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
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
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
Derdenger, Lewis Roca Rothgerber Christie LLP, Phoenix; and
Bennett Evan Cooper, Dickinson Wright PLLC, Phoenix,
Attorneys for Amicus Curiae Arizona Tax Research Association
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  joined. VICE
CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE BRUTINEL,
concurred in part and dissented in part.
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")§§ 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").
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.
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.
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.
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.
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.
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
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.
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.
"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).
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.
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
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).
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. 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
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. ...