ORDERS:
FINAL ORDER AND DECISION
STATEMENT
OF THE CASE
This matter comes before the Administrative Law Court (ALC or
Court) pursuant to the request of Petitioner, Travelscape, LLC, an online
travel company doing business as Expedia.com (Petitioner), for a contested case
hearing under S.C. Code Ann. § 12-60-460 (Supp. 2006). Petitioner is
contesting an assessment and penalties for sales and accommodations taxes issued to it by the South Carolina Department of
Revenue (Department) for the periods between July 1, 2001 through June 30, 2006.[1] A
hearing was held before me on October 21 and 22, 2008 at the offices of the
ALC.
LEGAL ISSUES RAISED
The
following issues were raised in this proceeding:
1. Whether the gross proceeds received by Petitioner from the rental of South
Carolina hotel rooms are subject to sales tax under S.C. Code Ann. § 12-36-920
(2000 & Supp. 2007)?
2. Whether imposition of sales
tax on the taxpayer violates the Commerce Clause of the United States
Constitution?
STIPULATIONS
OF FACT
At the hearing into
this matter and pursuant to ALC Rule 25(C), the parties entered the following
written stipulations of fact into the Record:
1. Petitioner is an online travel
company doing business as Expedia.com through the website, www.expedia.com, and
telephone call centers. Petitioner is a single member Nevada Limited Liability
Company located in Las Vegas, Nevada. Petitioner’s single member, Expedia,
Inc., a Washington corporation, is located in Bellevue, Washington.[2]
Petitioner contracts with hotels across the country, including hotels located
in South Carolina.
2. Under its merchant business model,
the contractual agreements between Petitioner and supplier hotels set room
rates that the hotels are willing to accept for reservations booked using
Petitioner’s website (the Net Room Rate). The Net Room Rates contracted
between Petitioner and the hotels are at a discounted price from the rates
offered to the general public.
3. Petitioner adds its Margin to the Net
Room Rate and then offers to book reservations for the public through the
www.expedia.com website.
4. A “base” number of rooms available
for booking through Petitioner are generally established; however, the supplier
hotel retains the right to book the reservations itself through channels other
than the Petitioner. Petitioner incurs no liability for unbooked base
reservations.
5. When a customer selects the
desired hotel accommodations using the www.expedia.com website, the total
amount owed by the customer is displayed on the site. In order to complete the
reservation process, the customer reserves the room by use of a credit card. Petitioner
is the merchant of record for this transaction. The Petitioner charges the
customer’s credit card account at the time a reservation is made.
6. The price charged by Petitioner to
its customers consists of the Net Room Rate that is pre-negotiated with the
hotel, Petitioner’s Margin, Petitioner’s Service Fees and the Tax Recovery Charge,
which is the anticipated Accommodations Tax expected to be charged by the
hotel.
7. When the customer arrives at the
hotel for check-in and the hotel confirms that the customer has a valid
reservation, the hotel assigns a room to the customer. The customer does not
make any further payment to the hotel except for incidental charges and
additional services purchased from the hotel. Only the guest has the right to
occupy the room.
8. The hotel thereafter invoices
Petitioner the agreed upon Net Room Rate. The invoice from the hotel includes
charges for the room and Accommodations Tax based upon the Net Room Rate. The
hotel remits this sales tax to the South Carolina Department of Revenue
(Department). No Accommodations Tax is paid on the difference between the
proceeds received by Petitioner from its customer, and the Net Room Rate
Petitioner pays to the hotel. At no time has Petitioner filed Accommodations
Tax returns with or paid Accommodations Tax to the Department.
Petitioner’s Operations & Business Model
9. Hotel reservations are typically
booked through Petitioner in the following manner: a potential guest calls
Petitioner or visits the www.expedia.com website, searches for available hotel
accommodations and books a reservation through Petitioner at a facility
selected by the customer.
10. Petitioner charges its customer’s
credit card the total reservation price at the time the reservation is booked.
The reservation is booked prior to the actual hotel stay.
11. Petitioner’s total reservation price
includes (1) the Room Reservation Rate displayed on the website (which consists
of the sum of the Net Room Rate and the Margin), plus (2) Tax Recovery Charges,
(3) Service Fees, and in some cases (4) certain hotel-imposed fees such as
resort fees. The Room Reservation Rate displayed on the website is a
combination of (a) the Net Room Rate for rooms reserved on the traveler’s
behalf and (b) the Margin retained by Petitioner. Petitioner’s Service Fees are
amounts retained by Petitioner as compensation in servicing the reservation. Petitioner’s
Accommodations Tax Recovery Charges are a recovery of the estimated transaction
taxes (e.g., Accommodations Tax, occupancy, room tax, excise tax, value added
tax, etc.) that Petitioner pays to the hotel supplier in connection with the
customer’s hotel reservations.
12. Pursuant to the hotel contracts, the
Net Room Rate that is pre-negotiated with the hotel must be kept confidential
and is not disclosed to consumers or competitors.
13. The Tax Recovery Charges are combined
with Service Fees in order to preserve the confidentiality of the Net Room
Rate. Petitioner does not impose Tax Recovery Charges on the Margin or fees it
charges as compensation for its services. The Service Fee is compensation for
the servicing of the customer’s travel reservation.
14. Employees and representatives of
Petitioner visit South Carolina in order to enable Petitioner to establish and
maintain hotel relationships and obtain the discounted Net Room Rate for rooms
booked for using the www.expedia.com website.
15. Expedia had one employee who
resided in South Carolina during the third and fourth calendar quarters of 2003
and the first and second calendar quarters of 2004.
16. Auditors from the Department examined
Petitioner’s records for the period July 1, 2000 through June 30, 2006 (the
“Audit Period”). Following the audit, the Department took the position that
the transactions between Petitioner and its Internet customers were retail
sales and that Petitioner should have reported and remitted sales tax on these
transactions. A proposed assessment for sales taxes was issued to the
Petitioner on February 14, 2007.
17. Petitioner fully cooperated with the
Department during the course of the audit by responding to requests for
information and producing books and records for the Department’s review.
18. The proposed assessment was calculated
based upon the total amount received by Petitioner from its Internet customers
without credit or offset for taxes the Petitioner paid to the hotels and in
turn remitted to the Department. [3]
19. The Department’s proposed assessment
consisted of sales taxes of $4,120,542.24; interest of $666,736.41; and penalty
of $1,589,176.06, all totaling $6,376,454.71 (hereafter, the “Proposed
Assessment”). Petitioner timely protested the Proposed Assessment on August 1,
2007. The Department issued its Determination on January 23, 2008. In response
to the Department’s Determination, Petitioner timely filed a notice of request
for a contested case hearing before the South Carolina Administrative Law Court
on February 20, 2008.
20. The following terms as used by the
parties had the indicated meanings:
“Net Room Rate” means the
net discount rate that Petitioner and its supplier hotels have pre-negotiated
for hotel rooms booked through Petitioner’s website.
“Margin” means the mark-up added
by Petitioner to the Net Room Rate as compensation to Petitioner.
“Room Reservation Rate” means
the price at which room reservations are offered to the public and is the sum
of the Net Room Rate and the Margin.
“Service Fees” means fees imposed by
Petitioner for its services.
“Tax Recovery Charge” means the estimated sales and use and/or accommodations
tax (“Accommodations Tax”) calculated based upon the Net Room Rate.
FINDINGS
OF FACT
Having
observed the witnesses and exhibits presented at the hearing and taking into
consideration the burden of persuasion and the credibility of the witnesses, I
make the following additional findings of fact by a preponderance of evidence:
Over
the course of the audit period from July 2001 to June 2006, Petitioner had
contracts with 364 South Carolina hotels allowing it to rent hotel rooms to its
customers over the internet. During the period from February 2004 to June
2006, Petitioner had contracts with 356 South Carolina hotels. These contracts
set a base number of hotel rooms that Petitioner is allowed to sell to its
customers during defined time periods. Petitioner’s website advertises hotel
accommodations for which it has entered into those contracts. The contracts
set a rental for Petitioner that is generally a discounted price from the
normal rates offered to the general public. A “base” number of rooms are
established allowing Petitioner to market a minimum number and category of
rooms to its customers.
