                      NOTICE: NOT FOR OFFICIAL PUBLICATION.
  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                  AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.




                                     IN THE
              ARIZONA COURT OF APPEALS
                                 DIVISION ONE


       CITY OF PHOENIX, et al., Plaintiffs/Appellees/Cross-Appellants,

                                         v.

ORBITZ WORLDWIDE INC., et al., Defendants/Appellants/Cross-Appellees.

                   Nos. 1 CA-TX 16-0016; 1 CA-TX 16-0018
                              (Consolidated)
                              FILED 9-6-2018


                 Appeal from the Arizona Tax Court
  Nos. TX2014-000470; TX2014-000471; TX2014-000472; TX2014-000473;
                   TX2014-000474; TX2014-000475
                           (Consolidated)
            The Honorable Christopher T. Whitten, Judge

    AFFIRMED IN PART; REVERSED IN PART AND REMANDED


                                    COUNSEL

Snell & Wilmer, L.L.P., Phoenix
By Barbara J. Dawson, Andrew M. Jacobs, Rebekah Elliott
Co-Counsel for Defendants/Appellants/Cross-Appellees

Jones Day, Dallas, Texas
By Deborah Sloan
Co-Counsel for Defendants/Appellants/Cross-Appellees

Kelly Hart & Hallman, LLP, Fort Worth, Texas
By Bryan T. Davis
Co-Counsel for Defendants/Appellants/Cross-Appellees
Freeborn & Peters, LLP, Chicago, Illinois
By Jeffrey A. Rossman
Co-Counsel for Defendants/Appellants/Cross-Appellees

Schneider Wallace Cottrell Konecky Wotkyns, LLP, Scottsdale
By Jeffrey R. Finley
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants

Wright Welker & Pauole, PLC, Phoenix
By Scott G. Andersen
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants

Crongeyer Law Firm, P.C., Atlanta, Georgia
By John W. Crongeyer
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants

Bird Law Group, P.C., Atlanta, Georgia
By Alexandria E. Seay, Kristen L. Beightol
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants

Steptoe & Johnson, LLP, Phoenix
By Patrick Derdenger, Bennett Evan Cooper
Counsel for Amicus Curiae Arizona Tax Research

Arizona Attorney General’s Office, Phoenix
By Scot G. Teasdale
Counsel for Amicus Curiae Arizona Department of Revenue

Van Cott & Talamante, PLLC, Phoenix
By Ryan J. Talamante
Co-Counsel for Amicus Curiae American Society of Travel Agents

American Society of Travel Agents, Inc., General Counsel, Alexandria,
Virginia
By Peter N. Lobasso
Co-Counsel for Amicus Curiae American Society of Travel Agents




                                       2
                     PHOENIX, et al. v. ORBITZ, et al.
                         Decision of the Court



                      MEMORANDUM DECISION

Judge James P. Beene delivered the decision of the Court, in which Acting
Presiding Judge Peter B. Swann and Judge Randall M. Howe joined.


B E E N E, Judge:

¶1             Orbitz Worldwide Inc. and other travel companies
(collectively the “online travel companies,” or “OTCs”) appeal the superior
court’s partial grant of summary judgment to the City of Phoenix and other
cities (“Cities”), holding the OTCs are brokers under the Phoenix City Code
(“Code”)1 and, thus, subject to transaction privilege tax on their sales of
hotel rooms. The Cities cross-appeal the court’s partial denial of that
summary judgment, which barred the Cities from assessing such taxes and
penalties against the OTCs before 2013. For the following reasons, we
affirm in part, reverse in part, and remand for further proceedings.

                FACTS AND PROCEDURAL HISTORY

¶2            The facts in this case are not in dispute. The OTCs operate
websites that advertise travel services and allow customers to reserve and
pay for hotel rooms. The OTCs do not own any hotels. Instead, they
employ a merchant model, under which the OTCs contract with hotels to
list rooms available for rent on their websites.

