Cases & Deals

Online travel companies prevail in challenge to improperly assessed transient occupancy tax

Client(s) Expedia, Inc.

Jones Day handled the appeal on behalf of Expedia, Inc. On November 24, 2009, Jones Day client Expedia, Inc., and several other online travel companies (the "OTCs"), won a significant battle in the war against an unprecedented $21.3 million transient occupancy tax ("TOT") assessment by the City of Anaheim (with numerous similar actions proceeding in other jurisdictions).

Historically, a taxpayer who seeks to challenge a tax has been required to pay the tax first and then challenge it on the merits – and later recover a refund if the merits challenge is successful. This "pay first, litigate later" rule is rooted in a general policy that governmental entities rely on tax revenue to fund critical public operations, and if a taxpayer is able to challenge the tax without paying first, those critical public operations would be disrupted.

Here, the City of Anaheim sought to compel Expedia and the other OTCs to "pay first" the $20 million-plus assessment. Jones Day successfully opposed the City's efforts in Orange County Superior Court. After the Court of Appeal's summarily denial from the California Court of Appeal, the City then petitioned for review by the California Supreme Court. In a somewhat unusual move, the Supreme Court granted review but directed the Court of Appeal to issue an order to show cause.

Five days after the argument, the California Court of Appeal issued a published opinion denying the City's petition for writ of mandate, holding (i) the California constitutional "pay first" requirement did not apply to the City's tax; (ii) there was no other statutory authority for imposing a "pay first" requirement; and (iii) public policy did not support a "pay first" requirement for the precise reasons argued by Expedia. Subsequent petition for review by the Supreme Court was denied.

City of Anaheim v., Case No. S179074 (Cal. Supr. Court); Case No. B216250 (2009 Cal. App. LEXIS 1891 (Cal. App. 2d Dist. Nov. 24, 2009))