Petitioner
increases or “marks-up” the discounted price of the hotel rooms and then offers
the rooms for sale to the public at the increased price on its internet
website. When a customer selects the desired hotel accommodations using Petitioner’s
website, the site shows the total price due for the rental of a room(s). Once
a customer reserves the room by use of a credit card, it is Petitioner that collects
money from the customer, thereafter makes arrangements with the hotel to
reserve the room, and then communicates the appropriate reservation information
to its customer.
Once
a customer pays for the accommodation(s), Petitioner directs that customer to
the particular hotel with a prepaid reservation for lodging at a price
determined by Petitioner. Petitioner is the merchant of record for these
transactions.
In fact, Petitioner charges the customer’s credit card upon making the room
reservation, not after the hotel stay has occurred. The customer makes no
payments to any entity other than the taxpayer unless he or she purchases
additional guest services or incidentals at the hotel site. If there are such
additional purchases, those transactions normally take place directly with the
hotel or a third party vendor and Petitioner is not involved.
Petitioner’s 2001 and 2002 10-K annual reports to the
Securities and Exchange Commission specified that the company was engaged in
the sale of hotel rooms or, in other words, that the above transactions were
sales of hotel rooms. Melissa Maher, nevertheless, testified on behalf of Petitioner
that use of the term “sell” in the hotel industry referred to “renting hotel
rooms.”
CONCLUSIONS
OF LAW
Based
upon the above Stipulations and Findings of Fact, I conclude the following as a
matter of law:
General
Findings
S.C.
Code Ann. § 1-23-600 grants jurisdiction to the Court to hear contested cases
under the Administrative Procedures Act. Additionally, S.C. Code Ann. §
12-60-460 grants the ALC the authority to conduct contested case hearings in
matters concerning tax assessments.
The standard of proof in these administrative proceedings is a
preponderance of the evidence. Anonymous v. State Bd. of Med. Exam’rs,
329 S.C. 371, 496 S.E.2d 17 (1998). Additionally, the burden of proof
is generally upon the party asserting the affirmative in an adjudicatory
administrative proceeding. 2 Am. Jur. 2d Administrative Law § 354
(2004). In this case, Petitioner, the taxpayer, requested a contested case
hearing to challenge the Department’s proposed assessment. Thus, since Petitioner
asserts the affirmative, it must carry the burden of proving the Department’s
proposed assessment is incorrect. Id.; cf. Cloyd v. Mabry,
295 S.C. 86, 367 S.E.2d 171 (1988) (“A taxpayer contesting an assessment has
the burden of showing the valuation of the taxing authority is incorrect.”).
Imposition
of the Accommodations Tax
As noted above, the
Department seeks an assessment and penalties for sales taxes it claims were due
between July 1, 2001 through June 30, 2006. S.C. Code Ann. § 12-36-920 (2000
& Supp. 2007 ) imposes a sales tax on the gross proceeds derived from the
rental of accommodations in South Carolina (Accommodations Tax). The South
Carolina Accommodations Tax is imposed on the vendor rather than the customer
(i.e., accommodation guest) and is thus referred to as a vendor tax. Id. Under Section 12-36-920(A), vendors are required to remit a tax on the “gross
proceeds derived from the rental or charges for any rooms . . . furnished to
transients by any hotel . . . or any place in which rooms, lodgings, or
sleeping accommodations are furnished to transients for a consideration.”
The Department contends
that since Petitioner charges transients for accommodations, the money it
receives as compensation should be considered “gross proceeds” derived from the
furnishing of accommodations to transients within the meaning of the statute.
Thus, Petitioner should be taxed under Section 12-36-920(A) at a rate of 7% on
the entire amount received from its customers instead of the discounted room
rate it now forwards to the hotels to be remitted to the Department.
Petitioner disputes the Department’s position that it “sells” hotel accommodations and instead
asserts that it is in the business of “facilitating” hotel reservations.
Notably, Petitioner is not a hotel, inn, or a place in which rooms, lodging, or
sleeping accommodations are furnished. Accordingly, Petitioner contends that
it is not subject to the Accommodations Tax because it does not furnish accommodations
within the meaning of the statute. This case thus turns on whether Petitioner
is a vendor subject to the Accommodations Tax.
Implication
of the Term Furnish in Section 12-36-920
Application
of Section 12-36-920(E)
Petitioner premises its
contention that is does not furnish accommodations upon the presumption that
the act of furnishing a room under the Accommodations Tax is limited only to
the physical act of providing a room to a transient. In other words,
furnishing and renting both involve the transfer of possession – a function
Petitioner does not provide. Following that reasoning, Petitioner contends
that since it does not own or manage any hotels, it cannot actually furnish
hotel rooms to customers. Rather, it merely facilitates the “booking” of rooms
at a hotel.
S.C. Code Ann §
12-36-920(E) provides that the tax on accommodations for transients is “imposed
on every person engaged or continuing within this State in the business of
furnishing accommodations to transients for consideration.” In determining the
meaning of that provision, “[t]he cardinal rule of statutory interpretation is
to ascertain and effectuate the intention of the legislature.” Chem-Nuclear
Sys., LLC v. S.C. Bd. of Health and Envtl. Control, 374 S.C 201, 205, 648
S.E.2d 601, 603 (2007). However, “[i]f a statute’s language is plain and
unambiguous, and conveys a clear and definite meaning, there is no occasion for
employing rules of statutory interpretation . . . .” Grant v. City of Folly Beach, 346 S.C. 74, 79, 551 S.E.2d 229, 231 (2001). Furthermore, in Edisto
Fleets, Inc. v. S.C. Tax Commission, 256 S.C. 350, 182 S.E.2d 713 (1971), it
was stated that:
It is the settled law of this jurisdiction that tax statutes
cannot be extended by implication beyond the clear import of the language used
and that any substantial doubt must be resolved against the state and in favor
of the taxpayer. Where a tax statute is ambiguous and it is reasonably
susceptible of an interpretation that would exclude taxation, any substantial
doubt must be resolved against the state and in favor of the taxpayer.
Id. at 357, 182 S.E.2d at
716 (Bussey, J., dissenting); see also S.C. Nat’l Bank v. S.C. Tax
Comm’n, 297 S.C. 279, 281, 376 S.E.2d 512, 513 (1989) (“In the enforcement
of tax statutes, the taxpayer should receive the benefit in cases of doubt.”).
Nevertheless, in Crescent Manufacturing Co. v. Tax Commissionn, 129 S.C.
480, 124 S.E. 761 (1924), the South Carolina Supreme Court observed:
If the intent of the Legislature is apparent from an
examination and consideration of the statute as a whole, the rule of strict
construction in favor of the taxpayer has no application. That rule of strict
construction of penal laws and tax status “is subordinate to the rule of
reasonable, sensible construction, having in view effectuation of the
legislation purpose,” . . . “and does not prevent the courts from calling to
their aid all other rules of construction and giving each its appropriate scope
. . . .”
Id. at 492, 124 S.E. at 765
(citations omitted).
Here, the facts
clearly establish that Petitioner does not own any of the hotels for which it
books rooms. Petitioner also does not provide its services on-site at the
hotel. However, the requisites of Section 12-36-920(E) are not limited to hotel
owners or operators. In fact, there is no requirement that a person own the
property to meet the criterion of furnishing a room under any portion of Section
12-36-920.
Instead, Section 12-36-920(E) broadly imposes the tax on every entity in
the business of “furnishing” accommodations that are located in the State of
South Carolina to transients for consideration. Moreover, the general concept
of “furnishing” does not express a condition precedent of ownership. “Where a
word is not defined in a statute, our appellate courts have looked to the usual
dictionary meaning to supply its meaning.” Lee v. Thermal Engineering Corp.,
352 S.C. 81, 91-92, 572 S.E.2d 298, 303 (Ct. App. 2002); see also City of Charleston, S.C. v. Hotels.com, LP, 520
F.Supp.2d 757 (D.S.C. 2007) (applying the dictionary definition of “furnish” in
interpreting Section 12-36-920). “Furnish” is defined in part as “to provide
what is needed”; “supply” or “give.” Merriam-Webster's Online Dictionary,
http://www.merriam-webster.com/dictionary. None of those terms connotes
ownership. In fact, one could “furnish” items that they neither owned nor had
the authority to supply. Nevertheless, at least under the analysis in this
case, there is an implicit requirement of a person’s authority and the ability
to provide an accommodation. Here, clearly Petitioner possessed the authority
to book rooms on behalf of the hotels from which it took bookings. Thus, the
relevant issue is what Petitioner provided when it booked the hotel room(s).
