances did not apply to them because they were not “doing business as motor courts, motels, hotels, inns, or like or similar accommodations businesses,” and that the extension of the transient room tax to the service fees included in the retail price constituted double taxation and an excise tax which was violative of the Kentucky Constitution.

In its original Opinion and Order, the Court disagreed with all of Defendants’ arguments and denied the Motion. After it reviewed Defendants’ Motion for Reconsideration, however, the Court agreed that the taxing ordinance did not apply to Defendants.

Focusing on whether Defendants were properly considered “like or similar accommodations businesses” of Chapter 121 of the Metro Ordinances, the Court held that the online travel companies do not have ownership or physical control of the rooms they offer for rent and therefore, are not like or similar to motor courts, motels, hotels, or inns. Accordingly, the Court held that the local taxing ordinances were inapplicable to the online travel companies.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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