Background of State Marketplace Facilitator Laws
While state sales and use tax laws vary widely, as a general rule, the “seller” of a taxable good or service, such as a taxable accommodation, must collect sales or use tax from the purchaser and remit the tax to the state. With the increased prominence of online marketplaces, including online travel companies, states have sought to require the platform itself to collect and remit the tax. Some states have attempted to do this by asserting this position in audits and litigation, which is what led to the controversy in Travelocity. Additionally, many states have done this legislatively, by enacting “marketplace facilitator” laws, which effectively shift state sales and use tax collection and remittance obligations from the seller of the taxable good or service to the marketplace or platform that facilitates the sale of the taxable good or service, either by expressly imposing a collection and remittance obligation on a marketplace facilitator or by treating marketplace facilitators as “retailers” otherwise required to collect and remit sales or use tax. Many state marketplace facilitator laws apply broadly to platforms facilitating the sale of any type of taxable goods or services, but some marketplace facilitator laws are more targeted, such as Maryland’s accommodations intermediary law, enacted in 2015, which applies specifically to certain online travel companies. (We note that Maryland also subsequently adopted a general marketplace facilitator law in 2019 that applies more broadly to platforms that facilitate sales of taxable goods and services.)
Maryland's Pre-2015 Sales and Use Tax Framework
Prior to 2015, Maryland imposed sales and use tax on “a retail sale in the State; and a use, in the State, of tangible personal property or a taxable service.” Md. Code Ann., Tax-Gen. § 11-102(a). Pursuant to the Maryland tax code, a “sale” required a “transaction for consideration” where “title or possession of property is transferred or is to be transferred absolutely or conditionally by any means, including by lease, rental, royalty agreement, or grant of a license for use.” Md. Code Ann., Tax-Gen. § 11–101(i). Md. Code Ann., Tax-Gen. § 11-101(k) defined tangible personal property as “corporeal personal property of any nature; or a right to occupy a room or lodgings as a transient guest.”
Under this tax framework, the burden of collecting the sales and use tax fell on the “vendors,” who were required to collect the tax from the buyer and remit it to the Comptroller of Maryland (“Comptroller”). Md. Code Ann., Tax-Gen. §§ 11- 401, 11-403. “Vendors” were defined as persons “engaged in the business of” being either a retail vendor or out-of-state vendor, i.e., selling or delivering tangible personal property into Maryland. Md. Code Ann., Tax-Gen. § 11-101 (o)(1); § 11-701 (b)–(d).
The Accommodations Intermediary Law
In 2015, the Maryland General Assembly amended the sales and use tax statute, Md. Code Ann., Tax-Gen. § 11-102. The amendment to the statute expanded the scope of a “vendor” to include an “accommodations intermediary” — “a person, other than an accommodations provider, who facilitates the sale or use of an accommodation and charges a buyer the taxable price for the accommodation[ ].” The amendment, which became effective in January 2016, was passed with the stated purpose of “altering the definition of ‘vendor’ under the State sales and use tax to include an accommodations intermediary [.]” 2016 Md. Laws Ch. 3 (H.B. 1065 & S.B. 190 (2015)); S.B. 190 (2015) Fiscal and Policy Note at 1.
The Travelocity Case: Lower Court Decisions
Between 1 March 2003 and 30 April 2011, Travelocity.com LP (“Travelocity”) operated as an online travel company and contracted with third-party hotel, airlines and car rental agencies to provide an independent platform to review and request reservations. Travelocity coordinated with the central reservation system of the hotels and car rental agencies to ascertain availability and subsequently listed the available rooms and vehicles on its website. Customers could access the Travelocity website could compare options and select their desired reservation on the website. Travelocity operated as the intermediary between the third-party company and the customer, handling payments, confirmation information, and cancellations. For its service, Travelocity charged customers a rate higher than the net rate that the hotels and car rental agencies offered to Travelocity. Thereafter, Travelocity paid the hotels and car rental agencies the net rate for the room, plus taxes on the net rate.
The Comptroller audited Travelocity for the period between 1 March 2003, and 30 April 2011, and assessed sales tax, penalties, and interest of approximately $6.5 million on the difference between the tax on the net rate paid by hotels and car rental agencies and the tax that the Comptroller asserted should have been collected on the total charge paid by consumers (i.e., the net rate plus Travelocity’s mark-up).
Travelocity challenged the assessment, arguing that it was not a “vendor” of hotel rooms and rental cars under the then existing state statute and was therefore not required to collect or remit sales tax on the total charge. It bolstered its challenge by citing to the 2015 amendment enacting the accommodations intermediary law, asserting that it was not a vendor before the law change which expressly expanded the definition of vendor to include “accommodations intermediary.”
On 18 December 2017, the Maryland Tax Court issued a final memorandum and order, finding that Travelocity was engaged in the business of a retail vendor because it sold the right to occupy a hotel room or rent a vehicle, both of which constituted tangible personal property. The Tax Court determined that Travelocity was liable for the tax, but not grossly negligent in failing to pay the sales and use tax during the audit period because “there [was] a good faith dispute as to whether the tax applie[d] to Travelocity.”
