DAVID Y. IGE

MARIA E. ZIELINSKI

GOVERNORDIRECTOR OF TAXATIONSHAN TSUTSUIDAMIEN A. ELEFANTE

LT. GOVERNOR

DEPUTY DIRECTOR

STATE OF HAWAII

DEPARTMENT OF TAXATIONP.O. BOX 259
HONOLULU, HAWAII 96809

PHONE NO: (808) 587-1530
FAX NO: (808) 587-1584

July 15, 2016

DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2016-06
RE:

Summary and Digest of the Hawaii Supreme Court decision in Travelocity.com, L.P. v.
Director of Taxation, 135 Hawaii 88 (2015).

SummaryOn March 17, 2015, the Supreme Court of Hawaii issued its decision in Travelocity.com, L.P.
v. Director of Taxation, 135 Hawaii 88 (2015), holding that online travel companies (OTCs), including
Travelocity.com, LLP, Expedia, Inc., Orbitz, LLC, Hotwire, Inc., and Priceline.com, are subject to
Hawaii’s general excise tax (GET), but not subject to Hawaii’s transient accommodations tax (TAT).
The Hawaii Supreme Court states that the OTCs operate websites where transients can research
destinations and make reservations for airfare, car rentals, and hotels. The Department of Taxation(Department) assessed the OTCs in connection with income derived from the sales of roomaccommodations in Hawaii under a business model whereby hotels granted the OTCs the right to sell
occupancy for a hotel room and the OTCs then sold the right to occupy the room to a transient.
The court held that the OTCs were engaged in business in the state and therefore subject to theGET. The court further held that the OTCs’ services were used or consumed in Hawaii. Accordingly,
the OTCs’ income was sourced to Hawaii and application of the exported services exemption wasdisallowed. The court also held that the OTCs were only subject to GET on their share of the grossincome because the income-splitting provision in section 237-18(g), Hawaii Revised Statutes (HRS),applied. With respect to the TAT, the court held that the OTCs were not operators and therefore notsubject to the TAT.
As discussed in detail below, the following are key points from the court’s decision:

Physical presence in Hawaii is not required to satisfy the statutory “in the State” requirement insection 237-13, HRS, and be subject to the GET’s “wide and tight net”
For purposes of the income-splitting provision in section 237-18(g), HRS, the term “travelagency” means an “enterprise engaged in arranging and selling travel services” and does notexclude an entity in direct contractual privity with the transient
The TAT is imposed once on a single operator of a transient accommodation
The Department’s assessment of penalties for failure to pay taxes is presumed correct, thereby
imposing the burden on the taxpayer to prove that the failure to pay was not due to negligenceor intentional disregard of the rules

Department of Taxation Announcement No. 2016-06
July 15, 2016Page 2 of 4General Excise Tax
A. Physical Presence is Not Required
The GET is a privilege tax imposed on all business and other activities “in the State.”1 TheOTCs asserted that the statutory phrase “in the State” means that a taxpayer must have a physicalpresence in Hawaii (i.e. a taxpayer’s business activities must be performed in Hawaii) in order to be
subject to the GET.2 The OTCs claimed that their services, performed outside Hawaii, were notsubject to the GET despite the fact that the travel occurred within Hawaii.3 The court rejected theOTCs’ argument, explaining that the GET, a tax designed to reach “virtually every economic activity
imaginable,” does not have any physical geographical limitation.4
The court held that the OTCs had sufficient business and other activities in the state to subject
them to the GET.5 Specifically, the court explained that the taxable event—the receipt of income fromtransients for providing accommodations in hotel rooms in Hawaii—provided the OTCs with an
economic gain arising from property located in Hawaii.6 Additionally, although the agreements
between the OTCs and transients took place outside of Hawaii, the intent was that “performance would
occur entirely in Hawaii,” where the occupancy rights were “wholly consumable and only consumablein Hawaii.”7 The court also noted that the OTCs were not passive sellers of services to Hawaii
consumers, as they actively solicited customers for Hawaii hotel rooms and actively solicited hotels toallow them to sell occupancy rights.8 Further, the court explained, the OTCs constructively benefited
through the transients’ use and benefit of state services, such as the use of roads and access to police,
fire, and lifeguard protection services.9 Accordingly, the OTCs were engaged in business “in theState.”10B. Sourcing and Exported Services Exemption
The court next rejected the OTCs’ argument that the GET did not apply because the OTCs’
services were used or consumed outside of the State.11 The OTCs, relying on the exported services
exemption in section 237-29.53, HRS, and the offset for taxes paid to other states provided for insection 237-22, HRS, asserted that their services were not used or consumed in Hawaii, but rather, in

1Haw. Rev. Stat. § 237-13.
Travelocity, 135 Hawaii at 103.
3Id. at 100.
4Id. at 103-105.
5Id. at 105.
6Id. at 104-105 (discussing similarities with In re Tax Appeal of Subway Real Estate Corp. v. Director ofTaxation, 110 Hawaii 25 (2006)).
7
Travelocity, 135 Hawaii at 105 (discussing similarities with In re Tax Appeal of Heftel Broadcasting Honolulu,
Inc., 57 Haw. 175 (1976)).
8
Travelocity, 135 Hawaii at 105 (discussing similarities with In re Tax Appeal of Baker & Taylor, Inc., 103 359(2004)).
9Travelocity Hawaii, 135 Hawaii at 105 (discussing similarities with In re Tax Appeal of Grayco Land Escrow,Ltd., 57 Haw. 436 (1977)).
10
Travelocity, 135 Hawaii at 105.
11Id. at 100, 105 n.20.
2