¶3             On an OTC’s website, customers reserve hotel rooms by
providing their personal information, length of stay, and payment
information to the OTC. The OTC provides the customer with a total price,
with two line items: the “Reservation Rate” or “Nightly Rate,” and the
“Taxes and Fees” or “Tax Recovery Charge and Service Fees.” However,
neither line item is further itemized. The “Reservation Rate”—effectively
the retail rate of the room—consists of the room rental rate set by the hotel
plus an additional amount the OTC retains for its services. The Reservation
Rate does not delineate the amount the hotel retains versus the amount the
OTC retains. The second line-item, the Taxes and Fees, includes the tax rate


1     In their briefs, the Cities and Orbitz reference the Model City Tax
Code. Because Phoenix is the named Appellee and the Phoenix City Code
and the Model City Tax Code are not substantively different, we refer to the
Phoenix City Code throughout this decision.


                                     3
                     PHOENIX, et al. v. ORBITZ, et al.
                         Decision of the Court

the hotel later remits to the city as a privilege tax and an additional service
fee paid to the OTC, undisclosed to the customer.

¶4            The OTC appears as the merchant of record on the customer’s
credit card. The OTC handles the customer’s financial and customer service
concerns until the customer arrives at the hotel. If the customer does not
keep a reservation and fails to cancel, the OTC sometimes keeps all of the
money from the transaction, including the tax. The customer directly pays
the hotel only for incidentals during the stay.

¶5             After a customer’s stay, the hotel typically invoices the OTC
for the net room rate and tax the hotel owes on that amount. The hotel then
pays tax to the city on the amount it receives from the OTC. The OTC does
not pay to the city any tax on its service fees, and the city does not receive
tax on the money the OTC keeps.

¶6             To illustrate, assume an OTC contracts with a hotel in a city
with a combined 10% occupancy tax. The OTC and the hotel agree to a net
rate of $80. The OTC, then, sells the right to occupy the room to a traveler
for $100, plus $10 taxes and service fee. After the traveler’s stay, the hotel
invoices the OTC for $80, plus the 10% tax of $8. The hotel remits the $8 to
the city, and the OTC keeps the remaining $22.

¶7            In 2014, the Cities issued business activity privilege tax
assessments to the OTCs for a review period of June 2001 to April 2009. The
Cities argued that the OTCs were engaged in taxable activities under the
Code §§ 14-444 and -447 for the privilege of engaging in the business of
operating hotels, or alternatively, for acting as brokers for hotels. The OTCs
sought redetermination of the Cities’ assessments, arguing that the OTCs
are not subject to the tax because they 1) do not operate hotels and are not
hotels; and 2) are not brokers.

¶8             The Hearing Officer agreed with the OTCs, finding that the
OTCs are not engaged in the business of operating a hotel and are not
brokers because they do not act for hotels in the operation of the hotel. Also,
the Hearing Officer found that, even if the OTCs were brokers under the
regulation, the taxable portion of the transaction is only the net amount paid
to the hotel, for which audits showed the Cities received remittance.

¶9            The Cities appealed the Hearing Officer’s ruling to the
superior court and filed a motion for summary judgment, which was
partially granted and partially denied. The superior court concluded: 1)
the OTCs did not own or operate hotels; 2) the OTCs “clearly and
unambiguously fall within the definition of ‘broker’” under the Code


                                      4
                      PHOENIX, et al. v. ORBITZ, et al.
                          Decision of the Court

because “the hotel uses the OTC as its agent to obtain business – in short,
as a broker;” 3) the Cities’ “broker” position constituted “a new
interpretation or application” under the Code, and the Cities could, thus,
only assess taxes prospectively. See Code § 14-542.

¶10           The OTCs timely appealed the superior court’s rulings. The
Cities cross-appealed the ruling barring retrospective collection of the tax.
We have jurisdiction pursuant to Arizona Revised Statutes (A.R.S.) §§ 12-
120.21(A)(1) and -2101(A)(1).

