Title: In re Transient Occupancy Tax Cases

State: california

Issuer: California Supreme Court

Document:

1 
Filed 12/12/16 
 
 
 
IN THE SUPREME COURT OF CALIFORNIA 
 
 
 
In re  
) 
TRANSIENT OCCUPANCY TAX CASES. )  
S218400 
 
 
) 
Ct.App. 2/2 B243800 
 
) 
 
) 
Los Angeles County 
                                                                        ) 
Super. Ct. No. JCCP 4472 
 
Like many other communities in this state and elsewhere, the City of San 
Diego (San Diego) has adopted an ordinance imposing a tax on visitors for the 
privilege of occupancy in hotels located within the city.  The tax, known as a 
transient occupancy tax, is calculated as a percentage of the “Rent charged by the 
Operator” of the hotel.  (See San Diego Mun. Code, § 35.0103.)  In recent years, 
many visitors have booked and paid for their hotel reservations online at the 
websites of online travel companies (OTCs) such as defendants and respondents in 
this case.1  The question before us is whether the San Diego transient occupancy 
tax is payable on the amount retained by the OTCs above the amount remitted to 
the hotels as the agreed wholesale cost of the room rental.  We conclude that under 
the San Diego ordinance, in a “merchant model” transaction of the sort at issue 
here, the operator of a hotel is liable for tax on the wholesale cost plus any 
                                              
1  
Defendants and respondents in this case are Hotels.com, L.P.; 
Priceline.com, Inc.; Travelweb LLC; Expedia, Inc.; Hotwire, Inc.; Hotels.com 
G.P., LLC; Travelocity.com, LP; Site59.com, LLC; Orbitz, LLC; Travelnow.com; 
Lowestfare.com, LLC; Trip Network, Inc. (doing business as Cheaptickets.com); 
and Internetwork Publishing Corp. (doing business as Lodging.com). 
2 
additional amount for room rental the operator requires the OTC to charge the 
visitor under what have been termed “rate parity” provisions of hotel-OTC 
contracts but, as San Diego has effectively conceded, OTCs are not operators 
within the meaning of the ordinance.  We shall therefore affirm the judgment of 
the Court of Appeal.   
The parties have not challenged the factual findings made by the hearing 
officer in the administrative proceedings.  Accordingly, we accept that those 
findings are supported by substantial evidence (Environmental Protection 
Information Center v. California Dept. of Forestry & Fire Protection (2008) 44 
Cal.4th 459, 479), while independently reviewing the legal determinations reached 
below (City of San Diego v. Board of Trustees of California State University 
(2015) 61 Cal.4th 945, 956), bearing in mind that an ambiguity in a tax statute will 
generally be resolved in favor of the taxpayer (Microsoft Corp. v. Franchise Tax 
Bd. (2006) 39 Cal.4th 750, 759; see Agnew v. State Bd. of Equalization (1999) 21 
Cal.4th 310, 330).   
We first describe the nature of the transactions at issue.  OTCs publish on 
their websites comparative information about airlines, hotels, and car rental 
companies, and allow consumers to book reservations with these travel and 
hospitality providers.  OTCs may do business under any of several business 
models; involved here is the one known as the merchant model.2  Under the 
                                              
2  
Other business models include the agency model, under which the 
customer, after making a reservation through the OTC, pays the room rent and 
associated tax directly to the hotel when checking in; after the customer‟s stay, the 
hotel remits a prearranged percentage of the rent to the OTC as a commission and 
pays tax on the full amount of the room rent; and the opaque model, where no 
room rate as such is shown to the customer and the customer instead bids for a 
reservation at a price the customer sets. 
3 
merchant model, OTCs contract with hotels to advertise and rent rooms to the 
general public.  OTCs handle all financial transactions related to the hotel 
reservations and become the merchant of record as listed on the customer‟s credit 
card receipt, but do not themselves own, operate or manage hotels, maintain an 
inventory of rooms, or possess or obtain the right to occupy any rooms.  The price 
the hotel charges the OTC for the room is the “wholesale” price; rate parity 
provisions3 in most master contracts between OTCs and hotels bar the OTC from 
selling a room for a rent lower than what the hotel quotes its customers directly.  
The OTC offers the rooms to the public at retail prices.  Its charge to the customer 
includes a “tax recovery charge,” which represents the OTC‟s estimate of what the 
hotel will owe in transient occupancy tax based on the wholesale price of the room 
as charged by the hotel to the OTC.  The OTC provides the customer with a 
receipt that lists the room rate and, on a separate line, an amount for taxes and 
service fees.4  Once the reservation has been made and paid for, the OTC provides 
customer service until the customer checks into the hotel.  The hotel then bills the 
OTC for the wholesale price of the room plus the transient occupancy tax the hotel 
will have to pay based on the room‟s wholesale price.  The OTC remits the 
charged amount to the hotel, which in turn remits the tax to San Diego; the OTC 
retains its markup and service fees. 
                                              
