Filed 12/12/16




      IN THE SUPREME COURT OF CALIFORNIA


In re                          )
TRANSIENT OCCUPANCY TAX CASES. )                                  S218400
                               )                             Ct.App. 2/2 B243800
                               )
                               )                            Los Angeles County
                               )                          Super. Ct. No. JCCP 4472


      Like many other communities in this state and elsewhere, the City of San
Diego (San Diego) has adopted an ordinance imposing a tax on visitors for the
privilege of occupancy in hotels located within the city. The tax, known as a
transient occupancy tax, is calculated as a percentage of the “Rent charged by the
Operator” of the hotel. (See San Diego Mun. Code, § 35.0103.) In recent years,
many visitors have booked and paid for their hotel reservations online at the
websites of online travel companies (OTCs) such as defendants and respondents in
this case.1 The question before us is whether the San Diego transient occupancy
tax is payable on the amount retained by the OTCs above the amount remitted to
the hotels as the agreed wholesale cost of the room rental. We conclude that under
the San Diego ordinance, in a “merchant model” transaction of the sort at issue
here, the operator of a hotel is liable for tax on the wholesale cost plus any

1      Defendants and respondents in this case are Hotels.com, L.P.;
Priceline.com, Inc.; Travelweb LLC; Expedia, Inc.; Hotwire, Inc.; Hotels.com
G.P., LLC; Travelocity.com, LP; Site59.com, LLC; Orbitz, LLC; Travelnow.com;
Lowestfare.com, LLC; Trip Network, Inc. (doing business as Cheaptickets.com);
and Internetwork Publishing Corp. (doing business as Lodging.com).



                                          1
additional amount for room rental the operator requires the OTC to charge the
visitor under what have been termed “rate parity” provisions of hotel-OTC
contracts but, as San Diego has effectively conceded, OTCs are not operators
within the meaning of the ordinance. We shall therefore affirm the judgment of
the Court of Appeal.
     The parties have not challenged the factual findings made by the hearing
officer in the administrative proceedings. Accordingly, we accept that those
findings are supported by substantial evidence (Environmental Protection
Information Center v. California Dept. of Forestry & Fire Protection (2008) 44
Cal.4th 459, 479), while independently reviewing the legal determinations reached
below (City of San Diego v. Board of Trustees of California State University
(2015) 61 Cal.4th 945, 956), bearing in mind that an ambiguity in a tax statute will
generally be resolved in favor of the taxpayer (Microsoft Corp. v. Franchise Tax
Bd. (2006) 39 Cal.4th 750, 759; see Agnew v. State Bd. of Equalization (1999) 21
Cal.4th 310, 330).
     We first describe the nature of the transactions at issue. OTCs publish on
their websites comparative information about airlines, hotels, and car rental
companies, and allow consumers to book reservations with these travel and
hospitality providers. OTCs may do business under any of several business
models; involved here is the one known as the merchant model.2 Under the


2      Other business models include the agency model, under which the
customer, after making a reservation through the OTC, pays the room rent and
associated tax directly to the hotel when checking in; after the customer‟s stay, the
hotel remits a prearranged percentage of the rent to the OTC as a commission and
pays tax on the full amount of the room rent; and the opaque model, where no
room rate as such is shown to the customer and the customer instead bids for a
reservation at a price the customer sets.




                                          2
merchant model, OTCs contract with hotels to advertise and rent rooms to the
general public. OTCs handle all financial transactions related to the hotel
reservations and become the merchant of record as listed on the customer‟s credit
card receipt, but do not themselves own, operate or manage hotels, maintain an
inventory of rooms, or possess or obtain the right to occupy any rooms. The price
the hotel charges the OTC for the room is the “wholesale” price; rate parity
provisions3 in most master contracts between OTCs and hotels bar the OTC from
selling a room for a rent lower than what the hotel quotes its customers directly.
The OTC offers the rooms to the public at retail prices. Its charge to the customer
includes a “tax recovery charge,” which represents the OTC‟s estimate of what the
hotel will owe in transient occupancy tax based on the wholesale price of the room
as charged by the hotel to the OTC. The OTC provides the customer with a
receipt that lists the room rate and, on a separate line, an amount for taxes and
service fees.4 Once the reservation has been made and paid for, the OTC provides
customer service until the customer checks into the hotel. The hotel then bills the
OTC for the wholesale price of the room plus the transient occupancy tax the hotel
will have to pay based on the room‟s wholesale price. The OTC remits the
charged amount to the hotel, which in turn remits the tax to San Diego; the OTC
retains its markup and service fees.



