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City of Phoenix v. Orbitz Worldwide Inc.

Supreme Court of Arizona

September 9, 2019

City of Phoenix et al, Plaintiffs/Appellees/Cross Appellants,
v.
Orbitz Worldwide Inc. et al, Defendants/Appellants/Cross Appellees.

          Appeal from the Arizona Tax Court The Honorable Christopher T. Whitten, Judge Nos. TX2014-000470, TX2014-000471, TX2014-000472, TX2014-000473, TX2014-000474, TX2014-000475

          Memorandum Decision of the Court of Appeals, Division One Nos. 1 CA-TX 16-0016 1 CA-TX 16-0018 Filed Sep. 6, 2018

          John Crongeyer (argued), Crongeyer Law Firm P.C., Atlanta, GA; Garrett W. Wotkyns, Schneider Wallace Cottrell Konecky Wotkyns LLP, Scottsdale; and Scott Andersen, Wright Welker & Pauole PLC, Phoenix, Attorneys for City of Phoenix, City of Apache Junction, City of Chandler, City of Flagstaff, City of Glendale, City of Mesa, City of Nogales, City of Prescott, City of Scottsdale, City of Tempe, and City of Tucson

          Thomas M. Peterson (argued), Morgan Lewis & Bockius LLP, San Francisco, CA; and Barbara J. Dawson, Andrew M. Jacobs, Snell & Wilmer L.L.P., Phoenix, Attorneys for Orbitz Worldwide Inc, Orbitz LLC, Trip Network Inc, Internetwork Publishing Corp, Expedia Inc, Priceline.com Inc, Travelweb LLC, Travelocity.com LP, Hotels.com LP, and Hotwire

          Pat Derdenger, Lewis Roca Rothgerber Christie LLP, Phoenix; and Bennett Evan Cooper, Dickinson Wright PLLC, Phoenix, Attorneys for Amicus Curiae Arizona Tax Research Association

          Mark Brnovich, Arizona Attorney General, Rusty D. Crandell, Deputy Solicitor General, Scot G. Teasdale, Assistant Attorney General, Phoenix, Attorneys for Amicus Curiae Arizona Department of Revenue

          JUSTICE LOPEZ authored the, in which JUSTICES BOLICK, GOULD, and BALES (Retired) and JUDGE ECKERSTROM [1] joined. VICE CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE BRUTINEL, concurred in part and dissented in part.

          OPINION

          LOPEZ JUSTICE

         ¶1 We consider whether online travel companies ("OTCs") like Orbitz Worldwide Inc. and the other appellants are subject to municipal privilege taxes under Model City Tax Code ("MCTC" or "the Code")[2]§§ 444 and 447, and if so, whether the City of Phoenix and other city appellees (collectively the "Cities") may assess those taxes, penalties, and interest retroactively. We hold that the OTCs are subject to taxation under § 444 because they are "brokers" - as defined by MCTC § 100 - engaging in "the business of operating a hotel," and the proceeds from this business - their service fees and markups on room rental rates - constitute taxable gross income. We further hold that the OTCs are not subject to taxation under § 447 because they are not "hotels." Finally, we hold that MCTC § 542(b) bars taxation based on a new policy, procedure, or interpretation of the Code until a city has adopted and provided impacted taxpayers with clear notice of the change, and we remand to the tax court to determine whether § 542(b) bars the Cities from assessing taxes, penalties, and interest due under § 444 before the 2013 Notices of Tax Assessment ("2013 Assessments").

         I.

         ¶2 The OTCs develop, operate, and maintain websites that offer travel-facilitation services. One of those services allows travelers to reserve and pay for hotel rooms. The OTCs do not own the hotels or rooms they advertise; they contract with the hotels to list rooms available for rent.

         ¶3 When a customer requests a hotel reservation, an OTC collects the customer's personal and payment information and provides a total price for the room. The total price is a combination of the "Reservation Rate" or "Nightly Rate" and an amount representing the "Taxes and Fees" or "Tax Recovery Charge and Service Fees." The "Reservation Rate" consists of the room rental rate set by the hotel in its contract with the OTC plus an additional markup that the OTC retains for its services. The "Taxes and Fees" consist of the tax rate the hotel later remits to the city as a privilege tax and an additional service fee paid to the OTC. The OTC does not disclose to the customer the amount of the markup on the room rental rate or the portion of the "Taxes and Fees" remitted for taxes.

