Opinion ID: 2786941
Heading Depth: 3
Heading Rank: 2

Heading: The OTC-transient contracts

Text: An OTC enters into a contract with a transient that reserves the transient’s right to occupy a hotel room for a certain period of time.7 In the Assessed Transactions, transients obtain the right to occupy those hotel rooms by transacting with the OTCs rather than with the hotels themselves. The OTC-transient contract may also include terms and conditions of the hotel.8 The OTC controls significant aspects of the relationship with the transient from the time the transient logs on to the OTC’s website until the transient checks in at the hotel. For instance, it is typical that prior to check-in, the only contact the transient has regarding the hotel reservation 7 The parties appear to use the term “reservation” as synonymous with “paid reservation” to describe the booking made by the transient for the right to occupy a hotel room for a certain period of time. 8 The Director asserts that there is no written contract between the transient and the hotel. The answering brief of the OTCs did not dispute this assertion; however, the declaration of a Travelocity.com LP employee indicated that on “arrival at the hotel for check-in, the traveler will be asked to . . . sign the hotel’s agreement and/or registration card.” - 7 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER is with the OTC. Prior to check-in, the transient is considered to be solely the OTC’s customer. Once the transient accepts the OTC’s contract terms, the OTC processes the credit card transaction as the merchant of record. The transient pre-pays the OTC in full when the right to occupy a hotel room for a certain period of time is reserved. The transient owes nothing to the hotel at check-in. The OTC does not disclose the individual amount of the net rate, mark-up, service fee, or tax to the transient. In the invoice to the transient, the OTC combines the taxes and service fees into a single line item called “taxes and fees.” Similarly, the OTC never discloses to the hotel the amount of the mark-up, service fee, or total price paid by the transient. Only the OTC knows all the individual amounts comprising the total price paid by the transient, including the net rate, markup, service fee, and taxes. Upon completing the reservation, the OTC sends an invoice or email confirmation to the transient. The hotel does not confirm the reservation directly with the transient. The OTC has its own cancellation policies the transient must accept when the booking occurs. If the transient changes or cancels a reservation, the OTC handles the change or cancellation. After booking the reservation, the OTC provides continuing customer - 8 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER support to the transient. The OTCs bear the risk of loss from credit card fraud or bad debt. In the Assessed Transactions, the OTCs collect the room charge and taxes from the transients and control the monies paid by the transients. The hotels contractually delegate to the OTCs the responsibility to collect all amounts, including taxes, from the transients. The OTCs thus collect all amounts from the transient at the time the transient makes the reservation with the OTC. The hotel invoices the OTC for the hotel stay, typically after the transient has checked out. Pursuant to the hotel’s invoice, the OTC pays the hotel the net rate and the tax (TAT and GET) that has been collected from the transient on the net rate. The OTC is not an occupant and does not obtain a right of hotel room occupancy. The transient is the occupant and obtains a right to room occupancy, but the transient is not a party to the payment of the net rate by the OTC to the hotel. B. Contact between the parties and actions of the parties prior to the 2011 Assessments The parties dispute the import and extent of prior knowledge and prior contacts of the parties in regard to the OTCs’ potential tax liability for the GET and TAT on the Assessed Transactions. The actions and contacts of the parties - 9 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER prior to the 2011 Assessments that can be garnered from the record are included here. Attorney-client privilege logs in the record indicate some OTCs were in discussions with their counsel regarding “excise tax,” “hotel occupancy taxes,” and “state tax accrual” from 2001. The record contains an email dated April 7, 2004, from an ostensible employee of the State of Hawaiʻi to a person apparently involved in the state government of Florida that indicated that Hawaiʻi could not “impose our TAT on an internet company’s retained portion of payment for a hotel rental.”9 In June 2006, the record indicates that members of the Department of Taxation (Department) convened an internal meeting to discuss the issue of taxing OTCs.10 In March 2007, employees of the Department met with a representative from one of the OTCs. A member of the Department testified that the conclusion reached at the meeting was “the Department was not going to pursue a case at that time,” and that conclusion was “probably communicated” to the OTCs’ representative. A declaration by the OTCs’ representative 9 The OTCs maintain that the email was written by a Hawaiʻi Department of Taxation Administrative Rules Specialist responding to an inquiry from the Florida Department of Revenue. The record does not indicate when the OTCs first became aware of this email. 