In simple terms, a
customer who wishes to book a hotel room upon Petitioner’s site enters a
request to book the room. After payment is assured via a credit card,
Petitioner, through its computers, verifies the availability of the room(s)
with the hotel and then issues the customer a confirmation of his room
reservation. Accordingly, the facts establish that Petitioner was not merely
receiving payment on behalf of a hotel when it booked a room. Here, a customer with a prepaid
hotel room reservation purchased on Petitioner’s website has a right to
occupy the room for a particular time. In other words, as a result of the
transaction that occurs upon Petitioner’s website, a customer obtains the right
to be furnished a room. This right to occupy a room is also in keeping with
the common meaning of the term room “reservation” -- “an
arrangement to have something (as a hotel room) held for one’s use ; also : a promise,
guarantee, or record of such engagement.” Merriam-Webster's Online
Dictionary, http://www.merriam-webster.com/dictionary. Therefore, an
Expedia guest, armed with a prepaid room reservation purchased on the
Expedia.com website, has a right to occupy a hotel room at a particular hotel
for a particular time.
Petitioner nonetheless
contends that it does not furnish rooms or accommodations because customers of
Petitioner are not provided a specific hotel room until after they arrive at
the hotel and present the hotel suitable identification. Under Petitioner’s
interpretation of Section 12-36-920(E), “furnishing” is basically limited to
the physical act of providing a room key to a hotel guest. However, Petitioner
has failed to distinguish that room registration practice from that of any
other hotel registration that may occur. Thus, the only implication offered by
Petitioner’s reasoning is that since the actual hotel room is not assigned
until a customer arrives upon the hotel property, the sale or rental does not
occur until that arrival.
In other words, Petitioner’s supposition centers not
upon the existence of the right to a room or accommodation but upon where that
right is ultimately exercised.
This reasoning assigns de minimis value to a prepaid reservation and conversely
assigns significant importance to physically providing the accommodations to guests.
The flaw in Petitioner’s
reasoning is revealed in the Petitioner’s own assigned value to a prepaid
reservation. Usually, the right to occupy the room is exercised upon arriving
at the hotel and requesting the use of the room. Nevertheless, if a party
fails to cancel a reservation, that person is charged for the use of the room
whether they occupy it or not -- or, more importantly, whether they physically
arrive upon the property or not. Thus, the furnishing of a room within the
context of Petitioner’s business model means something more than actually
taking possession of the room. If indeed the failure to cancel a reservation
results in a charge for the use of a room, the room must be contractually
furnished upon making the reservation or, in this instance, the acceptance of
the online booking. It is at that point when the customer has a right to use
the accommodations.
Moreover, it is
significant that the customer’s transaction of booking the hotel room does not
involve interaction with the hotel at all. Petitioner is the merchant of
record for the transactions in which a hotel room is booked by Petitioner. It
is Petitioner who accepts money from the customer and thereafter makes
arrangements with the hotel to reserve the room, and then communicates the
appropriate reservation information to its customer. The customer’s credit
card invoice shows that the hotel reservations were purchased not from the
hotel but from Petitioner. In renting a room, a customer makes no payments to
anyone other than Petitioner unless he or she purchases additional guest
services at the hotel site. If there are such additional purchases, those
transactions normally take place directly with the hotel or a third party
vendor and Petitioner is not involved. Based upon these same set of facts, the
court held in City of Charleston, S.C. v. Hotels.com, LP,
520 F.Supp.2d 757 (D.S.C. 2007), that:
If consumers access a website, use it to book a hotel room,
pay the website directly, and never pay the hotel, or interact with the hotel
at all until they arrive, the court cannot accept Defendants’ assertion that
they do not furnish accommodations to consumers.
Id. at 768.
Furthermore, “[t]he
legislature is presumed to have fully understood the meaning of the words used
in a statute and, unless this meaning is vague or indefinite, intended to use
them in their ordinary and common meaning or in their well-defined legal
sense.” S.C. Coastal Conservation League v. S.C. Dep’t of Health and Envtl.
Control, --- S.E.2d ----, 2008 WL 4693075, at *7 (Ct. App. 2008). In
seeking to ascertain the meaning of a statute, a court must also “presume the
legislature intended to accomplish something with an enacted statute and did
not intend for a section or provision to be purposeless or futile.” Id. at *8.
Significantly, in
Section 12-36-920(E), the General Assembly did not expressly limit the application
of the tax to businesses that own or manage the accommodation. This fact is particularly
salient in light of a review of other sections of the Sales and Use Tax Act. See Floyd v. Nationwide Mut. Ins. Co., 367 S.C. 253, 260, 626 S.E.2d 6, 10
(2005) (“The true guide to statutory construction is not the phraseology of an
isolated section or provision, but the language of the statute as a whole considered
in light of its manifest purpose.”). For instance, Section 12-36-920(A) provides
that the tax applies to not just the rental of the accommodation but to the
“charges” for the room. Application of the tax to the charges goes beyond just
the rental rate and imposes the tax on all the associated charges to obtain the
room. Likewise, the definition of “business” under the Accommodations Tax
includes “all activities” in which the object is to directly or indirectly profit. S.C. Code Ann. § 12-36-20 (2000).
In addition, Petitioner
points out that, since 1955, the General Assembly has amended or recodified the
Accommodations Tax several times, but it has never specifically expanded the tax
to cover online companies like Petitioner or any other intermediary which is
compensated by a party other than the hotel or other place of accommodation. For
instance, in 1976, the General Assembly expanded the list of businesses set
forth in Section 12-36-920(A) to include campgrounds. The 1976 amendment,
however, was clearly necessary to clarify whether a space at a campground was
an accommodation subject to the tax or simply the lease of property. Here, the
statute, as it currently exists, imposes a tax upon Petitioner because it was
furnishing an accommodation as contemplated by the statute. Thus, there was no
need for the statute to be amended to specifically enumerate companies like
Petitioner since those companies already fell within the broad language of the
statute. Therefore, since it was unnecessary to amend the statute to expressly
cover companies like Petitioner, there can be no inference ensuing from the General
Assembly’s failure to do so.
Application
of Sections 12-36-920 (A), (B), (C) and (D)
Petitioner
argues that the language of Sections
12-36-920 (A), (B), (C) and (D) reflect the legislative intent that Petitioner’s
provision of online hotel reservations is not the act of furnishing a
room under the Accommodations Tax. Those
sections, however, simply do not reflect the General Assembly’s intent to
circumscribe the businesses to which the Accommodations Tax applies. Indeed, in
analyzing these arguments, it important to note that “a court should not focus
on any single section or provision but should consider the language of the
statute as a whole.” Chem-Nuclear, 648 S.E.2d at 603. Additionally,
“[t]he language of a statute must be read in a sense which harmonizes with its
subject matter and accords with its general purpose.” Id.
Petitioner
claims that the application of the Accommodations Tax to its business inconsistently
requires a liberal interpretation of the term “furnish” in Section (E) and a
narrow interpretation of the phrase “accommodations furnished” in Section (A)
as a service that can only be provided by hotels. The words of the statute must be construed in context and “must be given
their plain and ordinary meaning without resorting to subtle or forced
construction to limit or expand the statute’s operation.” Municipal Ass’n
of S.C. v. AT&T Comm. of S. States, Inc., 361 S.C. 576, 580, 606 S.E.2d
468, 470 (2004). Likewise, in construing a statute, this Court should
not consider the particular clause being construed in isolation, but should
read the clause in “conjunction with the purpose of the whole statute, and in
light of the object and policy of the law.” S.C. Coastal Council v. S.C. State Ethics Comm’n, 306 S.C. 41, 44, 410 S.E.2d 245, 247 (1991).
