Does Judicial branch have the best solution? Analysis of Supreme Court of Colorado's decision in City and County of Colorado v. Expedia, Inc.
a. What's OTC? Why are taxation issues of OTC important?
When was the last time that you made a hotel reservation on the phone? Newly arising online travel companies (OTCs) provide us with convenience and lower price when booking a hotel. More importantly, people choose to book a hotel on OTCs’ platforms because they could get access to information such as customer reviews about the hotels that traditional hotel booking couldn’t provide.
While this new trend of hotel reserving service has provided customers with convenience, legal problems arise from this new model of business: because most OTCs acts likely a merchant, not agency for the hotels, should government tax OTCs' service as for how they tax the hotel?
The answer to the question is important because with new business model fast arising, the city could lose a substantial amount of tax revenue without taxing OTCs for their markup fee. Not only the great amount of tax revenue is at stake, but finding a solution to answer the question also helps us to find solution legal problems arise with the internet-based third-party merchants in another field, such as Groupon.i
Why does OTCs pose a legal problem on states’ taxation law? To answer this question, some necessary background information must be provided. OTCs operate in two business models, "agency model" and "merchant model.ii Under "agency model," the travel companies act as the hotel's agents and help the hotels find customers. iiiAfter customers purchased the hotel room, the agent companies get commission fee from the hotels.iv Under "merchant model," acting as a merchant, OTCs negotiate a deal with hotels and sell the hotel room directly to customers with
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the price of their discretion.v Under this model, the merchant OTCs charge the customers directly. vi For agency-model, the hotels charge and remit the customer for hotel taxes. However, for merchant model, the OTCs are responsible for charging lodging taxes and pass the taxation to the hotel together with the charge for the room.vii When customer/lodger book a hotel on OTC platforms, they will see their purchase fee including the hotel fee and OTC’s markup fee and the tax. If a customer calculates the tax, he will find out that the markup fee is not included in the taxes calculation. For example, imagining a customer is looking for a hotel room on Priceline. After browsing for an hour, he finally decides to book a room in Squeaky-Bed Hotel. The total amount that he will pay for a Queen squeaky bed room for one night is 104.9 dollars, including 70 dollars for the hotel fee and 30 dollars for the Priceline’s markup and 4.9 dollars of the tax, Supposing the hotel tax for the city where Squeak-Bed hotel locates is 7%($70 X7%). This example shows a taxation problem for the OTCs under merchant’s model: the markups have never been taxed. After 2010, multiple law suits regarding the taxation of the markup have been filed against OTCs in the state courts.viii In many pending claims, the courts still concern about the how broad they should read tax law to determine whether to include the OTCs as “vendors"/ "operators," or to interpret the OTCs as service providers.
In recent decisions of the Supreme Court of Colorado in City and County of Denver v. Expedia, Inc. the court held that the OTCs are vendors of lodges and the markups should be taxed.ix This paper examines the Supreme Court of Colorado’s decision and argues that Supreme Court interpreted the statute over creatively. Even though the author believes the markups should be taxed, the judicial branch is not the appropriate governmental branch to save this issue. To support this, the article has two parts. In the first part, the article will examine how Supreme Court of Colorado over-interpreted the tax statute in Expedia decision. In the second part, the
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article will articulate the reason for judicial branch is not the ideal governmental branch to solve this issue and the issues should be solved in the legislative branch.
b. An examination of Supreme Court’s decision in City and County of Colorado v. Expedia, Inc.
In City and County of Denver v. Expedia, Inc. The City and Country of Denver sued various OTCs, including Expedia, Inc.; Hotels. Com LP; Hotwire. Inc. etc.x The City claimed, according to the city lodger’s tax article, the tax owed by these OTCs with penalties, exceeded forty million dollars to the city. The Denver District Court ruled in favor of the City and denied the OTCs’ protest.xi The Court of Appeals reversed the decision, holding that the Denver tax statute was ambiguous on OTC’ as vendors and the purchase paid and charged for the lodging.
The main issues, in this case, boiled down to two major ones: whether the OTCs are “vendors” according to Sec. 53-170 (8) xiiIf so, could the city tax the markups?
Sec. 53-170 (8) defines the “vendor” to be “a person making sales or furnishing lodging to a purchaser in the city.”xiii To collect the tax from OTCs, the court need to explain how OTCs are “vendors” of rooms. The problem is, lodging tax law did not define "furnishing." The plain meaning of “furnishing” in the dictionary was "the person who furnishes lodging is the one who provides access to a specific room."xiv The definition posed obstacles on the court to find OTCs as vendors because OTCs do not actually hand the keys in lodger’s hand. To counter that obstacle, the court read the “or” between “making sales” and "furnishing" as "coordinate conjunction introducing a synonymous word or phrase, or it may join different term expressing the same idea or thing.”xv “‘furnishing lodging’ cannot mean providing a room, in the sense of controlling physical access to it, but can only mean making a sale of lodging.”xvi The court then reasoned that OTCs, in fact, were setting the price and marketing the lodge and therefore, selling
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the lodges.xvii The courts subsequently concluded that OTC is a vendor. xviiiThe court further reasoned that because the customer does not have a choice to reject the markup fee, therefore the markup is directly connected and included in the price of the furnishing of the room or accommodations.” xix Based on the reasoning provided, the court found OTCs were subject to Denver state tax statute and should pay for the tax for the markup fee. xx
The Supreme Court's decision, in this case, is problematic on following three reasons.