10 The record does not indicate when the OTCs first became aware of the 2006 meeting. - 10 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER confirms that the meeting took place. The representative testified that he was informed that “we were certainly not subject to TAT” but “we may be subject to a GET or use tax.” Testimony by former Department Director Kurt Kawafuchi (Director Kawafuchi) does not contradict this assessment of the meeting and suggests that the Department may have invited a request for a private letter ruling that the OTCs did not owe the TAT. The OTCs did not request such a ruling. In 2008, the Department began investigating the potential assessment of the GET and TAT against the OTCs. In May 2008, the Director sent information requests to the OTCs for transactional data. In July 2008, a meeting was held involving the Governor’s office and representatives from the Department and the OTCs. Another meeting involving representatives of the OTCs and the Department’s outside counsel took place in August 2008. On August 21, 2008, the OTCs were apparently informed that the Department’s requests for transactional data were on hold pending a request to the OTCs for information regarding tax litigation in other jurisdictions. The OTCs were informed that the Director’s review of the litigation materials would take some time and that there was no expectation for the OTCs to provide the transactional data as long as the OTCs were in discussion with the Department. - 11 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER In 2008, however, the matter was dropped. Director Kawafuchi testified that the matter ultimately was elevated to the Governor’s level and the “Governor decided not to pursue a case.” The OTCs’ representative declared he spoke with Director Kawafuchi in November 2008 and was informed that the TAT inquiry would not go forward. The OTCs’ representative also declared that it was communicated to him that “the recommendation that the Department not go forward was unanimous among members of [the Department] leadership team” and that the Governor “had decided that the State would not pursue the [TAT] matter against the OTCs.” The representative further declared that the Department would “get back” to him regarding a possible GET audit but that the Department “never contacted” him. In a letter dated October 9, 2009, the Attorney General of the State of Hawaiʻi (Attorney General) responded to a request from the Senate President and the Speaker of the House relating to OTCs and the Hawaiʻi GET and TAT (2009 Attorney General Letter).11 The letter stated that the Department “determined that it did not wish to pursue and would not support litigation against the OTCs.” The reasons provided in the letter for that determination were that the TAT “did not apply to [OTCs] because the OTCs are not operators” and the GET “would 11 The record does not indicate when the OTCs became aware of the October 9, 2009 letter to the Senate President and the Speaker of the House. - 12 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER probably also not be applicable due to the sourcing of the income outside of Hawaii.” “In addition, the [Department] believed it may have had substantial litigation hazards in showing that the majority of OTCs had sufficient presence in Hawaii to establish substantial nexus as a prerequisite to the imposition of state taxes.” Director Kawafuchi, who was copied on the letter, testified that he did not write the letter and could not remember if he reviewed it before it went out. Director Kawafuchi testified that he disagreed with the letter’s conclusion that the Department may have difficulty proving that the OTCs had sufficient presence in Hawaiʻi to establish constitutional nexus; he testified that the OTCs “have nexus in the State of Hawaii.” On October 13, 2009, the Rules Office of the Department prepared a memorandum to file that concluded that the OTCs were not subject to the TAT because they are not operators and the Department was not likely to succeed in assessing the OTCs for the GET because current Hawaiʻi nexus and sourcing laws are uncertain.12 The Director suggests that some of the conclusions generated by the Department between 2007 and 2009 were due to 12 The record does not indicate when the OTCs became aware of the October 13, 2009 memorandum to file. - 13 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER misrepresentations by the OTCs. The voluminous sealed records that provide factual support for the Director’s assessment of the Assessed Transactions were not available to the Director when the Department initially considered taxing the OTCs in 2007 through 2009. The implication from the Director is that the Department’s current position is the result of the information that was gathered during pretrial discovery relating to this case. C. Standards of review This court reviews an award of summary judgment de novo, under the same standards applied by the trial court. Therefore, “summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fujimoto v. Au, 95 Hawaiʻi 116, 136, 19 P.3d 699, 719 (2001) (alteration omitted) (quoting Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw. 85, 104, 839 P.2d 10, 22 (1992)). Where the appeal is from the Tax Appeal Court, it is well settled that, in reviewing the findings of fact, “a presumption arises favoring its actions which should not be overturned without good and sufficient reason. The appellant has the burden of showing that the decision of the Tax Appeal - 14 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER Court was ‘clearly erroneous.’” Weinberg v. City & Cnty. of Honolulu, 82 Hawaiʻi 317, 322, 922 P.2d 371, 377 (1996); see Kamikawa v. United Parcel Serv., Inc., 88 Hawaiʻi 336, 338, 966 P.2d 648, 650 (1998). When the facts are undisputed and the sole question is one of law, the decision of the Tax Appeal Court is reviewed “under the right/wrong standard.” Kamikawa, 88 Hawaiʻi at 338, 966 P.2d at 650 (quoting Weinberg, 82 Hawaiʻi at 322, 922 P.2d at 377).