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Arizona Court of Appeals Decides Privilege Tax Case


Impact on Non-OTA Agencies Unclear

A case with potential implications for many travel advisors was decided by the Arizona Court of Appeals earlier this month.  The case, captioned City of Phoenix, et al. v. Orbitz Worldwide, et al., concerned the issue of whether online travel agencies (OTAs) are considered “brokers” under the tax codes of Phoenix and the other Arizona cities named as plaintiffs (the “Cities”) such that the OTAs would be subject to the Cities’ privilege tax ordinances on the sales of hotel rooms.  Unlike a sales tax, a privilege tax is one levied on a seller for the privilege of conducting certain business activities in the state.

While the hotels whose rooms were booked by the OTAs’ customers remitted the privilege tax to the Cities, the tax was only paid on the amount the hotels received from the OTAs, and not on the portion of the purchase price retained by the OTA as its service fee. In 2014 the Cities began issuing privilege tax assessments on the OTAs to recover these amounts on the ground that the OTAs were engaged in taxable activities under two different statutes or, alternatively, that they were acting as the hotels’ brokers and should be assessed on that basis. The trial court held that while the OTAs were not operating hotels, they were indeed acting as the hotels’ brokers and therefore were properly subject to the privilege tax.  However, the court determined that the Cities could not assess the privilege taxes retroactively because their position that the OTAs were subject to the tax as brokers represented a new interpretation of the tax code.

The OTAs appealed the decision, arguing that the trial court erred when it determined that they were brokers for purposes of the two tax statutes.  The Cities cross-appealed that portion of the decision which held that their interpretation of the tax code was a new one and therefore only could assess the privilege tax on the OTAs prospectively.

On appeal, the lower court’s decision was affirmed in part and reversed in part.  Specifically, the Court of Appeals agreed with the trial court that the OTAs were acting as the hotels’ brokers.  However, due to differences in the language found in the tax provisions at issue, the OTAs, being neither owners nor operators of hotels, could only be liable for the privilege tax as brokers under one of the two statutes.  The appellate court further determined that the Cities had not advanced a new interpretation of the tax code when they sought to tax the OTAs and accordingly they were not barred from assessing the privilege taxes retroactively.       

At this time it is unclear whether the OTAs will elect to take a further appeal to the Arizona Supreme Court.  Assuming the decision stands, it remains to be seen how wide a net the taxing authorities will cast, as although only OTAs were targeted for enforcement the holding can be extended to Arizona hotel bookings made by traditional travel advisors utilizing the merchant model, wherein the agency appears as the merchant of record on the purchaser’s credit card statement.  ASTA filed an amicus brief in the case last year in which it raised just this point, among others, and urged the Court of Appeals to reverse the trial court’s determination that OTAs were acting as brokers for purposes of both of the tax statutes at issue.          

ASTA will continue to monitor the situation and will provide an update if an appeal is taken and granted by the Arizona Supreme Court.  Members who have questions or seek additional information about this decision may contact ASTA’s General Counsel, Peter Lobasso, at

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