         ¶4 Before finalizing a transaction with a customer, the OTC confirms the room rates and availability with the hotel and requests a reservation on the customer's behalf. After the hotel confirms the reservation, the OTC charges the customer's credit card, appearing on the statement as the merchant of record. Until the customer checks into the hotel, the OTC provides customer service support and facilitates any modifications or cancellations.

         ¶5 After a customer's stay, the hotel invoices the OTC for the net room rate-not including the OTC's markup - and the amount covering the tax owed by the hotel. The hotel then remits the tax to the city. Neither the OTC nor the hotel pays the city any money representing tax on the OTC's service fees or markups.

         ¶6 In 2013, the Cities issued privilege tax assessments against the OTCs - the 2013 Assessments - following a multi-year audit of the OTCs' books and records. The assessments were based on the Cities' position that the OTCs owed unpaid privilege taxes under §§ 444 and 447 for engaging in the business of operating hotels, or alternatively, for acting as brokers for hotels. The OTCs challenged the assessments, and in May 2014 an administrative hearing officer overturned them, concluding the OTCs were not subject to taxation under §§ 444 or 447 because the OTCs were neither hotel operators nor brokers.

         ¶7 In the ensuing appeal, the tax court partially granted and partially denied the Cities' motion for summary judgment. The court concluded the OTCs do not own or operate hotels, but the OTCs "clearly and unambiguously" qualify as "brokers" under the Code and are subject to taxation under both §§ 444 and 447. The court also concluded that the Cities' position on OTCs as "brokers" in the 2013 Assessments constituted "a new interpretation or application" under § 542(b), thus the Cities could only assess taxes prospectively.

         ¶8 The OTCs appealed the tax court's ruling regarding their liability for taxes, and the Cities cross-appealed the ruling barring retroactive collection of the tax. The court of appeals held that the OTCs are subject to taxation under § 444 because they qualify as "brokers" engaging in the taxable activity under the provision, and the OTCs' proceeds from that activity-service fees and markups -are part of the taxable gross income. City of Phoenix v. Orbitz Worldwide Inc., Nos. 1 CA-TX 16-0016; 1 CA-TX 16-0018, 2018 WL 4265950, at *3 ¶ 14 (Ariz. App. Sept. 6, 2018) (mem. decision). It further held that the OTCs are not subject to taxation under § 447 because the tax liability of that provision is limited to hotels. Id. at *5 ¶ 27. Finally, the court held that the Cities could assess the taxes, penalties, and interest under § 444 retroactively, for years preceding the 2013 Assessments, "[b]ecause there was no change in the Cities' application or interpretation of the Code and the OTCs' business activities are not new." Id. at *6 ¶ 32.

         ¶9 We granted review because the applicability of municipal privilege taxes to the OTCs is a recurring legal issue of statewide importance. We have jurisdiction under article 6, section 5(3) of the Arizona Constitution.

         II.

         ¶10 "City . . . ordinances are to be construed by the same rules and principles which govern the construction of statutes," Rollo v. City of Tempe, 120 Ariz. 473, 474 (1978), and "we review issues of statutory interpretation de novo, seeking to effectuate the drafters' intent." City of Surprise v. Ariz. Corp. Comm'n, 246 Ariz. 206, 210 ¶ 10 (2019). "In construing a specific provision, we look to the statute as a whole and we may also consider statutes that are in pari materia-of the same subject or general purpose- for guidance and to give effect to all of the provisions involved." Stambaugh v. Killian, 242 Ariz. 508, 509 ¶ 7 (2017). If possible, we give meaning "to every word and provision so that no word or provision is rendered superfluous." Nicaise v. Sundaram, 245 Ariz. 566, 568 ¶ 11 (2019). If the language of a statute is unambiguous, "we apply it without further analysis." Glazer v. State, 237 Ariz. 160, 163 ¶ 12 (2015).

         III.