Here, the meaning of
the term “furnish” is clear from the context of both statutory provisions. In
subsection (E), the operative phrase is “in the business of furnishing
accommodations.” That phrase applies to “every
person” who engages or continues within this State in the business of
furnishing accommodations to transients for recompense. As explained above,
Petitioner’s provision of hotel reservations meets the criteria of furnishing
an accommodation. On the other hand, in subsection (A), the operative
phrase is “rooms, campground spaces, lodgings, or sleeping accommodations
furnished to transients by any hotel, inn . . .” In that provision, the word
“furnished” is followed by the phrase “by any hotel, inn . . .” Nevertheless, as
further explained below, when viewed in light of the entire statute, the most
reasonable interpretation of the phrase “furnished . . . by any hotel, inn . .
.” in subsection (A) is that it simply sets forth where the “rooms, campground
spaces, lodgings, or sleeping accommodations” must be located. The notion that
the phrase limits tax liability to the hotel or inn itself is refuted by subsection
(C) of the statute. Therefore, there is no inconsistency in the application of
the term “furnish” in reaching the conclusion that the Accommodation Tax applies to Petitioner. Subsection (A) sets forth what the tax is imposed upon and subsection (E) sets forth who is responsible
for collecting and remitting the tax.
Petitioner next argues that
Section 12-36-920(A) sets forth the list of businesses which are subject to the
Accommodations Tax as “hotels, inns, tourist courts, tourist camps, motels,
campgrounds, and residences.” Petitioner further claims that since the General
Assembly did not include in that list businesses facilitating reservations at
such places, under the doctrine of “expressio unius est exclusio alterius,” it
is not subject to Section 12-36-920(A). That doctrine provides that:
the enumeration of particular things excludes the idea of
something else not mentioned. Under the rule, exceptions made in a statute give
rise to a strong inference that no other exceptions were intended.
Pennsylvania Nat. Mut.
Cas. Inc. Co. v. Parker, 282 S.C. 546, 554-55, 320 S.E.2d 458, 461 (1984)
(citations omitted). Though Section 12-36-920(A) lists entities which could
potentially be subject to the Accommodations Tax such as hotels and inns, as
explained above, that list limits the
application of the tax to where the accommodation is provided, not from whom
the gross proceeds are derived. Since a reservation received at Petitioner’s website
furnishes the right to an accommodation at one of the locations listed in
subsection (A), the doctrine of “expressio unius est exclusio alterius” does not preclude Petitioner from being subject to tax
liability.
Petitioner also avers
that the language used in Section 12-36-920(B) reflects legislative intent that
the Accommodations Tax does not apply to Petitioner. Section 12-36-920 imposes two distinct vendor taxes related to transient
accommodations. Section 12-36-920(A) imposes a sales tax at the rate of 7
percent on the gross proceeds derived from the “rental or charges” for any
rooms etc., whereas Section 12-36-920(B) imposes a 5 percent sales tax for the
“additional guest charges” specified in subsection (B). Petitioner seeks to
apportion meaning to the fact that the phrase, “any place where rooms, lodges,
or accommodations are furnished to transients for consideration,” in Section
12-36-920(B) is nearly identical to the phrase “any place in which rooms,
lodges, or sleeping accommodations are furnished to transients for
consideration,” in Section 12-36-920(A). According to Petitioner, the use of
these nearly identical phrases demonstrates that the General Assembly intended
for the taxes imposed by subsections (A) and (B) to be imposed on the same
taxpayers – i.e., those places where rooms, lodges, or accommodations are furnished
to transients for consideration. However, as discussed above, subsection (E)
sets forth who is responsible for collecting and remitting the taxes
imposed by Section 12-36-920 and subsections (A) and (B) set forth what is
being taxed. Subsection (B) simply provides that additional guest charges “at
any place where rooms, lodgings, or accommodations are furnished to transients
for a consideration” are subject to taxation.
Petitioner also
contends that Section 12-36-920(C) clarifies which types of businesses are
required to pay the Accommodations Tax. Under Petitioner’s analysis, Section 12-36-920(C)
provides that the only other businesses required to remit the Accommodations Tax
other than the hotels which physically provide rooms or lodging are “real
estate agents, brokers, corporations, or listing services.” Petitioner
interprets Section 12-36-920(C) as a “remitter provision” that, consistent with
normal agent/principal rules, requires an agent to remit taxes collected on
behalf of the principal. Since Petitioner views its function as independent – and at arms-length – from the hotels, Petitioner submits it is not a business which
is either required to pay or remit the Accommodations Tax.
Petitioner’s premise, however, erroneously presumes that it is not engaged in the
business of furnishing accommodations under the statute. Furthermore, I
find that Petitioner’s interpretation is a patent expansion of the intent of
subsection (C). Subsection (C) provides that:
Real estate agents, brokers, corporations, or listing
services required to remit taxes under this section shall notify the department
if rental property, previously listed by them, is dropped from their listings.
Thus, subsection (C) merely creates
a responsibility that businesses or persons who are required to remit Accommodations
Taxes must notify the Department if the listing is dropped. Moreover, rather
than operate to limit the application of the provisions of Section 12-36-920(A),
subsection (C) actually reflects a legislative intent that Section 12-36-920(A)
be read broadly. For instance, clearly “real estate agents, brokers, corporations,
or listing services” are not included among the businesses described in subsection
(A). Yet, in subsection (C), the General Assembly plainly includes them as
businesses or persons who may be required to remit Accommodations Taxes. Thus,
though these entities are not necessarily the owners or operators of rental
units, the statute contemplates their liability for the tax if they are “in the
business of furnishing accommodations to transients for consideration.” See S.C. Code Ann. § 12-36-920(E) (2000).
Petitioner further
argues that subsection (D) reflects the Legislature’s intent that the
Accommodations Tax applies only to the place in which rooms, lodging, or
sleeping accommodations are furnished. The Court disagrees. As set forth
above, the gross proceeds paid for the provision of the physical room includes,
under South Carolina law, all the “charges” paid to attain that right. Though subsection
(D) contemplates the existence of a taxpayer who “owns or manages rental
units,” it does not limit tax liability to only the owner or manager of the
unit, nor does it limit the tax to only the funds collected by the owner or
manager of the unit. Moreover, in a very real sense, Petitioner is managing
the rental of the properties in this case. The American Heritage College
Dictionary defines “manage” as “to direct or control the use of.” American Heritage College Dictionary 822 (3rd ed. 1993).
Here, Petitioner has the authority to bind the property concerning the rental
of certain units. Moreover, pursuant to that authority, it even collects the
funds for the rental of those units.
Other
Authority
Finally, it is also
notable that in Louisville/Jefferson County Metro Government v. Hotels.com,
No. 3:06-CV-480-R, 2008 WL 4500050 (W.D. Ky. 2008), the court held that
accommodations taxes did not apply to internet travel companies. The business
model that was considered in Metro Government was virtually the same as
Petitioner’s business model. The issue the court considered in Metro
Government, however, is distinguishable from the issue before this court.
In Metro Government, the court was seeking to determine whether
“internet businesses that have neither ownership, nor physical control, of the
rooms they offer for rent are ‘like or similar’ to ‘motor courts, motels,
hotels, or inns.’” Obviously, here, as in Metro Government, resolution
of whether the accommodations tax applies to the internet company focuses upon
an analysis of the “business” of the internet company. Nevertheless, the
decisive issue in this case is not whether Petitioner’s business is “like or
similar” to the hotel business, but whether Petitioner is engaged “in the
business of furnishing accommodations” to travelers for consideration. The
South Carolina Sales and Use Tax defines “business” to include “all activities,
with the object of gain, profit, benefit, or advantage, either direct or
indirect.” S.C. Code Ann. § 12-36-20 (2000) (emphasis added). A business
does not necessarily have to be “alike in substance or essentials”[12] to the hotel itself to nonetheless be engaged in an activity with the object to
either directly or indirectly profit from furnishing hotel
accommodations to travelers. Furthermore, as explained above, the business of
furnishing accommodations merely requires the authority and the ability to
provide an accommodation, not the ownership of the accommodation.
