Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 11

The Thorny Issue of Taxing Internet Sales
From the very beginning of e-commerce, cities and states have complained that they are losing millions, if not billions, of dollars of potential tax revenues because nearly all e-commerce companies do not collect state and local sales taxes. Although most states have laws requiring their residents to report purchases from other states and to pay taxes on those purchases (so-called use taxes), few (if any) U.S. consumers ever comply with these laws. Certainly, the possibility of avoiding sales taxes has likely contributed to the growth of e-commerce. Not surprisingly, retailers with investment in physical sales outlets have complained to local, state, and federal governments about this "sales tax inequity."
Local Governments Are Suing Online Travel Companies
One recent trend in the effort to collect taxes from e-commerce has focused on online travel companies, including Travelocity, Priceline.com, Hotels.com, and Orbitz.com. By 2011, at least a dozen cities, including Atlanta, Charleston, Philadelphia, and San Antonio, had filed suits claiming that the online travel companies owed taxes on hotel reservations that they had booked. All of the cities involved in the suits impose hotel occupancy taxes. In Atlanta, for example, the local statute authorizes the city to devise "a rate of taxation, the manner of imposition, payment, and collection of the tax, and all other procedures related to the tax."
At issue in the lawsuits is not whether the online travel companies owe hotel occupancy tax, but rather the amount of tax that they owe and the procedure that should be used to collect it. Online travel companies, such as Hotels.com, typically purchase blocks of hotel rooms at a wholesale rate and subsequently resell the rooms to customers at a marked-up retail rate, keeping the difference as profit. The company forwards to the hotel an amount intended to cover the hotel occupancy tax on the wholesale price of the rooms sold. The hotel then remits to the city taxing authority the tax on the rooms sold by the online travel agency. Thus, the online travel companies do not remit taxes directly to any city authorities.
In calculating the amount of tax owed, the online travel companies assess the occupancy tax rates on the wholesale prices of the rooms, rather than the retail prices that they charge. The cities claim that the online travel companies should be assessing the hotel occupancy tax on the retail prices of the rooms. The cities also want the online companies to register with the local jurisdictions and to collect and remit the required taxes directly.
What the Courts Have Been Deciding
More than a dozen cases have been brought against online travel agencies, but so far the courts have been divided. Many of these cases have been brought in federal district courts, and those courts have often ruled in favor of the cities.
Some state courts have also upheld the cities' claims. In one case, for example, the Supreme Court of Georgia reversed the lower court's dismissal and remanded the case for trial on Atlanta's claim concerning the city's hotel tax ordinance. Given that most cities and counties have found themselves in dire financial straits since the latest recession, we can expect to see more such suits around the country.
FOR CRITICAL ANALYSIS
Why do you think that cities and states have not brought similar lawsuits against e-commerce retailers such as Amazon.com?