3      The parties differ regarding the meaning of the term “rate parity” in
reference to the hotel-OTC contracts. We need not resolve this nomenclature
dispute; for present purposes, when we refer to rate parity provisions we mean any
provisions in hotel-OTC contracts that set the “floor” room rate the OTCs must
quote and charge customers.
4      Although at earlier stages of this litigation San Diego sought to apply the
room tax to the fee portion of the taxes-and-fees line item shown on the customer
receipt, it has disavowed the effort here.



                                          3
     We turn now to the ordinance at issue in this case. First enacted in 1964, it
provides that “[f]or the privilege of Occupancy in any Hotel located in [San
Diego], each Transient is subject to and shall pay a tax in the amount of six
percent (6%) of the Rent charged by the Operator.” (San Diego Mun. Code,
§ 35.0103.) Four times in subsequent years San Diego enacted increases in the tax
rate without altering the ordinance‟s operative language. (Id., §§ 35.0104,
35.0105, 35.0106, 35.0108.) Proceeds of the tax are to be used for promoting San
Diego, including by planning, building, and maintaining tourism-related cultural,
recreational, and convention facilities, among other governmental purposes. (San
Diego Mun. Code, § 35.0101, subd. (b).)
     Other provisions define the ordinance‟s key terms. “ „Occupancy‟ means the
use or possession, or the right to the use or possession, of any room, or portion
thereof, in any Hotel . . . for dwelling, lodging, or sleeping purposes.” (San Diego
Mun. Code, § 35.0102.) “ „Rent‟ means the total consideration charged to a
Transient as shown on the guest receipt for the Occupancy of a room, or portion
thereof, in a Hotel . . . . „Rent‟ includes charges for utility and sewer hookups,
equipment, (such as rollaway beds, cribs and television sets, and similar items),
and in-room services (such as movies and other services not subject to California
taxes), valued in money, whether received or to be received in money, goods,
labor, or otherwise. „Rent‟ includes all receipts, cash, credits, property, and
services of any kind or nature without any deduction therefrom.” (Ibid.)
“ „Operator‟ means the Person who is the proprietor of the Hotel, . . . whether in
the capacity of owner, lessee, sublessee, mortgagee in possession, licensee, or any
other capacity. „Operator‟ includes a managing agent, a resident manager, or a
resident agent, of any type or character, other than an employee without




                                          4
management responsibility.” (Ibid.)5 “ „Transient‟ means any Person who
exercises Occupancy, or is entitled to Occupancy, by reason of concession, permit,
right of access, license, or other agreement for a period of less than one (1)
month.” (Ibid.)
     The ordinance provides that “[e]ach Operator shall collect the tax . . . to the
same extent and at the same time as the Rent is collected from every Transient.”
(San Diego Mun. Code, § 35.0112, subd. (a).) “The amount of tax charged each
Transient shall be separately stated from the amount of Rent charged, and each
Transient shall receive a receipt for payment from the Operator.” (Id., § 35.0112,
subd. (c).) The operator must, among other remitting and reporting
responsibilities, “remit monthly the full amount of taxes collected for the previous
month with the appropriate approved return form available from the City
Treasurer.” (Id., § 35.0114, subd. (a).) The operator must “keep and preserve . . .
all business records as may be necessary to determine the amount of such tax for
which the operator is liable for collection and payment to the City.” (Id.,
§ 35.0121.) The San Diego city treasurer may inspect the operator‟s business
records and “apply auditing procedures necessary to determine the amount of tax
due to the City.” (Ibid.) If an operator “fail[s] or refuse[s] to collect” or remit the
tax, the treasurer “shall forthwith assess the tax and penalties . . . against the
operator.” (Id., § 35.0117, subd. (a).) An operator may challenge the assessment
by requesting a hearing, and must be given notice of the final “determination and
the amount of such tax and penalties” imposed. (Id., § 35.0118, subd. (a).)
     In December 2004, the City of Los Angeles filed a putative class action on
behalf of various California cities against various OTCs, alleging each such

5       San Diego has abandoned the argument it made in earlier stages of this
litigation that OTCs are operators within the meaning of the ordinance.