For similar reasons,
the Court also finds the Fourth Circuit’s decision in Pitt County v.
Hotels.com, L.P., No. 07-1900, 2009 WL 81448 (4th Cir. January 14, 2009) to
be distinguishable from the present case. In that case, a county in North Carolina brought a class action suit against a group of online travel companies for
failure to pay the county’s hotel occupancy tax. The dispositive issue in the
case was whether the online travel companies constituted “retailers” within the
meaning of N.C. Gen. Stat. § 105-164.4(a)(3) (2007). Section 105-164.4(a)(3) defined
retailers to include “[o]perators of hotels, motels, tourist homes, tourist camps,
and similar type businesses.” The Fourth Circuit concluded that the online
travel companies constituted neither “operators of hotels” nor “similar type
businesses” and thus found that the county’s complaint failed to state a claim
upon which relief could be granted.
In the present case,
unlike in Pitt County, the Court need not find that Petitioner is an
operator of a hotel or a “similar type” of business in order to determine that
Petitioner is liable for the Accommodations Tax. Rather, the Court must only
conclude that Petitioner is engaged “in the business of furnishing
accommodations” to transients for consideration. As discussed above, being
engaged “in the business of furnishing accommodations” does not require an
entity to operate a hotel or to be “of the same kind, character and nature” as a hotel.
Facilitation
fee – Gross Proceeds
Petitioner argues that the
difference between the amount it collects from its customer and the discounted
amount paid to the hotel suppliers, characterized as a “facilitation fee,” is a
non-taxable service. In other words, the “facilitation fee” should not be
considered as a portion of the “gross proceeds” because it is not gross
proceeds derived from the rental or charges for any rooms by any hotel. The
Court disagrees.
Section
12-36-920(A) imposes a sales tax on the “gross proceeds” derived from the
rental of a hotel room. Under S.C. Code Ann. § 12-36-90 (2000 & Supp. 2007),
“gross proceeds of sales” or “any similar term” means the value “accruing from
the sale, lease, or rental of tangible personal property.” The term specifically includes “the
proceeds from the sale of tangible personal property without any deduction for
. . . (ii) the cost of materials, labor, or service.” S.C. Code Ann. §
12-36-90(1)(b) (2000).
Under Petitioner’s
“merchant model,” Petitioner charges its customers two fees -- a “Room Charge”
and a fee for “Tax Recovery and Services.” Both fees include a mark-up for
compensation to Petitioner. Afterwards, hotels invoice Petitioner the
applicable tax rate for rooms furnished by them to guests. After Petitioner
remits the money to the hotel, the hotel remits the tax to the Department.
This tax is calculated based upon the room rate that Petitioner has negotiated
with the hotels, not the total amount the customer pays to Petitioner.
Petitioner describes
its fees as the amount the customer pays to the company for “facilitating
reservations.” It characterizes itself as “an unrelated third party providing
services to its customers.” Thus, Petitioner avers that by submitting sales taxes based upon the discounted
rates to the hotel, the proper amount of sales taxes are being paid in that the
hotels remit tax on the amount of money actually received by them for providing
the hotel rooms to Petitioner’s customers.
No matter the
nomenclature used to describe the fees, however, these amounts are subject to
the tax. The fees are charged to the customer for the value of receiving the
right to rent a room from a hotel. Even if Petitioner’s business is
characterized as a “service,” the service it provides is by no means unrelated
to the rental of the hotel room. This argument would be much more persuasive
if the service Petitioner provided was provided distinctly to the hotel, such
as providing a conduit for the transfer of funds after a reservation is made
with the hotel. Petitioner’s service, however, requires very little
interaction with the hotel and ultimately results in the culmination of the
agreement and payment to rent the hotel room. More importantly, Section
12-36-90(b)(ii) declares that in calculating gross proceeds from the rental of personal
property, no deduction is made for the cost of labor or service. The statutory
definition of “gross proceeds” thus does not allow the cost of a service to be
deducted for the purpose of determining “gross proceeds.” Rather, “gross
proceeds” as the term is used in Section 12-36-920(A) embraces all charges associated
with the furnishing of accommodations, including Petitioner’s facilitation fee,
such that the entire sum collected by Petitioner from its customers is therefore
subject to sales tax.
Petitioner also maintains that the General Assembly’s use of the phrase
“by any hotel …” in Section 12-36-920(A)
reflects a legislative intent to restrict the taxing of gross proceeds to only
those proceeds collected by the hotel and other businesses described therein
for their furnishing of an accommodation. Again, the words of the statute must
be construed in context and “must be given their plain and ordinary meaning
without resorting to subtle or forced construction to limit or expand the
statute’s operation.” Municipal Ass’n of S.C., 606 S.E.2d at 470; see also S.C. Coastal Council v. S.C. State Ethics Comm’n, 306
S.C. 41, 44, 410 S.E.2d 245, 247 (1991) (The court should not consider the
particular clause being construed in isolation, but should read the clause in “conjunction
with the purpose of the whole statute, and in light of the object and policy of
the law.”). Here, interpreting the phrase “furnished to transients by any
hotel . . .” to limit the application of the
statute only to gross proceeds specifically collected by hotels is a narrow
reading of the statute. Petitioner’s reading of the statute would apply the
limiting phrase “derived from” to both the “rental or charges” and to the
hotels, themselves. To the contrary, the clear intent of the statute is to
impose a tax on all gross proceeds derived from the rental or charges for the furnishing
of any rooms, etc. Therefore, as discussed above, the phrase “by any hotel . .
.” limits the application of the tax to where the accommodation is located, not
from whom the gross proceeds are derived. In addition, Petitioner
also asserts that various facts distinguish its business in regard to the
receipt of gross income. Petitioner notes that:
· Hotels do not charge facilitation fees or pay Petitioner’s fee.
· Its facilitation fee is not paid by the hotel or ever even
received by the hotel.
· Its facilitation fee is not a charge for services provided with
the hotel (i.e., maid services).
Petitioner’s facilitation fee
nevertheless is a mandatory charge as a condition for obtaining a reservation
for a hotel room through Petitioner. Moreover, whether hotels typically charge
a facilitation fee is irrelevant to the determination of whether Petitioner’s
fee is a component of gross proceeds. Rather, this determination centers on
the issue of whether the fee, itself, is a component of the gross proceeds
collected for the rental of the room. The
question is from whom and for what are those proceeds applicable.
Clearly, the fee is
paid by the customer of Petitioner as a portion of the charge to receive a
reservation for the hotel. That fee is certainly a portion of the gross amount
a customer pays to Petitioner for the right to receive a hotel reservation.
Furthermore, whether or not the hotel receives the fee is not the issue. The
intent of the statute is to tax the proceeds “derived” from the rental or charges for any rooms. In other words, the fundamental
issue is how much did the customer pay for the right to obtain the
reservation. Here, the customers paid a greater amount than what was used
as a basis for calculating the sales tax owed. Therefore, the corresponding underpayment
of sales tax was in violation of Section 12-36-920.
Application
of Section 12-36-920(E) to Out-of-State Companies
Seizing upon the phrase
“within this State” in Section 12-36-920(E), Petitioner next contends that the Accommodations Tax is limited to transactions
where: (1) the taxpayer; (2) the business activity of furnishing
accommodations; and (3) the accommodations themselves are all within this State.
According to Petitioner, because it is an out-of-state business that performs
the act of booking hotel rooms outside of South Carolina, it is not liable for
the Accommodations Tax.
Since there is no
dispute that the accommodations themselves are located within South Carolina, the
Court must only address whether Section 12-36-920(E) limits the Accommodations
Tax to transactions where: (1) the taxpayer; and (2) the business activity of
furnishing accommodations are both within this State.
