Cases & Deals

Expedia obtains ruling overturning City of San Diego's transient occupancy tax assessment

Clients Expedia, Inc.; Hotels.com, L.P.; and Hotwire, Inc.

On September 6, 2011, Expedia, Inc.; Hotels.com; and Hotwire, Inc. won an important victory when the Los Angeles Superior Court overturned an administrative hearing officer ruling and held that the Expedia Entities were wrongfully assessed transient occupancy tax ("TOT") by the City of San Diego. The City of San Diego had issued more than $21 million in assessments against the Expedia Entities and other online travel companies ("OTCs") for alleged underpayment of TOT for a period of eight plus years, from 2000-2008. The trial on the writ of mandate took place before Los Angeles Superior Court Judge Elihu Berle, who granted the Expedia Entities request for writ of mandate, denied the City's cross-motion for judgment, and confirmed that the online travel companies were not obligated to collect and remit TOT.

In May 2010, a City-appointed hearing officer concluded the OTCs were liable for back TOT, penalties, and interest finding that the OTCs were "operators" and "managing agents" of the hotels for which the OTCs facilitated reservations. The hearing officer further held that the amounts the OTCs charged for their travel-related services were subject to TOT and therefore the OTCs had been underpaying transient occupancy tax for a period of eight plus years. After trial on the Expedia Entities' petition for administrative writ of mandate, Judge Berle concluded that the City erred in assessing the OTCs because (1) the OTCs were neither "operators" nor "managing agents" of the hotels and therefore had no obligation to collect and remit TOT; (2) since the plain language of the City's ordinance defined "rent" as the amount "charged by the operator," the proper amount of tax due to the City is based on the amount paid to the hotel operator, not to the OTC.

The victory before Judge Berle, which follows a similar February 2010 ruling by Judge Carolyn Kuhl, has significant implications for a pending class action alleging underpayment of TOT brought by the City of Los Angeles and currently part of a Judicial Council Coordinated Proceeding now before Judge Berle. At least 49 cities throughout California are members of the putative class action alleging that the Expedia Entities owe several hundred million dollars in back taxes, penalties, and interest. Judge Berle's ruling will likely have a significant effect on the viability of that class action and the attempts by other cities in California to assess TOT.

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