Facts
- Travelscape, LLC operated an online hotel-reservation business through Expedia using a “merchant model” and did not own or operate hotels.
- Travelscape contracted with South Carolina hotels for discounted “net rates,” then offered rooms to consumers at a higher total price.
- The consumer-facing price included the net rate plus a facilitation fee, a service fee (retained by Travelscape), and a tax recovery charge (based on the net rate).
- Travelscape charged the customer’s credit card; typically, the customer paid nothing to the hotel at check-in or checkout absent incidental purchases.
- After the stay, the hotel invoiced Travelscape for the net rate plus sales tax owed by the hotel; Travelscape remitted those amounts and kept its fees without collecting or remitting sales tax on the retained fees.
- The South Carolina Department of Revenue audited Travelscape for July 1, 2001 through June 30, 2006 and assessed accommodations/sales tax on the gross proceeds from South Carolina hotel reservations (including retained fees), plus penalties.
- Travelscape’s employees traveled into South Carolina to solicit and negotiate hotel agreements and maintain business relationships.
Issues
- Whether an online travel intermediary is a “person engaged … in the business of furnishing accommodations to transients for consideration” under S.C. Code Ann. § 12-36-920(A), making it liable for accommodations tax on the transaction’s gross proceeds, including its retained fees.
- Whether applying the accommodations tax to Travelscape violates the Dormant Commerce Clause, including the “substantial nexus” requirement under the Complete Auto framework.
Decision
- The South Carolina Supreme Court affirmed the Administrative Law Court’s decision upholding the tax assessment.
- The Court held Travelscape was engaged in the business of furnishing accommodations in South Carolina for consideration within § 12-36-920(A).
- The Court held “gross proceeds” from the rental transaction included the facilitation and service fees retained by Travelscape.
- The Court held the tax, as applied, did not violate the Dormant Commerce Clause because Travelscape had a sufficient nexus with South Carolina and the tax satisfied the Complete Auto requirements.
- The Court left undisturbed the ALC’s refusal to sustain certain penalties.
Legal Principles
- An entity may “furnish” sleeping accommodations for purposes of a state accommodations tax even if it does not own or physically operate the lodging, where it sells the right to occupy the room in exchange for consideration.
- For accommodations taxes imposed on “gross proceeds” from rentals or charges, the taxable base may include intermediary markups and service-related fees when they are part of the amount paid by the consumer for the accommodations transaction.
- A state may impose sales/accommodations tax on an out-of-state seller consistent with the Dormant Commerce Clause where in-state contracting, solicitation, or other business activity creates substantial nexus and the tax is fairly apportioned, nondiscriminatory, and related to state-provided services.
Conclusion
The court treated an online travel company operating under a merchant model as a taxable furnisher of South Carolina sleeping accommodations and required tax on the full consumer-paid amount, including retained fees, while rejecting a Dormant Commerce Clause challenge based on the company’s in-state contractual and business activities.