Statutes very similar
to Section 12-36-920(E) were interpreted in City of Charleston v. Hotels.com,
520 F.Supp.2d 757, and in International Harvester Co. v. Wasson, 281
S.C. 458, 316 S.E.2d 378 (1984) cert. denied, 469 U.S. 882 (1984). The
first of these two cases, City of Charleston v. Hotels.com, provides
guidance on whether the Accommodations Tax may be imposed on out-of-state
businesses. In that case, a civil lawsuit was filed by two South Carolina
cities to collect taxes under their respective Accommodations Tax ordinances from
certain on-line travel companies. In a motion to dismiss, the defendants
argued that S.C. Code Ann. § 6-1-510(1) (2006), the state statute that defined
“local accommodations tax,” prohibited the cities’ proposed application of the
ordinances to businesses located outside of the cities’ boundaries. Section
6-1-510(1) provided:
“Local accommodations tax” means a tax on the gross proceeds
derived from the rental or charges for accommodations furnished to transients
... and which is imposed on every person engaged or continuing within the
jurisdiction of the imposing local governmental body in the business of
furnishing accommodations to transients for consideration.
S.C. Code Ann. § 6-1-510(1) (2006)
(emphasis added). The court, however, rejected the defendants’ arguments,
explaining: As discussed in the previous subsection,the
guiding principle of the court when called upon to determine a statutory
ambiguity to is to discern and honor legislative intent. For the same reasons
outlined above regarding the enabling statute, the court finds that the
most reasonable interpretation of the legislators’ intent in passing the
definitional statute is that accommodations taxes can be levied against those
engaged in the practice of providing hotel rooms within the municipal
boundaries, regardless of the providers’ physical location.
Accordingly, the court finds that Plaintiffs are not prohibited by state law
from applying their Municipal Accommodations Fee Ordinances against
out-of-state persons and businesses, and thus Defendants are not entitled to
dismissal on these grounds.
Id. at 767 (emphasis added).
Here, the language of
Section 6-1-510(1) is nearly identical to the language of Section 12-36-920(E).
Both provide that their respective taxes are imposed on “every person engaged
or continuing” within their jurisdiction “in the business of furnishing
accommodations to transients for consideration.” Moreover, the Court finds the
federal district court’s reasoning to be sound. Similar to that of Section
6-1-510(1), the main purpose of Section 12-36-920(E) is to impose a tax on the
amount of money visitors to the State spend on their accommodations. Cf. City of Charleston v. Hotels.com, 520 F.Supp.2d at 768 (“The core
purpose of the Ordinances is to levy a tax on the amount of money visitors to
the municipality spend on their hotel rooms or other accommodations.”). These
taxes help the State to cope with the increased burden on governmental services
that tourists create. It thus seems rather unlikely that the General Assembly
intended to exempt companies like Petitioner from paying these taxes simply
because they are headquartered in another state. In the words of the federal
district court, had the General Assembly intended to grant such an exemption, “they
could have easily done so with explicit language to that effect.” City of Charleston v. Hotels.com, 520 F.Supp.2d at 766.
The second case, International
Harvester, 281 S.C. 458, 316 S.E.2d 378, sheds light on whether the Accommodations
Tax is limited to transactions where the business activity of furnishing
accommodations occurs within this State. In that case, the South Carolina
Supreme Court addressed whether, under S.C. Code Ann. § 12-35-510 (1976), a
sales tax could be imposed upon the sale of truck-tractors by a Delaware corporation
to a South Carolina corporation. Section 12-35-510 imposed a sales tax “upon
every person engaged or continuing within this State in the business of selling
at retail any tangible personal property ....” In construing Section 12-35-510,
the court determined that, to be subject to the tax, a taxpayer “must be in
business of making retail sales in South Carolina.” Id. at 460, 316
S.E.2d at 379. After noting that S.C. Code Ann. § 12-35-20 (1976) defined “business”
as “all activities engaged in ... with the object of gain,” the court concluded
that “[t]here is little question that plaintiff is in business in South
Carolina for a profit since it maintains outlets in Greenville and Charleston
as well as soliciting business in this State by a resident salesman from
Carolina Fleet Sales of Charlotte, North Carolina.” Id.
Similar to S.C. Code
Ann. § 12-35-20 (1976), Section 12-36-20 defines the term “business” to include
“all activities, with the object of gain, profit, benefit, or advantage,
either direct or indirect.” S.C. Code Ann. § 12-36-20 (2000) (emphasis
added). Therefore, contrary to Petitioner’s claims, the phrase “engaged or
continuing within this State in the business of furnishing accommodations” in
Section 12-36-920(E) does not mandate that the isolated act of booking a hotel
room occur within South Carolina. Rather, that phrase simply requires a taxpayer
to engage in profit-driven activities within this State involving the
furnishing of South Carolina accommodations.
Here, unlike the plaintiff
in International Harvester, Petitioner does not maintain outlets or
offices in this State, nor does it employ a resident salesman in this State. Nevertheless,
“no universal formula has been, or is likely to be, devised for determining
what constitutes doing business by a foreign corporation within a state . . .” Krell v. Carolina Bank, 283 S.C. 5, 8, 320 S.E.2d 491, 493 (Ct. App.
1984). Instead, “[t]he question must be resolved upon the facts of the
particular case.” Id.
In Krell, the
Court of Appeals addressed the question of whether Carolina Bank, a bank
organized and existing under the laws of North Carolina, was doing business in
South Carolina within the meaning of S.C. Code Ann. § 36-2-803(1) (1976). The
court concluded that it was, explaining in part:
Carolina Bank has accounts with three large retail chain
stores of different natures operating in South Carolina-Golden Coral Stores,
Pantry, Inc. Stores and Mack Stores. These accounts are not one-time
transactions such as mortgages and security agreements but are on-going,
continuous relationships with business in South Carolina. Further, Carolina
Bank has contracted directly with a South Carolina corporation. This contract
with First Federal involves all of the mortgages held by Carolina Bank on North Carolina properties owned by North Carolina residents. This contract is not the
result of a fortuitous contact with South Carolina; it came through the
deliberate actions of Carolina Bank in taking on a South Carolina partner in
its mortgage business.
Krell, 283 S.C. at 8-9, 320
S.E.2d at 493.
In the present case, Petitioner
deliberately contracted with hundreds of South Carolina hotels during the five-year
audit period to furnish, for a profit, accommodations to Petitioner’s customers
traveling into this State. These were not “one-time transactions,” but were
rather “on-going, continuous relationships” with businesses in South Carolina. The hotels regularly invoiced Petitioner for the rooms and Petitioner, in
turn, submitted payment to the hotels. Under these facts, the Court concludes
that Petitioner was indeed engaged in profit-driven activities within this
State involving the furnishing of South Carolina accommodations.
However, this
conclusion does not end the Court’s inquiry. In International Harvester,
the court also held that an additional “criteria” for a taxable sale was that “the
sale must be a sale within South Carolina.” International Harvester,
281 S.C. at 460, 316 S.E.2d at 379. After examining the evidence in that case,
the court in International Harvester ultimately concluded that the truck
sales had taken place in South Carolina. The court explained:
Section 12-35-100 defines a sale as any transfer of tangible
personal property for a consideration. Thus, if the transfer of the trucks,
i.e., delivery, took place in South Carolina, the sale would take place in this
State. The trucks were manufactured in Indiana and delivered to the purchaser
in Greenville, South Carolina, by a common carrier hired and paid by the plaintiff.
Further, the Bill of Lading for each truck shows that delivery was made to the
purchaser in Greenville, South Carolina. Finally, the President of Senn
Trucking, the purchaser, signed an affidavit to the effect that the trucks were
delivered in South Carolina. Based on the foregoing factual support, it is
concluded that the sales took place in South Carolina.
Id.
Here, Section 12-36-100,
like the former Section 12-35-100 at issue in International Harvester,
defines “sale” as “any transfer, exchange, or barter, conditional or otherwise,
of tangible personal property for a consideration.” S.C. Code Ann. § 12-36-100
(2000). Moreover, similar to International Harvester, in this case, the
transfer of possession of the physical property involved here – the
accommodations – took place in South Carolina. While it is true that Petitioner
entered into the sales agreements with its customers outside of South Carolina, International Harvester clearly stands for the proposition that a
sale takes place in the State where the sales item is delivered, not the State
where the sales agreement is entered into by the vendor. Therefore, the Court
concludes that Petitioner’s “sales” took place in South Carolina.
For these reasons, the
Court concludes that the phrase “within this State” in Section 12-36-920(E)
does not exempt Petitioner from tax liability under Section 12-36-920(A).