Department of Taxation Announcement No. 2016-06
July 15, 2016
Page 3 of 4
“whatever out-of-state location the transient is located at the time of purchase.”12 The court rejected
the OTCs’ argument, holding that it was “clear that the Assessed Transactions are business
transactions that continue in the state,” where the hotel rooms are used or consumed.13
C. Division of Income Under Section 237-18(g), HRS
The GET is imposed on a business’ gross proceeds or gross income, which is defined as all
gross receipts “without any deduction on account of the cost of the property sold, the cost of materials
used, labor cost, taxes, royalties, interest, or discount paid or any other expenses whatsoever.”14 In
limited circumstances, however, and only as provided by statute, a business will be subject to the GET
only for its share of gross income.
Section 237-18(g), HRS, provides such an exception: “Where transient accommodations arefurnished through arrangements made by a travel agency or tour packager at noncommissioned
negotiated contract rates and the gross income is divided between the operator of transient
accommodations on the one hand and the travel agency or tour packager on the other hand, the tax
imposed by this chapter shall apply to each such person with respect to such person’s respective
portion of the proceeds, and no more.”
The court held that section 237-18(g), HRS, applied to the assessed transactions, clarifying that
the OTCs fell within the ordinary definition of “travel agency”—an “enterprise engaged in arranging
and selling travel services.”15 The court explained that the fact that the OTCs were in directcontractual privity with the transients (as opposed to merely being an intermediary between the hotels
and the transients) did not preclude them from qualifying as travel agents.16 The court also clarified
that a noncommissioned rate is an amount of money paid to an entity or person other than an agent oremployee.17 The court explained that unlike a commissioned transaction, in which a fee is usually paid
as a percentage of the income received, in a noncommissioned transaction, a hotel has no means ofknowing what the travel agent’s mark-up will be.18 Because the court found the OTCs operated astravel agents, divided income with the hotels, and furnished transient accommodations at
noncommissioned negotiated contract rates in the assessed transactions, the court held that the OTCs
were subject to the GET for their share of the gross income.19
Transient Accommodations Tax
The TAT is imposed on the gross proceeds derived from furnishing transient
accommodations.20 The TAT is payable by operators, defined in section 237D-1, HRS, as “any person
operating a transient accommodation, whether as owner or proprietor or as lessee, sublessee,
12Id.
Id. at 105 n.20.
14Haw. Rev. Stat. § 237-3.
15
Id. at 106-108.
16
Id. at 108.
17Id. at 111.
18
Id. at 111-13.
19
Id. at 113.
20Haw. Rev. Stat. § 237D-2(a).
13Department of Taxation Announcement No. 2016-06
July 15, 2016
Page 4 of 4
mortgagee in possession, licensee, or otherwise, or engaging or continuing in any service business
which involves the actual furnishing of transient accommodation.”21 The court held that the OTCs
were not operators, as defined by statute, because there can only be a single operator that furnishestransient accommodations.22 Because it was undisputed that the hotels were operators, the OTCs could
not also be operators.23 Accordingly, the court held that the OTCs were not subject to the TAT.24
Penalties
The Supreme Court, having determined that the OTCs were subject to the GET, affirmed theTax Appeal Court’s ruling that the OTCs were subject to penalties under section 231-39(b)(1), HRS,
for failing to timely file a tax return.25 The court held that the OTCs failed to demonstrate an honest
belief that they were not responsible for filing a GET return and were therefore subject to the failure to
file penalty.26
The Supreme Court also affirmed the Tax Appeal Court’s ruling that the OTCs were subject topenalties under section 231-39(b)(2)(A), HRS, for underpayment of tax due to negligence or
intentional disregard.27 The court explained that because the Department’s assessments are prima faciecorrect, the burden is on the taxpayer to prove that the failure to pay was not due to negligence orintentional disregard of the rules.28 Because the OTCs failed to present any evidence to rebut thepresumed validity of the penalty, the Tax Appeal Court’s ruling was affirmed.29
This Tax Announcement is a summary and digest of the Hawaii Supreme Court decision in
Travelocity.com, L.P. v. Director of Taxation, 135 Hawaii 88 (2015) and should not be relied upon as astatement of law or fact. For more information please refer to the decision or call the AdministrativeRules Office at 808-587-1530.

MARIA E. ZIELINSKI
Director of Taxation

21

Haw. Rev. Stat. §§ 237D-1, 237D-2(a).
Travelocity, 135 Hawaii at 127.
23
Id.
24
Id.
25
Id. at 113-14.
26
Id.
27
Id. at 114-15.
28
Id. (citing Haw. Rev. Stat. § 231-20).
29
Travelocity, 135 Hawaii at 114-15.
22