3  
The parties differ regarding the meaning of the term “rate parity” in 
reference to the hotel-OTC contracts.  We need not resolve this nomenclature 
dispute; for present purposes, when we refer to rate parity provisions we mean any 
provisions in hotel-OTC contracts that set the “floor” room rate the OTCs must 
quote and charge customers. 
4  
Although at earlier stages of this litigation San Diego sought to apply the 
room tax to the fee portion of the taxes-and-fees line item shown on the customer 
receipt, it has disavowed the effort here. 
4 
We turn now to the ordinance at issue in this case.  First enacted in 1964, it 
provides that “[f]or the privilege of Occupancy in any Hotel located in [San 
Diego], each Transient is subject to and shall pay a tax in the amount of six 
percent (6%) of the Rent charged by the Operator.”  (San Diego Mun. Code, 
§ 35.0103.)  Four times in subsequent years San Diego enacted increases in the tax 
rate without altering the ordinance‟s operative language.  (Id., §§ 35.0104, 
35.0105, 35.0106, 35.0108.)  Proceeds of the tax are to be used for promoting San 
Diego, including by planning, building, and maintaining tourism-related cultural, 
recreational, and convention facilities, among other governmental purposes.  (San 
Diego Mun. Code, § 35.0101, subd. (b).)   
Other provisions define the ordinance‟s key terms.  “ „Occupancy‟ means the 
use or possession, or the right to the use or possession, of any room, or portion 
thereof, in any Hotel . . . for dwelling, lodging, or sleeping purposes.”  (San Diego 
Mun. Code, § 35.0102.)  “ „Rent‟ means the total consideration charged to a 
Transient as shown on the guest receipt for the Occupancy of a room, or portion 
thereof, in a Hotel . . . .  „Rent‟ includes charges for utility and sewer hookups, 
equipment, (such as rollaway beds, cribs and television sets, and similar items), 
and in-room services (such as movies and other services not subject to California 
taxes), valued in money, whether received or to be received in money, goods, 
labor, or otherwise.  „Rent‟ includes all receipts, cash, credits, property, and 
services of any kind or nature without any deduction therefrom.”  (Ibid.)  
“ „Operator‟ means the Person who is the proprietor of the Hotel, . . . whether in 
the capacity of owner, lessee, sublessee, mortgagee in possession, licensee, or any 
other capacity.  „Operator‟ includes a managing agent, a resident manager, or a 
resident agent, of any type or character, other than an employee without 
5 
management responsibility.”  (Ibid.)5  “ „Transient‟ means any Person who 
exercises Occupancy, or is entitled to Occupancy, by reason of concession, permit, 
right of access, license, or other agreement for a period of less than one (1) 
month.”  (Ibid.) 
The ordinance provides that “[e]ach Operator shall collect the tax . . . to the 
same extent and at the same time as the Rent is collected from every Transient.”  
(San Diego Mun. Code, § 35.0112, subd. (a).)  “The amount of tax charged each 
Transient shall be separately stated from the amount of Rent charged, and each 
Transient shall receive a receipt for payment from the Operator.”  (Id., § 35.0112, 
subd. (c).)  The operator must, among other remitting and reporting 
responsibilities, “remit monthly the full amount of taxes collected for the previous 
month with the appropriate approved return form available from the City 
Treasurer.”  (Id., § 35.0114, subd. (a).)  The operator must “keep and preserve . . . 
all business records as may be necessary to determine the amount of such tax for 
which the operator is liable for collection and payment to the City.”  (Id., 
§ 35.0121.)  The San Diego city treasurer may inspect the operator‟s business 
records and “apply auditing procedures necessary to determine the amount of tax 
due to the City.”  (Ibid.)  If an operator “fail[s] or refuse[s] to collect” or remit the 
tax, the treasurer “shall forthwith assess the tax and penalties . . . against the 
operator.”  (Id., § 35.0117, subd. (a).)  An operator may challenge the assessment 
by requesting a hearing, and must be given notice of the final “determination and 
the amount of such tax and penalties” imposed.  (Id., § 35.0118, subd. (a).)   
In December 2004, the City of Los Angeles filed a putative class action on 
behalf of various California cities against various OTCs, alleging each such 
                                              
