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An online travel company has been found liable for sales and use tax on its sales of car rentals and hotel rooms in Maryland.

After a lengthy legal battle, an online travel company (OTC) has been found liable for sales and use tax on its sales of car rentals and hotel rooms in Maryland. However, the punishment isn’t as great as it could have been. The Maryland Tax Court found the OTC to have disputed the assessed tax in good faith. Furthermore, the court determined that Maryland’s legal definition of the “taxable price” of accommodations lacked clarity during the audit period.

Travelocity.com LP vs. Comptroller of Maryland pertains to the audit period 2003–2011, when Travelocity entered into contracts with hotels to sell rooms listed in the hotels’ databases, and with car rental agencies to sell car rentals. When it booked a service, Travelocity charged the customer’s credit card the car or hotel room rental rate, a tax recovery charged based on the tax rate, and service fees. After the customer used the room or car, the hotel or car rental company billed Travelocity for the stay or service.

The Maryland Comptroller found the OTC to be liable for tax on its sales of car and room rentals. Travelocity appealed the assessment, arguing that it wasn’t the “vendor” of the lodging or car rentals — it was a technology company providing services over the internet. It said the true vendors of the lodging and vehicles were the hotels and car rental agencies, so they were responsible for collecting and remitting sales and use tax.

The court ruled against the OTC. Yet it acknowledged liability wasn’t entirely clear: “Although the sales and use tax statute on its face appears to apply to OTCs like Travelocity, the General Assembly in 2015 amended the statute for the express purpose of removing any doubt in the marketplace that OTCs are required to collect and remit taxes for their online services.”

That’s a reference to Senate Bill 190, which makes it clear that OTCs are responsible for collecting and remitting tax when they act as an accommodations intermediary. It also defined the taxable price of the sale or use of an accommodation facilitated by an accommodations intermediary as “the full amount of the consideration paid by a buyer for the sale or use of an accommodation, but not including any tax that is remitted to a taxing authority.”

SB 190 was vetoed by Governor Larry Hogan because of the ongoing Travelocity dispute, but the legislature overrode the governor’s veto and the measure took effect February 20, 2016. Find more details in Maryland Clarifies Taxable Price of Accommodations.

Although SB 190 clarified the tax obligations of accommodations intermediaries from February 20, 2016, forward, ambiguity during the period under question in Travelocity vs. Comptroller remained. The court has taken all that into consideration.

The ruling states, “Although the law supports the tax assessment by the Comptroller, reasonable cause exists to justify waiving penalties and interest and enforcing the four-year statute of limitations. Travelocity has demonstrated … that it was not grossly negligent in not paying any sales and use tax as a newly defined vendor. Moreover, the legislature’s efforts to clarify and alter the definition of a vendor suggest that substantial uncertainty exists as to the applicability of the law to Travelocity and similar OTCs.”

Maryland is one of many states that has struggled to adapt existing sales and use tax laws to the services online travel companies perform. And Travelocity is one of many companies caught in a sort of limbo, uncertain how old laws apply to new technologies.

Fortunately, technology can also help simplify sales and use tax compliance for lodging. Learn more.

photo credit: Hotel e relax via photopin (license)