Online Travel Company's Facilitation and Service Fees Subject to South Carolina Accommodations Tax

The South Carolina Supreme Court held that the facilitation and service fees charged by an online travel company for providing hotel reservations in South Carolina were subject to the state sales tax imposed on gross proceeds from the rental or charges for rooms or sleeping accommodations furnished to transients by any hotel. In addition, the imposition of sales tax does not violate the Dormant Commerce Clause. (Travelscape, LLC v. S.C. Dept. Rev., S.C. S. Ct., Dkt. No. 26913, 01/18/2011.)

Tax on gross proceeds. Under S.C. Code Ann. §12-36-920(A), sales tax is imposed on “the gross proceeds derived from the rental or charges for any rooms... furnished to transients by any... place in which rooms, lodgings, or sleeping accommodations are furnished to transients for consideration.” The court found that the service and facilitation fees charged by the online travel company were subject to sales tax under the plain language of the statute as gross proceeds, because the statute imposed tax on the “gross proceeds derived from the rental or charges for any room.” Gross proceeds includes the value obtained from the rental of accommodations without deduction for the cost of services.

Company engaged in business. Under S.C. Code Ann. §12-36-920(E), the accommodations tax is imposed “on every person engaged or continuing within this State in the business of furnishing accommodations to transients for consideration.” The court held that the tax was not limited to the person physically providing sleeping accommodations, but rather applied to the person who was accepting money in exchange for supplying the room. Though the term “furnish” as used in S.C. Code Ann. §12-36-920(A) connotes physically providing sleeping accommodations to customers, in S.C. Code Ann. §12-36-920(E) “furnish” encompasses the activities of persons “who, directly or indirectly, provide hotel reservations to transients for consideration.” The online travel company comes within the scope of this provision because it is in the business of providing accommodations. The legislative purpose of S.C. Code Ann. §12-36-920 is to impose a tax on the amount of money visitors spend on their hotel rooms or other accommodations.

Business engaged in within the state. The sales tax is imposed on persons engaged or continuing in the business of furnishing accommodations in South Carolina, whether or not the entities maintain offices or otherwise reside in the state. Thus, the online travel company is responsible for remitting the sales tax on its services because it was engaged in the business of furnishing accommodations in South Carolina. It entered into contracts with hundreds of hotels in South Carolina in which the hotels agreed to accept a discounted price for reservations made on Expedia; it sent employees to South Carolina to negotiate these agreements; and it booked reservations in exchange for consideration at hotels located in the state.

Dormant Commerce Clause. The accommodations tax did not violate the Dormant Commerce Clause because it satisfies the four-part test in Complete Auto Transit, Inc. v. Brady, U.S. S. Ct., 430 US 274 (1977). The online travel company had sufficient physical presence in South Carolina because its employees and representatives visited South Carolina to establish and maintain hotel relationships and to obtain the discounted room rate for rooms booked on Expedia. Moreover, the company enters into contracts with South Carolina hotels for the right to offer reservations at various locations throughout the state, and when a reservation is booked on Expedia, the customer stays at a hotel within the state. The internal and external consistency tests are met because if every state imposes a similar tax on accommodations provided within its boundaries, no multiple taxation occurs because the same accommodations cannot be furnished in two different states at one time. The court held that issues concerning discrimination against interstate commerce and whether the tax fairly related to services provided by the state had not been preserved for appellate review. The Administrative Law Court did not rule on arguments concerning the last two elements of the “Complete Auto” test. The online travel company thus should have made a Rule 59(e) motion to preserve issues raised but not ruled on by the trial court, which it failed to do.