5  
San Diego has abandoned the argument it made in earlier stages of this 
litigation that OTCs are operators within the meaning of the ordinance. 
6 
company was liable for transient occupancy tax as the “operator” of every hotel.  
In October 2007, putative class member San Diego began auditing the OTCs.  
Eventually it issued transient occupancy tax assessments against the OTCs, which 
each OTC timely appealed.  A hearing officer conducted a consolidated 
administrative hearing to determine whether each OTC had obligations and 
liability under the tax.  In May 2010 the officer issued a decision, finding that the 
OTCs owed tax on their markup in merchant model transactions.  The OTCs 
challenged the hearing officer‟s determination by filing a petition for writ of 
mandate and cross-complaint seeking declaratory relief.  After briefing and 
argument, the superior court granted the OTCs‟ motion for judgment granting the 
writ of mandate and denied San Diego‟s cross-motion for judgment denying the 
writ.6  The court thereafter issued the writ, ordering the hearing officer to vacate 
his ruling in favor of the City, issue a new ruling that the OTCs are not liable for 
the tax, and set aside the assessments.  The court reasoned the ordinance imposes 
tax on rent “charged by the Operator”; OTCs are not operators or managing agents 
of the hotels; and the markup the OTCs charge for their services is not part of the 
rent subject to the tax.  
San Diego appealed.  Noting the salient facts are undisputed and the case 
turns solely on the interpretation of the ordinance, the Court of Appeal affirmed.  
Like the superior court, it reasoned the ordinance imposed tax on “rent charged by 
the . . . operator” and concluded that hotels, not the OTCs, are operators within the 
meaning of the ordinance.   
                                              
6  
This and other lawsuits alleging similar claims and pending in various 
jurisdictions within the state have been coordinated in the Los Angeles County 
Superior Court as Transient Occupancy Tax Cases, JCCP 4472. 
7 
San Diego petitioned for rehearing on the basis the Court of Appeal had 
improperly cited and relied on two unpublished decisions arising out of the same 
coordinated proceedings; the Court of Appeal granted rehearing and issued a new 
opinion again citing the same unpublished decisions, explaining the reliance was 
proper because the decisions were relevant as law of the case.  (See Cal. Rules of 
Court, rule 8.1115(b).)  Contending the Court of Appeal‟s law-of-the-case analysis 
was flawed, San Diego unsuccessfully petitioned for rehearing.  We granted San 
Diego‟s petition for review.  
San Diego contends the tax base for calculating the tax must be the full 
amount of the payment the customer is charged to obtain occupancy.  In San 
Diego‟s view, the stated purpose of the tax—“It is the purpose and intent of the 
City Council that there shall be imposed a tax on Transients” (San Diego Mun. 
Code, § 35.0101, subd. (a))—reflects a legislative focus on the transaction 
between the OTC and the customer.  The statutory definition of rent—“the total 
consideration charged to a Transient as shown on the guest receipt for the 
Occupancy of a room” (San Diego Mun. Code, § 35.0102)—in San Diego‟s view, 
shows the tax base was intended to be the total amount quoted to, charged to, and 
paid by the customer, not the lesser amount the hotel has agreed to accept as its 
share of the rental proceeds; indeed, a customer cannot obtain the privilege of 
occupancy by paying only the amount the hotel nets on OTC transactions nor 
anything less than the total amount quoted and charged to him or her.  Moreover, 
San Diego observes, the tax is determined and collected at the same time the room 
is booked (id., § 35.0112, subd. (a))—the “taxable moment,” as San Diego calls it.  
We agree with San Diego‟s argument in part.  The ordinance imposes the tax 
on the amount “charged by the Operator” (San Diego Mun. Code, § 35.0103); it 
does not refer to amounts “received” or “collected” by the operator.  To the extent 
a hotel determines the markup, such as by contractual rate parity provisions 
8 
requiring the OTC to quote and charge the customer a rate not less than what the 
hotel is quoting on its own website, it effectively “charges” that amount, whether 
or not it ultimately receives or collects any portion of the markup, and that amount 
is therefore subject to the tax.  Because, however, the ordinance imposes on “the 
Operator” alone the duty to remit the tax (San Diego Mun. Code, § 35.0114, subd. 
(a)), and subjects the operator alone to the assessment process when taxes are 
determined to be unpaid and owing (id., § 35.0117, subd. (a)), it does not appear to 
contemplate that the city treasurer may assess an intermediary such as an OTC for 
unpaid transient occupancy tax. 
San Diego contends the entire amount paid by the customer, presumably 
including any portion of the markup within the exclusive control of the OTC 
above that set by the hotel, is subject to the tax because that amount is charged 
“for the privilege of Occupancy” within the meaning of the ordinance, and no 
lesser amount will gain that privilege for the customer.  (San Diego Mun. Code, 
§ 35.0103.)  This contention, however, fails to acknowledge that the relevant 
ordinance identifies the taxable amount as the rent “charged by the Operator” 
(ibid.)—and the only such amount involved in online room rental transactions is, 
as we have seen, the wholesale room rate plus any portion of the markup set by the 
hotel pursuant to the contractual rate parity provisions or otherwise.  Thus, it is the 
wholesale room rate plus the hotel-determined markup, exclusive of any 
discretionary markup set by the OTC, that is “charged by the Operator” and 
subject to the tax.7 
                                              