                                DISCUSSION

¶11           Entry of summary judgment is proper “if the moving party
shows that there is no genuine dispute as to any material fact and the
moving party is entitled to judgment as a matter of law.” Ariz. R. Civ. P.
56(a). We determine de novo whether any genuine issue of material fact
exists and whether the trial court erred in applying the law, and will uphold
the court’s ruling if correct for any reason. Logerquist v. Danforth, 188 Ariz.
16, 18 (App. 1996). We construe the evidence and reasonable inferences in
the light most favorable to the non-moving party. Wells Fargo Bank v. Ariz.
Laborers, Teamsters & Cement Masons Local No. 395 Pension Tr. Fund, 201 Ariz.
474, 482, ¶ 13 (2002).

¶12            This case involves issues of statutory interpretation that we
review de novo. United Bank of Ariz. v. Allyn, 167 Ariz. 191, 195 (App. 1990);
State v. Gallagher, 205 Ariz. 267, 269, ¶ 5 (App. 2003). City charters and
ordinances are construed by the same rules and principles that govern
construction of statutes. Rollo v. City of Tempe, 120 Ariz. 473, 474 (1978).

¶13           “[T]he best and most reliable index of a statute’s meaning is
its language and, when the language is clear and unequivocal, it is
determinative of the statute’s construction.” State ex rel. Montgomery v.
Harris (Shilgevorkyan), 234 Ariz. 343, 344, ¶ 8 (2014) (citation omitted). “We
construe the statute as a whole, and consider its context, language, subject
matter, historical background, effects and consequences, as well as its spirit
and purpose.” State ex rel. Ariz. Dep’t of Revenue v. Capitol Castings, Inc., 207
Ariz. 445, 447, ¶ 9 (2004) (quoting State ex rel. Ariz. Dep’t of Revenue v. Phx.
Lodge No. 708, Loyal Order of Moose, Inc., 187 Ariz. 242, 247 (App. 1996))
(internal quotations and marks omitted). Statutes imposing taxes are
liberally construed in favor of taxpayers and against the government. Id. at
¶ 10.




                                       5
                      PHOENIX, et al. v. ORBITZ, et al.
                          Decision of the Court

   I.        The OTCs are brokers engaging in a taxable activity under
             Phoenix City Code Section 14-444.

¶14           In section 14-444, the Code imposes a tax on “the gross income
from the business activity of every person engaging or continuing in the
business of operating a hotel charging for lodging.” Code § 14-444. The
OTCs are included under this section because: a) they are brokers; b) they
provide services generally performed in operating a hotel; and c) their
service fee is part of the entire amount a customer must pay for the
lodging—the taxable gross income.

        A.      The OTCs are persons under section 14-444 because they are
                brokers.

¶15            The Cities argue the OTCs are “persons” under this ordinance
because they are hotel room brokers. The OTCs counter the definition does
not apply to them because they do not own or operate hotels. The Code
generally defines “person[s]” as any “individual, firm, partnership, joint
venture, association, corporation, estate, trust, receiver, syndicate, broker,
the Federal Government, this State, or any political subdivision or agency
of this State.” Code § 14-100 (emphasis added). The Code, then, specifically
defines “broker” as “any person engaged or continuing in business who
acts for another for a consideration in the conduct of a business activity
taxable under this Chapter, and who receives for his principal all or part of
the gross income from the taxable activity.” Code § 14-100. The superior
court concluded that the OTCs “clearly and unambiguously fall within the
definition of ‘broker.’” We agree.

¶16           Under the Code, the OTCs are brokers for the following four
reasons: 1) they act for hotels by providing advertising, booking, and other
hotel services; 2) they accept payment for their services from travelers; 3)
they accept consideration for their services from hotels; and 4) they assist
hotels with taxable hotel operations.