Commerce
Clause
Petitioner further
claims that requiring it to collect the Accommodations Tax would violate the
Commerce Clause of the United States Constitution.
The Commerce Clause of the
United States Constitution provides that Congress has the power to regulate
commerce among the several states. The United States Supreme Court has held
that, even without affirmative Congressional action, the “dormant” or
“negative” Commerce Clause prohibits state taxation that unduly burdens
interstate commerce. See General Motors Corp. v. Tracy, 519 U.S. 278 (1997); S.C. State Highway Dep’t v. Barnwell Bros., Inc., 303 U.S. 177 (1938). According to the U.S. Supreme Court, a state tax is able to withstand a
Commerce Clause challenge when the tax: (i) is applied to an activity with a
substantial nexus with the taxing State; (ii) is fairly apportioned; (iii) does
not discriminate against interstate commerce; and (iv) is fairly related to the
services provided by the State. Complete Auto Transit, Inc. v. Brady,
430 U.S. 274, 279 (1977).
In this case,
Petitioner claims that South Carolina does not have a “substantial nexus” with
the services that Petitioner provides. Petitioner further claims that applying
the tax to its services would violate the Commerce Clause’s requirement that
taxes be “fairly apportioned.” Each argument is addressed below.
Substantial
Nexus
In the context of sales
taxes, the U.S. Supreme Court has held that a business must have a “physical presence”
in a taxing State in order for its activities to have a substantial nexus with that
State under the Commerce Clause. See Quill Corp. v. North Dakota,
504 U.S. 298 (1992) (upholding “physical presence” requirement set forth in National
Bellas Hess, Inc. v. Dep’t of Revenue, 386 U.S. 753 (1967)). Thus, a State
cannot impose the duty to collect sales taxes on “sellers whose only connection
with customers in the State is by common carrier or the United States mail.” Quill, 504 U.S. at 301 (quoting National Bellas Hess, 386 U.S. at 758).
In ruling on a Motion
for Reconsideration filed in the City of Charleston v. Hotels.com litigation
discussed above, the court addressed the question of whether, under Quill,
the defendants’ activities lacked a substantial nexus with South Carolina. The
court ruled that they did not, explaining:
The court has no hesitation in ruling here that the Dormant
Commerce Clause is not implicated by the Defendants’ alleged actions. The
cases cited by Defendants in which attempted taxation was struck down typically
involves scenarios where the only connection between the taxed entity and the
taxing jurisdiction is that goods happen to have been shipped through the jurisdiction
on the way to their eventual destination. Here, there is both a substantial
nexus and a physical presence between the taxing jurisdictions and Defendants,
since Defendants are alleged to have proactively marketed, booked, and leased
hotel rooms and other accommodations which are physically located in Charleston and Mt. Pleasant. Therefore, the court finds that allowing the levying of
municipal accommodations taxes against Defendants for the types of transactions
in question would not unduly restrict interstate commerce, and is not a
constitutional violation.
City of Charleston v.
Hotels.com, LP, Nos. 2:06-CV-1646-PMD and 2:06-CV-2087-PMD, 2008 WL 4921295,
at *5 (D.S.C. Apr. 29, 2008).
This Court agrees with
the federal district court’s analysis. In examining the constitutionality of
State taxes under the Commerce Clause, the U.S. Supreme Court has frequently
noted that “[i]t was not the purpose of the commerce clause to relieve those
engaged in interstate commerce from their just share of state tax burden even
though it increases the cost of doing the business.” Commonwealth Edison
Co. v. Montana, 453 U.S. 609, 646 (1981) (quoting Complete Auto Transit,
430 U.S. at 279). The Supreme Court has further explained that the “just share
of state tax burden” includes sharing in the cost of providing “police and fire
protection, the benefit of a trained work force, and ‘the advantages of a
civilized society.’” Commonwealth Edison, 453 U.S. at 624 (quoting Exxon Corp. v. Wisconsin Dep’t of Revenue, 447 U.S. 207, 228 (1980)).
Here, just like the
defendants in City of Charleston v. Hotels.com, Petitioner derived
income from booking accommodations that were located within South Carolina –
accommodations which enjoyed the benefits of local fire and police protection.
Moreover, the services of South Carolinians employed at those accommodations
were critical to Petitioner’s ability to produce that income. While it is true
that those working at the South Carolina accommodations were not employees of Petitioner,
that fact is of minor constitutional significance. See Scripto, Inc.
v. Carson, 362 U.S. 207, 211 (1960) (in finding nexus between appellant and
State of Florida based on “continuous local solicitation in Florida” by
salesmen, court acknowledged that the salesmen were not “regular employees of
appellant devoting full time to its service,” but concluded that “such a fine
distinction is without constitutional significance”). Rather, “the crucial
factor governing nexus is whether the activities performed in this state on
behalf of the taxpayer are significantly associated with the taxpayer’s ability
to establish and maintain a market in this state for the sales.” Tyler Pipe
Industries, Inc. v. Washington State Dep’t of Revenue, 483 U.S. 232, 250 (1987) (quoting Tyler Pipe Industries, Inc. v. State Dep’t of Revenue, 715 P.2d
123, 126 (Wash. 1986)). As other courts have made clear, a finding of a “substantial
nexus” between a state and an out-of-state vendor may be based upon activities
performed by an in-state company on behalf of the out-of-state vendor. See, e.g., Arco Bldg. Systems, Inc. v. Chumley, 209 S.W.3d 63, 74
(Tenn. Ct. App. 2006) (in finding a substantial nexus between Tennessee and an
out-of-state vendor, the court noted that “unlike the sellers in National
Bellas Hess and Quill Corp., this case involves an out-of-state
seller that has chosen to rely heavily on an in-state company to perform a wide
range of services that are integral to the success of the seller’s overall
business operations in the taxing state”); State v. Dell Int’l, Inc.,
922 So.2d 1257 (La. Ct. App. 2006) (concluding that evidence supported a
finding of substantial nexus where foreign retailer had entered into agreement
with in-state technical service provider under which service provider provided
computer support services on the retailer’s behalf and those services were
crucial to the retailer’s ability to sell its products).
Furthermore, the
primary case relied upon by Petitioner to show lack of nexus, McLeod v. J.E.
Dilworth Co., 322 U.S. 327 (1944), is distinguishable from the present
case. In McLeod, the State of Arkansas sought to tax sales of machinery
and mill supplies by two Tennessee corporations to residents of Arkansas. The Tennessee corporations were not qualified to do business in Arkansas and did not have a sales office, branch plant or any other place of business in Arkansas. Orders for goods came to Tennessee through solicitation in Arkansas by traveling
salesmen domiciled in Tennessee or by mail or telephone. The goods were
shipped from Tennessee, collection of the sales price was made in Tennessee, and title to the goods passed upon delivery to a carrier in Tennessee. Based upon
these facts, the U.S. Supreme Court determined that the Commerce Clause barred
the corporations’ liability for the sales tax.
The facts of the
present case are quite different from those of McLeod. In McLeod,
the Tennessee corporations relied very little on the services of Arkansas to facilitate the sale of their goods to Arkansas residents. See Nat’l
Geographic Soc’y v. California Bd. of Equalization, 430 U.S. 551, 558 (1977) (noting, in nexus determinations, the “significance of the inquiry” as to
whether “the out-of-state seller enjoys services of the taxing State”). While
some of their salesmen occasionally travelled to Arkansas to solicit sales,
their salesmen were domiciled in Tennessee. Here, in contrast, Petitioner
relies heavily on services and other benefits provided by South Carolina and
its residents for the carrying out of Petitioner’s sales transactions.
Moreover, unlike in McLeod, the physical property being sold by Petitioner in this case (i.e.,
the accommodations) are located, in a rather permanent fashion, in South Carolina.
For these reasons, the
Court concludes that Petitioner was “physically present” in South Carolina
during the tax years in question. Accordingly, the Court finds that Petitioner’s
activities had a “substantial nexus” with South Carolina.
Fairly
Apportioned
As noted above, Petitioner
also claims that applying the Accommodations Tax to its facilitation fee would
violate the “fairly apportioned” prong of the Complete Auto Transit test. The Court disagrees.
