December 15, 2016

Local governments may see an impact on tax revenue in the aftermath of a State Supreme Court decision this week. On Monday, the California Supreme Court concluded that the City of San Diego cannot collect transient occupancy taxes (TOT) on the amount charged by online travel companies, like Priceline.com, for example. Instead, the TOT is limited to the amount the online travel company pays for the room, and not the amount that the actual room occupant pays to the online travel company.

Priceline and similar companies book large blocks of rooms at a discounted rate from hotels and then resell them to the end user, presumably at a higher rate. That’s how they make a profit. However, the rate they ultimately collect from the traveler could be different than the hotel’s standard rate.

Like many cities and counties, San Diego adopted its TOT ordinance well before the advent of online hotel booking websites, and the ordinance applies to “rent charged by the operator of the hotel.” The Supreme Court concluded that this language limits the TOT only to what the hotel collects from the online travel company, even if the person who actually sleeps in the room pays more than that to the online travel company.

For counties with TOT ordinances similar to the one at issue in this case, the result of this decision means less potential TOT revenue unless the ordinances are amended. It is worth noting that due to Propositions 62 and 218, any amendment to a TOT ordinance that shifts the TOT base from the discounted charge to the full charge paid by the customer requires a vote of the electorate.

Read more about this case here.