         ¶11 We first address whether the OTCs are subject to taxation under § 444. This provision imposes a tax on "the gross income from the business activity upon every person engaging in or continuing in the business of operating a hotel charging for lodging." Therefore, to be subject to taxation under § 444, the OTCs' business activities must constitute "the business of operating a hotel," the proceeds the OTCs receive from hotel customers in the form of markups and service fees must be part of the taxable gross income contemplated by § 444, and the OTCs must qualify as "persons" liable for the tax. We agree with the court of appeals that all three requirements are satisfied here. See Orbitz, 2018 WL 4265950, at *3 ¶ 14.

         ¶12 At the outset, we recognize that other jurisdictions have reached varying conclusions on whether OTCs are subject to taxes on hotel lodging. Compare, e.g., City & County of Denver v. Expedia, Inc., 405 P.3d 1128, 1138 ¶ 36 (Colo. 2017) (city ordinance taxed privilege of purchasing lodging and OTCs' markups are inseparable from selling price of lodging), and Travelocity.com, L.P. v. Wyo. Dep't of Revenue, 329 P.3d 131, 143 ¶ 41, 145 ¶ 55 (Wyo. 2014) (OTCs qualify as "vendors," taxable under city's ordinance, and their markups are part of the "sales price" subject to city's tax on hotel lodging), with State v. Priceline.com, Inc., 206 A.3d 333, 341 (N.H. 2019) (statute at issue explicitly limited lodging tax to "operators," and OTCs did not qualify as hotel operators), and Pitt County v. Hotels.com, G.P., LLC, 553 F.3d 308, 313 (4th Cir. 2009) (same). Each of these cases was decided based on the language of the particular statute or ordinance at issue. Because the language of § 444 and the rest of the Code differs in several key respects - especially with respect to its treatment of "brokers" - we do not find these cases particularly instructive in resolving the issues before us. Instead, our analysis is guided by the language of the Code.

         A.

         ¶13 We agree with the court of appeals that the OTCs are engaged in the taxable business activity: "the business of operating a hotel." Orbitz, 2018 WL 4265950, at *4 ¶ 21. As a threshold matter, we note that § 444 is a transaction privilege tax because it levies "an excise tax on the privilege or right to engage in an occupation or business . . . . [It] is not a sales tax, but rather is a tax on the gross receipts of a person or entity engaged in business activities." See Ariz. Dep't of Revenue v. Action Marine, Inc., 218 Ariz. 141, 142 ¶ 6 (2008) (internal quotations and citations omitted); see also MCTC § 400 (broadly imposing privilege taxes); Rigel Corp. v. State, 225 Ariz. 65, 67 ¶ 12 (App. 2010) (noting that transaction privilege taxes, as compared to sales taxes, are levied on gross receipts rather than individual sales and on business providers rather than consumers).

         ¶14 The taxable business activity under § 444 is "the business of operating a hotel." Section 100 defines "business" to mean, in relevant part, "all activities or acts, personal or corporate, engaged in or caused to be engaged in with the object of gain, benefit, or advantage, either directly or indirectly." This section also defines "hotel" as brick-and-mortar lodging places.[3] But the Code does not define what it means to "operate" such locations. Because it does not appear from the context that the drafters intended a special meaning, we are guided by the word's ordinary meaning. See State Tax Comm'n v. Peck, 106 Ariz. 394, 395 (1970); Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 69 (2012) ("Words are to be understood in their ordinary everyday meanings - unless the context indicates that they bear a technical sense.").

         ¶15 The OTCs and the dissent assert that the "business of operating a hotel" must be limited to the business activity of hotel owners and operators - those who physically own or furnish lodging to customers. See infra ¶ 49 (citing Pitt County, 553 F.3d at 313 and Mont. Dep't of Revenue v. Priceline.com, Inc.,354 P.3d 631, 635 (Mont. 2015)). We disagree. As we noted previously, supra ¶ 12, the cases upon which the dissent relies are inapposite because their holdings were decided based on the language of the particular statute or ordinance at issue. In Pitt County, the tax provision at issue levied a tax on "[o]perators of hotels, motels, tourist homes, tourist camps, and similar type businesses." 553 F.3d at 311. Similarly, the Montana tax provision levied a tax on an "owner or operator" of lodging facilities. Mont. ...


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