7  
In practice, the distinction we are drawing between the portion of the 
markup set by the hotel pursuant to contractual rate parity provisions and the 
portion unilaterally set by the OTC may be chimerical.  Market forces are likely to 
ensure that the room rate charged by an OTC is seldom significantly higher than 
the rate a hotel charges to its customers directly.   
9 
San Diego further contends that even though the OTCs do not qualify as 
operators within the meaning of the ordinance, they are liable for the tax under 
various contractual and statutory theories.  We are unpersuaded.   
San Diego first asserts the OTCs are liable for assessment of room tax 
because they are agents of the hotels for purposes of charging and collecting the 
tax.  It points to the hearing officer‟s finding, unchallenged in this litigation, that 
“[t]he OTCs serve as the hotels‟ agents in assuming essentially (or absolutely) all 
of the marketing, reservation, room price collection, and customer service 
functions as to those Transients who book online through the OTCs.”  San Diego 
also cites the Court of Appeal‟s statement that “[t]he OTC collects the rent on the 
hotel‟s behalf” and the OTCs‟ acknowledgment that they “serv[e] as an 
intermediary” in “facilitating a guest‟s payment to the hotel for the hotel‟s 
furnishing of sleeping accommodations.”  By virtue of this function, San Diego 
contends the entirety of what the OTCs collect is deemed collected on behalf of 
the principal.  
That the OTCs act as hotels‟ agents or intermediaries for the limited purpose 
of charging and collecting the rent, however, does not subject the OTCs to 
assessment as an operator or make any undifferentiated portion of the charge 
representing the amount unilaterally set by the OTCs “Rent charged by the 
Operator.”  As noted, the hotels set the parity or floor rate the OTCs must charge 
the visitor, but do not control or determine any additional amount the OTCs may 
charge for their services, a circumstance that refutes any suggestion the OTCs are 
the hotels‟ agents for purposes of setting and collecting such discretionary 
additional charges.  
San Diego also cites contractual provisions by which the OTCs agree to be 
responsible for any taxes assessed by any governmental authority on the markup, 
to collect and remit room tax, and to assume liability to San Diego for nonpayment 
10 
or underpayment of the tax.  These provisions allocate responsibility as between 
the hotels and the OTCs for properly assessed room taxes but, like the other 
contractual terms discussed above, they do not in themselves create such liability; 
only the ordinance can do that.  The same reasoning defeats San Diego‟s assertion 
it is entitled as a third party beneficiary of the hotel-OTC contracts to tax the 
OTCs for the entire markup:  Even assuming San Diego is a third party beneficiary 
of the contracts, a question we need not address, the contracts cannot expand room 
tax liability under the ordinance.  
Neither Civil Code section 2777 nor Civil Code section 2344 assists San 
Diego.  The former statute provides that “[o]ne who indemnifies another against 
an act to be done by the latter, is liable jointly with the person indemnified, and 
separately, to every person injured by such act.”  (Civ. Code, § 2777.)  But San 
Diego fails to cite any decisions holding that a taxing authority may invoke an 
indemnity agreement to impose an assessment on a party not otherwise subject to 
assessment under the statute in question.  Civil Code section 2344 provides that 
“[i]f an agent receives anything for the benefit of his principal, to the possession of 
which another person is entitled, he must, on demand, surrender it to such 
person . . . .”  But as we have seen, the circumstances that the OTCs act as agents 
for the hotels in renting rooms, providing customer service, and collecting and 
remitting to the hotels the rent and room tax on all transactions, and that, as 
between themselves, the hotels and the OTCs may contractually allocate to the 
OTCs responsibility for unpaid room tax, cannot expand the reach of the 
ordinance and, in particular, do not subject an entity other than an Operator to 
assessment of the tax and penalties (San Diego Mun. Code, § 35.0117, subd. (a)).  
11 
DISPOSITION 
The judgment is affirmed. 
 