¶17            First, the OTCs act for hotels by advertising available rooms,
soliciting customers, collecting customer information, processing payment,
and handling certain aspects of customer service. While the OTCs argue
they merely provide information and services to travelers, they facilitate
additional services to travelers by taking on numerous duties of the hotel
during the booking process.

¶18           Second, the OTCs earn consideration for their actions in the
form of service fees. They argue they are not brokers under the Code
because the traveler pays the fees in consideration for their services. But the


                                      6
                     PHOENIX, et al. v. ORBITZ, et al.
                         Decision of the Court

Code does not specify who must pay the consideration, only that
consideration is exchanged.

¶19            Third, the OTCs perform hotel operations, for which hotels
exchange consideration. The OTCs claim customers pay their fees for the
information compiled on their websites and ease in the booking process.
However, advertising and booking are essential hotel operations that the
OTCs assume. The OTCs, thus, receive consideration for acting on behalf
of the hotel, as contemplated by the Code. See Code § 14-100. Additionally,
hotels agree to take a smaller amount of revenue in OTC-facilitated
transactions in exchange for the exposure to a wider customer base the
OTCs provide. This loss in revenue, in exchange for services and access to
customers, is also a form of consideration.

¶20           Fourth, although the OTCs argue they do not directly engage
in business activities taxable under the Code, the taxable activity is
furnishing hotel lodging to customers. Not only do the OTCs collect the
entire amount of fees for lodging on behalf of hotels, but they also assume
advertising, booking, and customer service duties for hotels.

       B.     The OTCs provide services performed in the business of
              operating a hotel.

¶21            The OTCs correctly point out that they do not perform all of
the functions involved in operating a hotel; however, defining brokers as
those who perform all aspects of hotel operation is contrary to the Code’s
plain language. See Harris (Shilgevorkyan), 234 Ariz. at 344, ¶ 8. Brokers are
included as “persons” under § 14-444, and all “persons” must pay tax on
the total amount of revenue they generate from hotel operations. The
OTCs, as brokers, assume a number of duties hotels generally perform.
Thus, brokers must pay tax on the income they generate from performing
those operational duties. Applying the Code only to those who perform all
operational functions of a hotel would render the broker definition
superfluous. See Phx. Newspapers, Inc. v. Dep’t of Corr., 188 Ariz. 237, 244
(App. 1997) (“We presume that the legislature does not enact superfluous
or reiterative legislation.”).

       C.     The entire amount the OTCs collect from a customer is the
              taxable gross income for the lodging transaction.

¶22           The OTCs contend the revenue they collect is not the gross
income paid for hotel lodging; instead, the customer pays a certain amount
for the hotel stay and a separate amount the OTC retains as a service fee.
However, Code section 14-100.1 provides:


                                      7
                      PHOENIX, et al. v. ORBITZ, et al.
                          Decision of the Court

       (a) For the purposes of proper administration of this chapter
       and to prevent evasion of taxes imposed, brokers shall be
       wherever necessary treated as taxpayers for all purposes, and
       shall file a return and remit the tax imposed on the activity on
       behalf of the principal. No deduction shall be allowed for any
       commissions or fees retained by such a broker, except as provided
       in Section 14-405, relating to advertising commissions.

(Emphasis added.)

¶23           The OTCs admit that the fees they collect are service fees.
Although the OTCs argue that these fees are separate from the price
customers pay for the right to occupy a hotel room, each consumer must
pay the total amount the OTC charges, including service fees, to rent the
room. The OTC’s decision not to separately itemize service fees, but to label
the hotel room’s net rate plus the service fees as the “Reservation” or
“Nightly Rate” on their customer invoices, further demonstrates that the
entire amount is the price paid for lodging. Because customers must pay
the entire combined amount to obtain future lodging at the time they book
with the OTC, the entire amount they pay is the sales price for the lodging
paid to the OTC on the hotel’s behalf at the time of the sale. The Code does
not provide a deduction for service fees retained by the OTCs. Thus, the
entire sales price the OTC charges is the gross income for the lodging
transaction and is taxable under § 14-444.