First, even though the Supreme Court’s motive behind the reasoning is justified, the method that the court employed to interpret the statute was over creative. When the court interprets the "or" between "making sales" and "furniture" as a conjunction and interpret the "making sales” and “furnishing” as same, the court made a big logical jump by saying "furnishing" was same as "making sales." "Furnishing" is "to actually provide access to the customer”, "making sales" is to sell a room as a commodity product. “making sales” is same as “furnishing” the room.xxi The “or” here introduces an alternative, not a conjunction. Judge Gabriel in dissent opinion, criticized that the court went beyond the plain meaning, “I understand the plurality’s desire to avoid the settled rule that ambiguous tax provisions will be construed against the taxing authority, I do not believe that it can properly do so here.”xxii Also, the court's reasoning on OTEs was making a sale of rooms did not fully address the problem that can a person making the sale of things that a person does not actually occupy or own.
Second, unlike the Supreme Court of Montana in Montana Department of revenue v. Priceline.com, Inc., xxiiiThe Supreme Court of Colorado did not adhere to the general rule of interruptionxxiv, “it was also widely accepted that where the body enacting particular legislation has not express define a term or otherwise limited its meaning, that term must be given its ordinary meaning." "it is settled rule in the interpretation of revenue laws, that in case of doubt or
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ambiguity the construction must be in favor of the public.xxv The court admits that the taxation statute of Colorado is ambiguous but did not interrupt it in favor of tax payers. The general rule of statutory interpretation regulated the court to interpret the ambiguous words in favor of defendant because statute should have a function of notifying the public with its clearly and unambiguous meaning. If the statute’s meaning is unclear, the court should not punish the public for legislative branch’s negligence. Also, one of the statute’s function is to regulate the public and hold the public's behavior more accountable. When a court interprets a statute creatively like Supreme Court of Colorado did, the public would doubt their understanding of the statutory meaning and therefore act differently according to their presumption of how a court would interpret the statute. The court's holding violated the general rule of statutory interpretation and injured judicial branch’s predictability in statutory interpretation.
Third, the court should not cover up for the inaction of the legislative branch. The litigations between city government and OTCs started from10 years ago. The legislative branch should have been aware of the trend of OTCs and the litigation associated with it. Also, City of Colorado and OTCs also have been battling in courts for years, the Colorado legislative branch was well noticed of the issue but has not acted on this. It’s possible that if a court using plain meaning rule and rule in favor of OTCs, legislative branch probably will enact legislation in response to the decision quickly. Therefore, the court should not cover up the work that legislative branch should have done.
c. The legislative branch has the better solution to this issue.
The Supreme Court’s motive behind this decision is justified because it would be unfair for OTEs to utilize the state’s resource to make a profit without paying state government. However, as the current limitation on state statute for taxing OTCs, no matter how justified the court
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motive is, the court has to interpret the statute beyond its plain meaning to include the OTCs into taxation group. To avoid the court over-interpret the statute and create uncertainty of statute meaning in public. The better solution is to enact new taxation law specifically deal with OTC through legislation process. The legislative branch is better suited to fix such issue for following reasons.
First, Legislative branch is better to gather information and weigh how OTCs affect social economy when imposed a tax on them. Also, customers, hotel, and OTCs' lobbying activities probably will make legislative branch consider he interests from all sides.
Second, the court is bond to reach a yes/no decision and therefore lack flexibility to afford adequate solution this issue. For example, in various states that the court held that OTCs are subject to pay taxes for their markup fee, OTCs unlisted the hotel for that state completely. xxviThe legislative branch is better suited to counter this problem because the legislative branch could weigh the cost and benefit of such tax and find a middle point that balance the interest of city and OTCs. For example, the legislative branch could make new legislation specifically for OTC and set a tax rate that’s lower than lodging tax but mandatory for OTC to pay.
Third, whether to tax OTCs is not just a judicial decision, it is also a political question. The court is not the best branch to deal with issues that so closely related to politics. First, to tax OTCs would burden interstate commerce. Hotels are important channels of interstate commerce. The most consumer of hotels are from outstate, to charge that customer with markup tax would place a burden on the outstate consumer.xxvii Second, Colorado, as one of a few states that held the City win over the issue, might face the OTCs reaction as withdrawing their business in Colorado as the protest to this decision like they did in other states. The city could potentially lose more business than the tax money that they collected. The executive and legislative branch
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are better suited than a court to weigh the cost and benefit of taxing the OTCs. Third, in other states that the court did not hold in favor of the city, many litigations were eventually settled between the parties. xxviiiHowever, city making a deal directly with OTCs on taxation issues encroached on legislative branch’s legislative power on setting up taxation rate. Therefore, the court is not suited to deal with strong political effects.
d. Conclusion
The new business model such as OTCs posed difficulties on tax law. Certainly, it is justified that city seeks to collect a share of OTCs markup. However, with current limitation in the language of the tax statute, the court needs to interpret existing statute creatively to encompass the OTCs as Vendors of lodges. Such creative interpretation violates the general practice of statutory interpretation and will result in court lost predictability. The legislative branch is better suited to fix such issue because first, the court doesn't have better information than legislative branch to represent the best interest of all parties. Second, the legislative branch is not bound by yes/no decision to provide a solution to this issue. Third, the issues highly political, judicial branch should leave politics to the legislative branch and executive branch.