 
 
 
 
 
WERDEGAR, J. 
 
WE CONCUR: 
 
CANTIL-SAKAUYE, C. J. 
CHIN, J. 
CORRIGAN, J. 
LIU, J. 
CUÉLLAR, J. 
KRUGER, J. 
 
See next page for addresses and telephone numbers for counsel who argued in Supreme Court. 
 
Name of Opinion In re Transient Occupancy Tax Cases 
__________________________________________________________________________________ 
 
Unpublished Opinion 
Original Appeal 
Original Proceeding 
Review Granted XXX 225 Cal.App.4th 56 
Rehearing Granted 
 
__________________________________________________________________________________ 
 
Opinion No. S218400 
Date Filed: December 12, 2016 
__________________________________________________________________________________ 
 
Court: Superior 
County: Los Angeles 
Judge: Elihu Berle 
 
__________________________________________________________________________________ 
 
Counsel: 
 
Daniel F. Bamberg and Jon E. Taylor , Deputy City Attorneys; Kiesel Boucher Larson, William L. Larson, 
Thomas H. Peters, Paul R. Kiesel; Baron & Budd, Laura J. Baughman, Thomas M. Sims; McKool Smith, 
McKool Smith Hennigan, Steven D. Wolens, Gary Cruciani; Greines, Martin, Stein & Richland, Irving H. 
Greines, Kent L. Richland, Cynthia E. Tobisman and David E. Hackett for Plaintiff and Appellant City of 
San Diego. 
 
Colantuono, Highsmith & Whatley, Michael G. Colantuono and Ryan Thomas Dunn for League of 
California Cities and California State Association of Counties as Amici Curiae on behalf of Plaintiff and 
Appellant City of San Diego. 
 
Skadden, Arps, Slate, Meagher & Flom, Darrel J. Hieber, Stacy R. Horth-Neubert and Daniel M. Rygorsky 
for Defendants and Respondents Priceline.com Incorporated and Travelweb LLC. 
 
Jones Day, Elwood Lui, Brian D. Hershman and Erica L. Reilley for Defendants and Respondents Expedia, 
Inc., Hotwire, Inc. Hotels.com, L.P., and Hotels.com G.P., LLC. 
 
K&L Gates, Nathaniel S. Currall; Kelly Hart & Hallman, Brian S. Stagner and Chad Arnette for 
Defendants and Respondents Travelocity.com L.P., and Site59.com, LLC. 
 
McDermott Will & Emery, Elizabeth Herrington, Jessica A. Mariani and Jeffrey A. Rossman for 
Defendants and Respondents Orbitz, LLC, Trip Network, Inc., doing business as Cheaptickets.com and 
Internetwork Publishing Corp. doing business as Lodging.com 
 
Julian M. Baum & Associates and Julian M. Baum for Society of Travel Agents, Inc., as Amicus on behalf 
of Defendants and Respondents. 
 
 
 
 
 
 
 
Counsel who argued in Supreme Court (not intended for publication with opinion): 
 
Kent L. Richland 
Greines, Martin, Stein & Richland 
5900 Wilshire Boulevard, 12th Floor 
Los Angeles, CA  90036 
(310) 859-7811 
 
Darrel J. Hieber 
Skadden, Arps, Slate, Meagher & Flom 
300 South Grand Avenue, 34th Floor 
Los Angeles, CA  90071 
(213) 687-5000