Travelscape, LLC v. South Carolina Department of Revenue
2011 S.C. LEXIS 12, 391 S.C. 89, 705 S.E.2d 28 (2011)
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Rule of Law:
An online travel company is considered to be in the 'business of furnishing accommodations' and is therefore liable for state sales tax on the gross proceeds of a hotel room rental, which includes any service or facilitation fees the company retains. Imposing such a tax on an out-of-state company does not violate the Dormant Commerce Clause if the company has a substantial nexus with the state, which can be established through the in-state hotels that fulfill its bookings.
Facts:
- Travelscape, LLC, an online travel company, operated through the website Expedia.com to offer hotel reservations.
- Travelscape contracted with hotels in South Carolina to secure rooms at a discounted 'net rate.'
- When listing rooms on Expedia, Travelscape added a facilitation fee, service fee, and tax recovery charge to the hotel's net rate, creating a higher total price for the customer.
- Customers booked rooms by paying the full marked-up price directly to Travelscape via credit card.
- The customer would stay at the hotel without making any direct payment to the hotel for the room.
- After the customer's stay, the hotel would invoice Travelscape for the discounted net rate plus the sales tax owed on that net rate.
- Travelscape remitted the net rate and the tax recovery charge to the hotel but retained its facilitation and service fees, on which it did not pay sales tax.
- During the audit period, Travelscape employees and representatives visited South Carolina to establish and maintain relationships with hotels.
Procedural Posture:
- The South Carolina Department of Revenue conducted an audit of Travelscape's records for July 2001 through June 2006.
- The Department issued a tax assessment and penalty of over $6.3 million against Travelscape for unpaid sales taxes.
- Travelscape filed a request for a contested case hearing before the South Carolina Administrative Law Court (ALC).
- The ALC issued a final order finding Travelscape was liable for the taxes but not the penalties.
- Travelscape (appellant) appealed the ALC's decision on the tax liability directly to the Supreme Court of South Carolina.
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Issue:
Does South Carolina's accommodations tax, which applies to the 'gross proceeds' from 'furnishing accommodations,' require an out-of-state online travel company to remit tax on the full retail price it charges customers, including its retained service fees, for hotel rooms located in the state, and does the imposition of this tax violate the Dormant Commerce Clause?
Opinions:
Majority - Justice Hearn
Yes, the accommodations tax applies to the full retail price charged by the online travel company, and its imposition does not violate the Dormant Commerce Clause. The court reasoned that the statutory term 'gross proceeds' includes the full value of the rental without deduction for the cost of services, meaning Travelscape's service and facilitation fees are part of the taxable amount. The court further held that while Travelscape does not physically provide the rooms, it is 'engaged... in the business of furnishing accommodations' under the statute's broad definition of 'business.' The tax does not violate the Dormant Commerce Clause because it satisfies the four-part test from Complete Auto Transit. Travelscape has a 'substantial nexus' with South Carolina not only through its employees' visits but also because the in-state hotels are 'significantly associated with the taxpayer’s ability to establish and maintain a market in this state for its sales,' thus creating a physical presence. The tax is also fairly apportioned because if every state adopted a similar tax, no multiple taxation would occur on the same accommodation.
Dissenting - Justice Pleicones
No, the legislature did not intend for the accommodations tax to apply to the separate fees charged by intermediaries like Travelscape. The dissent argued that the statute is ambiguous, and any ambiguity in a tax statute should be resolved in favor of the taxpayer. The majority gives the word 'furnish' two different meanings within the same statute, which violates a standard principle of statutory construction. In subsection (A), 'furnished' clearly means to physically provide the accommodation, which Travelscape does not do. The majority improperly broadens the meaning of 'furnishing' in subsection (E) to include Travelscape's facilitation services. This inconsistency demonstrates a lack of clear legislative intent to tax such intermediary fees, and therefore the court should not expand the statute's reach.
Analysis:
This decision established a key precedent for taxing e-commerce transactions in the hospitality industry, affirming that the taxable base for a hotel stay is the full retail price paid by the consumer, not the lower wholesale rate paid by an intermediary to the hotel. It significantly impacts the business model of online travel companies (OTCs) by requiring them to collect and remit sales tax on their service fees, increasing their tax liability and potentially consumer costs. The ruling also expanded the understanding of 'physical presence' for Dormant Commerce Clause purposes, finding that the actions of in-state, third-party service providers (the hotels) could create a substantial nexus for an out-of-state online seller.
