Overview
In Travelscape, LLC v. South Carolina Department of Revenue, the South Carolina Supreme Court held that the online travel company, Expedia, was required to remit State accommodations tax on the gross proceeds it received from providing hotel reservations in South Carolina. In determining the applicability of the state accommodations tax, the Court focused on whether despite the absence of physical presence in the taxing jurisdiction, the company was "engaged in" or "doing" business within the jurisdiction. The Court concluded that notwithstanding the company's intermediary status, it was engaged in the business of furnishing accommodations in South Carolina because it (1) entered into contracts with hotels in South Carolina for a discounted rate for reservations, (2) sent employees into the state to negotiate such agreements, and (3) booked reservations in exchange for services to be performed by hotels in the state.
Summary
Travelscape is an online travel company offering hotel reservations nationwide through Expedia.com. The hotels accept discounted rates in exchange for reservations made on Expedia. Travelscape adds a facilitation fee, service fee and tax recovery charge to the room rate, retaining the facilitation and service fees as compensation and does not pay sales tax on these fees. The Administrative Law Court ruled that such fees charged for the services it provides are taxable as gross proceeds derived from the furnishing of sleeping accommodations. The ALC also found that the tax did not violate the Dormant Commerce Clause's requirement of a "substantial nexus" between the company's business activities and the state. Travelscape appealed.
The South Carolina Supreme Court affirmed the ALC's decision. The Court determined that Travelscape is subject to the accommodations tax because it is engaged in the business of furnishing accommodations despite an absence of physical presence within the state. Although Travelscape neither owns nor operates hotels, the Court broadly interpreted "furnish" to include those engaged in the business of furnishing accommodations, not merely physically providing sleeping accommodations to customers. This interpretation is consistent with City of Charleston, S.C. v. Hotels.com.
In that case, the City of Charleston alleged several internet travel companies violated a local tax ordinance, which imposed a sales tax on gross proceeds derived from rental of accommodations within its boundaries, because the companies only remitted sales tax on the net rates negotiated with hotels instead of the marked-up price actually charged to customers. The Court focused on who was accepting money in exchange for supplying hotel rooms, rather than who was physically providing sleeping accommodations, and found that such companies were engaged in the business of furnishing accommodations. This finding reveals that such an application of "engaged in" is not limited to those physically present in the state. The Court also ruled that Travelscape's business activities constitute sufficient physical presence to satisfy the Dormant Commerce Clause nexus requirement because the services it provides are significantly associated with its ability to establish and maintain a market in South Carolina for its sales. Such services include Travelscape's employees visiting the state to maintain hotel relationships and negotiating the contracts for booking hotels across the state.