¶24           Our reasoning accords with decisions regarding the taxability
of OTCs in other state and federal courts. In jurisdictions that require only
hotel owners and operators to remit taxes on the revenues they receive, the
OTCs’ service fees have generally not been found taxable.2 In jurisdictions
that apply a tax to the entire cost of purchasing lodging, the OTCs’ service
fees have been found taxable.3 For example, Baltimore changed its tax laws

2      See, e.g., Pitt Cty. v. Hotels.com, G.P., LLC, 553 F.3d 308, 313 (4th Cir.
2009) (tax only imposed on hotel “operators”); Louisville/Jefferson Cty. Metro
Gov’t v. Hotels.com, L.P., 590 F.3d 381, 385 (6th Cir. 2009) (imposed tax on
amounts charged by entities “doing business as . . . hotels”); City of
Columbus v. Hotels.com, L.P., 693 F.3d 642, 651 (6th Cir. 2012) (amount
charged by hotel is taxable).

3      See, e.g., Travelscape, LLC v. S.C. Dep’t of Revenue, 705 S.E.2d 28, 32–33
(S.C. 2011) (OTCs’ hotel transactions subject to tax upon gross proceeds);
Travelocity.com, L.P. v. Wyo. Dep’t of Revenue, 329 P.3d 131, 145, ¶ 55 (Wyo.



                                       8
                     PHOENIX, et al. v. ORBITZ, et al.
                         Decision of the Court

to reflect models that charge tax on the entire lodging transaction to
successfully collect tax from the OTCs. Jaan Rannik, Note and Comment,
Locality v. Online Travel Company: Does the Bell Finally Toll for Quill
Corporation v. North Dakota?, 9 J. Bus. & Tech. L. 293, 297-98 (2014); see also
Mayor & City Council of Balt. v. Priceline.com Inc., 2012 WL 3043062 at *9 (D.
Md. July 24, 2012) (mem. decision).

¶25         The superior court correctly applied the law and summary
judgment on this issue was appropriate.

   II.    The OTCs are not taxable entities under Phoenix City Code
          § 14-447.

¶26            Unlike § 14-444, which specifically incorporates hotel room
brokers as taxpayers, § 14-447 taxes “the gross income from the business
activity of any hotel engaging or continuing within the City in the business
of charging for lodging.” (Emphasis added.) The OTCs argue that § 14-447
taxes income received by hotels and does not apply to OTC activities. The
Cities argue that § 14-447 taxes all entities receiving gross business income
from furnishing lodging to customers.




2014) (as vendors, OTCs’ markups are subject to sales tax); City & Cty. of
Denver v. Expedia, Inc., 405 P.3d 1128, 1138, ¶ 35 (Colo. 2017) (the OTCs’
service fee is taxable as it is inseparable from the price of lodging).




                                      9
                          PHOENIX, et al. v. ORBITZ, et al.
                              Decision of the Court

¶27            While § 14-200 does define gross income broadly,4 § 14-447’s
plain text limits the taxable income to business activities of hotels. The Cities
do not explain how § 14-200 overcomes § 14-447’s limitation on hotel
income only. The Cities argue that § 14-447 institutes a tax on the entire
consideration consumers pay for hotel rooms regardless of its later division.
If § 14-447 were to be read as broadly as the Cities suggest, however, the tax
could be applied to the income of any business affiliated with the hotel
industry. We agree with the OTCs that the language of § 14-447 limits
taxpayers to hotels renting lodging to customers. It does not extend to
brokers engaging in hotel operations, as reflected in other sections of the
Code.

¶28            The superior court misapplied the law when it granted the
Cities’ motion for summary judgment as to the taxation provisions of § 14-
447. Therefore, we reverse the superior court’s grant of summary judgment
on this issue and remand for entry of judgment in favor of the OTCs.

