PHOENIX — The Arizona Supreme Court has ruled Orbitz and other online travel companies must pay sales taxes to cities for their work in arranging hotel stays for customers, but it remains unclear whether the communities will be able to collect millions of dollars in back taxes.
The ruling on Monday grew out of a 2013 effort by the cities to assess taxes against the sites for an eight-year period ending in April 2009.
The state’s highest court ruled the online travel companies are subject to the sales taxes because, under one tax law, they serve as brokers for the hotels.
The 11 cities that demanded that the sites pay taxes were Phoenix, Apache Junction, Chandler, Flagstaff, Glendale, Mesa, Nogales, Prescott, Scottsdale, Tempe and Tucson.
Lake Havasu City Mayor Cal Sheehy said the city is exploring what the ruling could mean for local government, but he said there were no clear answers yet. “We were just notified (Monday) about it, so we are reviewing what impact the Supreme Court’s ruling will have on Lake Havasu City and how that might be implemented in our particular case,” Sheehy said.
In Lake Havasu City, the sales tax is 2 percent with an additional 3 percent bed tax. Sheehy said online travel agencies are already paying at least some of that tax but it is still unclear if this ruling would open the door to more.
“They are currently remitting sales tax, we just have to make sure that they are remitting the correct amount,” Sheehy said. “They will still be paying the same percentage, but it has to do with gross volume. So they could already be paying what is due to the cities at this time. It is still premature for us to be able to know that until we can do a full analysis of the impact.”
Sheehy said that once the city finishes its analysis of the ruling, it should be able to go into effect fairly easily.
“Once we fully vet the Supreme Court ruling we would just have to provide notice to the OTAs to be able to start collecting that additional tax,” he said. “They are already paying tax, but it would just be the additional tax that is mentioned in the ruling.”
Lake Havasu City receives about 850,000 visitors annually, and tourism directly employs over 2,500 people according to Sheehy. Sheehy also said Mohave County sees $584 million in direct spending from tourism, which contributes more than $51.1 million in state and local taxes.
The Supreme Court ruled that the law prohibits taxation based on a new policy or interpretation until a city has provided taxpayers with clear notice of the chance.
The case is being sent back to a lower court to determine if the law prohibits cities from seeking the taxes before the tax assessments were made in 2013.
The cities argued they have applied the broker interpretation since 2002 and relied on a 2002 ruling involving a taxpayer in which a Scottsdale official regarded the online travel companies as brokers whose income is taxable. They also cited a 2007 letter from the city of Peoria to an industry representative relaying the same information as the 2002 ruling.
The Supreme Court said one city’s ruling for one taxpayer doesn’t provide clear notice to all online travel companies on behalf of all the cities.
The court said it’s possible that the cities provided official notice of their intent to assess taxes against the companies on their status as brokers, but “such evidence is not in the record currently before us.”
John Crongeyer, one of the attorneys representing the cities, declined to say the amount of tax money the communities believe they are owed, but he said it’s fair to say it’s millions of dollars.
Crongeyer said the hotels have paid their sales taxes but the online travel companies have never paid their share.
Crongeyer said the decision represents a victory for the cities because it establishes that the online travel companies must pay the sales taxes. “This is what has been contested by the companies for years,” Crongeyer said.
Thomas M. Peterson, an attorney representing the travel companies, didn’t immediately return a phone call Monday afternoon seeking comment on the Supreme Court’s decision.
Today’s News-Herald reporter Michael Zogg contributed to this story.