Both parties subsequently petitioned for judicial review of the Tax Court decision in the Circuit Court for Anne Arundel County. On 30 January 2020, the circuit court affirmed the decision of the Tax Court.
The Travelocity Decision
On appeal, the Maryland Court of Appeals (the state’s highest court) ruled that Travelocity was not required to collect and remit the state’s sales and use tax on the total charge collected from consumers during the audit period because it was not a vendor as statutorily defined under the Maryland tax code. Rather, Travelocity merely facilitated reservations with third-party agencies for the right to occupy a hotel room or rent a vehicle during the audit period, and did not acquire title or possession as required for a sale.
The court acknowledged that hotel room reservations and vehicle rentals fell within the definition of tangible personal property pursuant to Md. Code Ann., Tax-Gen. § 11-101(k). The dispute, therefore, was whether Travelocity was a “vendor” who “sold” or “delivered” the hotel and car rental reservations during the audit period. Under the plain language of the statute, the court concluded that Travelocity did not acquire “title or possession” to the hotel room or rental car, as required for a “sale” to occur under Md. Code Ann., Tax-Gen. § 11–101(i). Travelocity’s contracts showed that they did not result in the transfer of title or possession of hotel rooms or rental cars. The sample agreements provided on audit further clarified that Travelocity did not purchase or acquire inventory in the hotel rooms and rental vehicles, nor accept any risk of loss for the reservations. Therefore, construing the contracts as a whole, Travelocity could not have “sold” the rooms under Maryland law.
Further, as corroborated by the contracts, the purpose of the agreements was for Travelocity to facilitate hotel and car reservations for the benefit of the hotel and car rental agencies and “to broaden the distribution of [the third-party agencies’] travel products and services through Travelocity.” The court described the relationship between Travelocity and the third-party agencies as analogous to a “postal carrier who delivered, for a fee, items from a seller to a buyer while at the same time collecting payment from the buyer to return to the seller.”
The Court then turned to the relevance of the superseding 2015 legislation. It concluded that the subsequent inclusion of accommodations intermediary to the definition of vendor demonstrated that intermediaries such as Travelocity were not within the scope of the original definition of a vendor. The court noted that the legislative history confirmed that the amendment was passed with the stated purpose of “altering the definition of ‘vendor’ under the State sales and use tax to include an accommodations intermediary[.]” 2016 Md. Laws Ch. 3 (H.B. 1065 & S.B. 190 (2015)); S.B. 190 (2015) Fiscal and Policy Note at 1. If the amended statute were construed to have the same meaning as the original statute, the additional term “accommodations intermediary” would be rendered surplusage — an unfavorable result in statutory interpretation.
In a dissenting opinion, Judge Shirley M. Watts, joined by Chief Judge Mary Ellen Barbera and Judge Robert N, argued that the lower court decisions should have been upheld because, in the dissenting Judges’ opinion, Travelocity did act as a vendor and engaged in sales when customers used its website to reserve hotel rooms or car rentals. The dissenting opinion also asserted that “the circumstance that Travelocity did not immediately transfer possession of the hotel room or rental car to the customer does not change the fact that Travelocity immediately accepted consideration from the customer, and immediately transferred to the customer the grant of a license to use a hotel room or rental car.” The dissent argued that these actions were sales under the plain language of the statute and caused Travelocity to fall under the definition of a vendor.
Finally, turning to the 2015 amendment, the dissent reframed the purpose of the amendment as clarifying rather than altering the definition of vendor, characterizing the 2015 amendment to the definition as a “prophylactic measure that confirmed, out of an abundance of caution, what was already the intent under existing law.” As noted above, however, the majority disagreed with this finding and held that if the 2015 amendment “was merely clarifying that an accommodations intermediary was already included in the statutory definition of a vendor, then the additional term ‘accommodations intermediary’ would be surplusage — an unfavorable result in statutory interpretation.” Thus, the majority decision in Travelocity has strengthened the position that the enactment of a marketplace facilitator law does not retroactively broaden the obligations of facilitators such as Travelocity. The court observed “that Travel industry practices have long informed the developments of the State’s tax legislation,” and that “Travelocity’s business and technological acumen preceded the State’s tax legislation, until the General Assembly ‘caught up’ with the 2015 amendment.” While the court’s holding is limited to the accommodations intermediary law, this case could have relevance outside the online travel company context and provides support for an argument that marketplace facilitator laws were intended to alter the tax collection and remittance obligations of marketplace facilitators and thus should be prospectively applied, and states should not impose tax collection and remittance obligations on platforms for years before a marketplace facilitator law was enacted.
This alert is part of the Tax News and Developments newsletter. See the other articles below:
Part 1 - North America: Residual Profits and Market Jurisdictions
Part 2 - International: G20 supports latest Pillar One and Pillar Two proposals
Part 3 - United States: Eleventh Circuit agrees that the Federal Circuit effectively has control over all overpayment interest suits
Part 4 - United States: Ninth Circuit reverses Tax Court’s use of substance-over-form doctrine in Mazzei
Part 5 - North America: NOL carryback period waiver applies to certain specified liability losses
Part 7 - North America: IRS temporarily allows CFCs an automatic accounting method change to ADS