    III.      The Cities did not advance a new interpretation of the Code.

¶29            In its summary judgment order, the superior court concluded
the Cities are barred from assessing any tax, penalty, or interest
retroactively, before 2013, because the Cities did not enforce the taxes prior
to that year. This conclusion is contrary to Code § 14-542(b)(2), which
provides:




4          Pursuant to Code § 14-200(a), gross income includes:

           (1) The value proceeding or accruing from the sale of
           property, the providing of service, or both.

           (2) The total amount of the sale, lease, license for use, or rental
           price at the time of such sale, rental, lease, or license.

           (3) All receipts, cash, credits, barter, exchange, reduction of or
           forgiveness of indebtedness, and property of every kind or
           nature derived from a sale, lease, license for use, rental, or
           other taxable activity.

           (4) All other receipts, whether payment is advanced prior to,
           contemporaneous with, or deferred in whole or in part
           subsequent to the activity or transaction.



                                           10
                      PHOENIX, et al. v. ORBITZ, et al.
                          Decision of the Court

       If the Tax Collector adopts a new interpretation or application of
       any provision of this chapter or determines that any provision
       applies to a new or additional category or type of business and the
       change in the interpretation or application is not due to a change
       in the law . . . the Tax Collector shall not assess any tax,
       penalty or interest retroactively based on the change in
       interpretation or application.

(Emphasis added.)

¶30           Adoption of a new interpretation requires a change from an
old position because the “liability for transaction privilege taxes arises
automatically when a taxpayer engages in taxable business activity in
Arizona.” Tucson Mech. Contracting, Inc. v. Ariz. Dep’t of Revenue, 175 Ariz.
176, 178 (App. 1992) (emphasis added). While taxing authorities may audit
select taxpayers to ensure compliance, privilege taxes are self-assessed. Id.
Failure to collect a privilege tax does not render an unambiguous statute
unenforceable and does not preclude the tax authority from seeking to
collect those revenues in the future. Miami Copper Co. Div., Tenn. Corp. v.
State Tax Comm’n, 121 Ariz. 150, 153 (App. 1978). The OTCs bear the burden
of proving that the Cities changed their interpretation of the tax law. See
Code §§ 14-370(a) and 14-400(c); see also Valencia Energy Co. v. Ariz. Dep’t of
Revenue, 191 Ariz. 565, 582, ¶ 55 (1998) (the department can be estopped
from collecting taxes if taxpayer proves the department held inconsistent
positions).

¶31           Here, the record shows no evidence that the Cities held
positions contrary to the one they now advance. Therefore, the OTCs failed
to demonstrate they qualify for an exclusion based on a change in the Cities’
interpretation of the tax provisions. The OTCs also fail to demonstrate that
their business is a new activity or category. Brokering hotel and travel
services is not a new industry; although the OTCs provide these services
through the internet, the nature of the services remains the same. The
OTC’s business activities are, therefore, not “new.”

¶32            We conclude that the superior court misapplied the law;
dismissal of the Cities’ motion for summary judgment was inappropriate
as the Code allows the Cities to collect tax from previous years, when not
barred by statutes of limitation. Because there was no change in the Cities’
application or interpretation of the Code and the OTCs’ business activities
are not new, we reverse and remand for further proceedings consistent with
this decision.




                                       11
                    PHOENIX, et al. v. ORBITZ, et al.
                        Decision of the Court

                             CONCLUSION

¶33           For the foregoing reasons, we affirm the OTCs’ status as
taxable hotel room brokers under § 14-444, but reverse the conclusion that
the OTCs are taxable under § 14-447 and that the Cities may not assess tax,
penalties, and interest before 2013. We remand for further proceedings
consistent with this decision. We award the Cities their costs on appeal
subject to compliance with Arizona Rule of Civil Appellate Procedure 21.
We decline to award the Cities attorneys’ fees on appeal pursuant to A.R.S.
§ 12-348.01 because this section limits recovery by a municipality to
lawsuits involving dispute with another government entity.




                         AMY M. WOOD • Clerk of the Court
                         FILED: AA




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