“The central purpose
behind the apportionment requirement is to ensure that each State taxes only
its fair share of an interstate transaction.” Goldberg v. Sweet, 488 U.S. 252, 261 (1989). Nonetheless, the U.S. Supreme Court has “long held that the Constitution
imposes no single apportionment formula on the States and therefore have declined
to undertake the essentially legislative task of establishing a ‘single
constitutionally mandated method of taxation.’” Id. (quoting Container
Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983)). Rather, the
U.S. Supreme Court determines whether a tax is fairly apportioned “by examining
whether it is internally and externally consistent.” Goldberg, 488 U.S. at 261.
“To be internally
consistent, a tax must be structured so that if every State were to impose an
identical tax, no multiple taxation would result.” Goldberg, 488 U.S. at 261. Here, the tax at issue is imposed only on businesses that furnish
accommodations which are located within the boundaries of the State of South Carolina. If every State imposed a similar tax on accommodations furnished within
their boundaries, no multiple taxation would occur since the same
accommodations cannot be furnished in two different States at once. Therefore,
the tax is internally consistent.
“The external
consistency test asks whether the State has taxed only that portion of the
revenues from the interstate activity which reasonably reflects the in-state
component of the activity being taxed.” Goldberg, 488 U.S. at 262. In this case, Petitioner contends that the Department cannot tax the portion of the
revenues derived from Petitioner’s services since those services were performed
outside of South Carolina. The Court disagrees.
As one legal
commentator has noted, “[a]lthough ‘the term apportionment tends to conjure up
allocation by percentages,’ the [U.S. Supreme] Court has ‘consistently approved
taxation of sales without any division of the tax base among different
States.’” Samantha K. Graff, State Taxation of Online Tobacco Sales:
Circumventing the Archaic Bright Line Penned by Quill, 58 Fla. L. Rev. 375,
407 (2006) (quoting Okla. Tax Comm’n. v. Jefferson Lines, Inc., 514 U.S.
175, 186 (1995)). Instead, the Court has “held such taxes properly measurable
by the gross charge for the purchase, regardless of any activity outside the
taxing jurisdiction that might have preceded the sale or might occur in the
future.” Jefferson Lines, 514 U.S. at 186 (citing McGoldrick v.
Berwind-White Coal Mining Co., 309 U.S. 33 (1940)). Thus, “an internally
consistent, conventional sales tax has long been held to be externally
consistent as well.” Jefferson Lines, 514 U.S at 188.
For instance, in Jefferson
Lines, the U.S. Supreme Court addressed the question of whether Oklahoma’s sales tax on the full price of a ticket for bus travel from Oklahoma to Texas was externally consistent under the Complete Auto Transit test. In concluding
that the tax was externally consistent, the Court declared that “sales with at
least partial performance in the taxing State justify that State’s taxation of
the transaction’s entire gross receipts . . .” Id. at 189
(emphasis added). Moreover, the Court expressly rejected the argument that the
tax should be apportioned between Oklahoma and Texas since apportionment was
administratively feasible. The Court explained that there was “no reason to
leave the line of longstanding precedent and lose the simplicity of our general
rule sustaining sales taxes measured by full value, simply to carve out an
exception for the subcategory of sales of interstate transportation services.” Id. at 196.
Here, the tax at issue
is a conventional sales tax. It taxes the gross proceeds derived from the
rental or charges for accommodations located in South Carolina that are
furnished to transients for a consideration. Many other states have similar
sales taxes.
Moreover, because the accommodations are located in South Carolina, the sales
transaction clearly entails at least partial performance in South Carolina. Furthermore,
this Court has determined that the tax is internally consistent. Therefore,
based on Jefferson Lines, the Court concludes that the tax is also
externally consistent.
In conclusion, the Court
finds that imposing the Accommodations Tax on Petitioner does not violate either
the “substantial nexus” or the “fairly apportioned” prongs of the Complete
Auto Transit test.
Penalty
The Department assessed
a penalty of $1,589,176.06 against Petitioner for its failure to remit the
Accommodations Tax. However, I find the imposition of a penalty upon
Petitioner is not warranted. S.C. Code Ann. § 12-54-160 provides that
“[u]nless otherwise specifically prohibited, the department may waive, dismiss,
or reduce penalties.” The Department issued SC Rev. Proc. Bulletin #02-5 (the “Revenue Procedure”)
to provide procedural guidance for the waiver or reduction of penalties
pursuant to that statute. The Revenue Procedure provides that “[a] complete
penalty waiver is appropriate when lack of performance required by a taxpayer
is due to reasonable cause.” The Revenue Procedure provides that “the taxpayer
may have reasonable cause for noncompliance where difficult and complex issues
are involved when reasonable persons differ as to the appropriate tax treatment
of the issue and there is no Department guidance with respect to the issue.” Id., Example F.
Furthermore, the
implementation of penalties must be made in light of their purpose. The fundamental
purpose of the penalties is not to punish. See Plunkett v.
Commissioner, 118 F.2d 644, 650 (1st Cir. 1941). Rather, the penalties
“are provided primarily as a safeguard for the protection of the revenue and to
reimburse the Government for the heavy expense of investigation and the loss
resulting from the taxpayer’s fraud.” Helvering v. Mitchell, 303 U.S. 391, 401 (1938).
Here, the application
of the Accommodations Tax to Petitioner is a novel theory. Neither Section
12-36-920 nor any other authority specifically enumerates online travel
companies (OTCs) or any other company providing services solely outside the
State as subject to the Accommodations Tax. In fact, the Department admits
that difficult and complex issues exist in this case. Furthermore, the
Department has never pursued taxation of OTCs before the audit of Petitioner or
assessed any OTC, other than Petitioner, for the Accommodations Tax. Finally, the Department, even
though requested, has not published any official guidance regarding the
application of the Accommodations Tax to OTCs. More specifically, the
Department has never provided any guidance communicating that hotels are not
responsible for the Accommodations Tax of rooms booked through online travel
companies or that hotels should stop remitting the Accommodations Tax or filing
returns for transactions booked through online travel companies. I therefore
find that, since this case is the first instance in which South Carolina has
sought an Accommodations Tax from an OTC and the obligation to pay the tax was
not reflected by any Department guidance or past Department audits or
assessments, Petitioner had reasonable cause in not reimbursing the
Accommodations Tax.
Conclusion
The
“gross proceeds” generated by the sales transactions between Petitioner and its
internet customers are subject to sales tax under Section 12-36-920(A). However,
Petitioner has only accounted for sales taxes on the discounted amount (Net Room
Rate) paid to the hotel. This was improper as Petitioner’s gross proceeds were
greater than the Net Room Rate. As the retailer of the hotel room, Petitioner
was liable for sales tax on its entire gross proceeds of sale, including not
only the Net Room Rate, but also Petitioner’s Margin and Service Fees.
ORDER
Based upon the above
Findings of Fact and Conclusions of Law:
IT IS HEREBY ORDERED that, consistent with this Final Order and Decision, Petitioner remit to
the Department the sales tax owed under Section 12-36-920(A) on the Margin and
Service Fees collected by Petitioner during the periods between July 1, 2001
through June 30, 2006.
AND IT IS SO
ORDERED.
____________________________
Ralph
King Anderson, III
Administrative
Law Judge
February 12, 2009
Columbia, South Carolina
Petitioner contracts with hotels to provide bookings
to the public through Expedia, Inc.’s website, www.expedia.com. Petitioner’s
business activities are reported to the Securities and Exchange Commission,
with Expedia, Inc. as the reporting company.
Other
jurisdictions have also reached the same conclusion. See, e.g., In
re Broce Const. Co., Inc., 27 Kan. App. 2d 967, 980, 9 P.3d 1281, 1290
(2000) (“[O]ur Supreme Court has long held that “the tax found by the tax
commission to be due is presumed to be valid [and] the taxpayer has the burden
of showing its invalidity.”).
As noted above, Section 12-36-920(E)
provides that:
The taxes imposed by this
section are imposed on every person engaged or continuing within this State in the business of furnishing accommodations to transients for consideration.
S.C. Code Ann. § 12-36-920(E) (2000) (emphasis added).
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