OTCs Urge Fifth Circuit to Overturn Award of Texas Hotel Taxes
December 2, 2016

Several online travel companies (OTCs) are claiming that a federal district court erred in awarding a group of Texas cities $84 million in hotel taxes in a decade-long dispute.
In a brief filed with the U.S. Court of Appeals for the Fifth Circuit November 28, the 11 OTCs argue that the district court essentially ignored the plain meaning of the relevant ordinances in order to find that the OTCs “control” hotels and that their fees should be subject to hotel taxes.

The appellants also point out that a Texas state court came to the opposite conclusion in a recent decision, and they argue that the federal court should have deferred to the state court’s interpretation.
Whether OTCs should be subject to state hotel taxes on the fees they collect has been the subject of recent litigation in several states, including LouisianaIllinois, and Wisconsin.
The Texas case now before the Fifth Circuit began in 2006 as a class action involving 173 Texas cities. At issue in the case was whether the OTCs control hotels within the meaning of the cities’ respective ordinances. In 2009, a jury found that they did.

The district court reserved for itself the question of law whether or not the OTCs' fees were within the tax base of the ordinances. After several years, the court ultimately concluded that the fees did fall within the tax base; the court entered a final judgment of $84 million in April 2016. Still pending before the district court is whether the OTCs are liable for $45 million in attorney fees.
In the interim, the Texas Court of Appeals issued a decision involving the city of Houston, which had opted out of the
class action early on to pursue its own lawsuit. The state court held that the OTCs’ fees weren’t taxable because they weren’t paid to the hotel and were not part of the “cost of occupancy.” The Texas Supreme Court denied review in the case.

In their brief, the OTCs argue there is no evidence they control any hotels.

“The evidence is undisputed that OTCs have no ownership in any hotel, no involvement in the day-to-day operations of hotels, no authority over hotel policy or terms of occupancy, and no right to make binding decisions for hotels,” the brief says. The OTCs say that despite this, the district court found that the language of the ordinances wasn’t binding and that the cities weren’t required to show that the OTCs controlled the hotels, only that they controlled the taxable transactions.

The OTCs further argue that 126 of the relevant ordinances define the tax base as the “consideration paid by the occupant of the room to the hotel,” and that the remaining 47 ordinances also focus on taxing the amount paid to the hotel for the occupancy of a room. The OTCs argue that the district court “violated basic rules of statutory construction,” struck relevant language, and disregarded the statutory definition of “hotel” in order to find the OTCs' fees were part of the tax base.

The brief also says that under the Erie doctrine, which dictates that federal courts deferto state courts on issues of state law, the district court should have followed the Texas Court of Appeals decision involving Houston. The OTCs also argue that in the alternative, the Fifth Circuit should order a new trial because the district court admitted letters from the Texas comptroller that were “highly prejudicial.”

“The Comptroller Letters were so prejudicial that the District Court ruled before trial that ‘even with a limiting instruction, it would be natural for a jury to simply follow the Comptroller’s opinion rather than base its verdict on the facts presented at trial,’” the brief says. “Midway through trial, however, the District Court changed its mind, admitted the Letters, and allowed the Cities to use them unsparingly, including in closing argument when the Cities asked the jury simply to defer to the Comptroller’s ‘official’ opinion.”