                                            5
company was liable for transient occupancy tax as the “operator” of every hotel.
In October 2007, putative class member San Diego began auditing the OTCs.
Eventually it issued transient occupancy tax assessments against the OTCs, which
each OTC timely appealed. A hearing officer conducted a consolidated
administrative hearing to determine whether each OTC had obligations and
liability under the tax. In May 2010 the officer issued a decision, finding that the
OTCs owed tax on their markup in merchant model transactions. The OTCs
challenged the hearing officer‟s determination by filing a petition for writ of
mandate and cross-complaint seeking declaratory relief. After briefing and
argument, the superior court granted the OTCs‟ motion for judgment granting the
writ of mandate and denied San Diego‟s cross-motion for judgment denying the
writ.6 The court thereafter issued the writ, ordering the hearing officer to vacate
his ruling in favor of the City, issue a new ruling that the OTCs are not liable for
the tax, and set aside the assessments. The court reasoned the ordinance imposes
tax on rent “charged by the Operator”; OTCs are not operators or managing agents
of the hotels; and the markup the OTCs charge for their services is not part of the
rent subject to the tax.
     San Diego appealed. Noting the salient facts are undisputed and the case
turns solely on the interpretation of the ordinance, the Court of Appeal affirmed.
Like the superior court, it reasoned the ordinance imposed tax on “rent charged by
the . . . operator” and concluded that hotels, not the OTCs, are operators within the
meaning of the ordinance.



6       This and other lawsuits alleging similar claims and pending in various
jurisdictions within the state have been coordinated in the Los Angeles County
Superior Court as Transient Occupancy Tax Cases, JCCP 4472.



                                          6
     San Diego petitioned for rehearing on the basis the Court of Appeal had
improperly cited and relied on two unpublished decisions arising out of the same
coordinated proceedings; the Court of Appeal granted rehearing and issued a new
opinion again citing the same unpublished decisions, explaining the reliance was
proper because the decisions were relevant as law of the case. (See Cal. Rules of
Court, rule 8.1115(b).) Contending the Court of Appeal‟s law-of-the-case analysis
was flawed, San Diego unsuccessfully petitioned for rehearing. We granted San
Diego‟s petition for review.
     San Diego contends the tax base for calculating the tax must be the full
amount of the payment the customer is charged to obtain occupancy. In San
Diego‟s view, the stated purpose of the tax—“It is the purpose and intent of the
City Council that there shall be imposed a tax on Transients” (San Diego Mun.
Code, § 35.0101, subd. (a))—reflects a legislative focus on the transaction
between the OTC and the customer. The statutory definition of rent—“the total
consideration charged to a Transient as shown on the guest receipt for the
Occupancy of a room” (San Diego Mun. Code, § 35.0102)—in San Diego‟s view,
shows the tax base was intended to be the total amount quoted to, charged to, and
paid by the customer, not the lesser amount the hotel has agreed to accept as its
share of the rental proceeds; indeed, a customer cannot obtain the privilege of
occupancy by paying only the amount the hotel nets on OTC transactions nor
anything less than the total amount quoted and charged to him or her. Moreover,
San Diego observes, the tax is determined and collected at the same time the room
is booked (id., § 35.0112, subd. (a))—the “taxable moment,” as San Diego calls it.
     We agree with San Diego‟s argument in part. The ordinance imposes the tax
on the amount “charged by the Operator” (San Diego Mun. Code, § 35.0103); it
does not refer to amounts “received” or “collected” by the operator. To the extent
a hotel determines the markup, such as by contractual rate parity provisions

                                         7
requiring the OTC to quote and charge the customer a rate not less than what the
hotel is quoting on its own website, it effectively “charges” that amount, whether
or not it ultimately receives or collects any portion of the markup, and that amount
is therefore subject to the tax. Because, however, the ordinance imposes on “the
Operator” alone the duty to remit the tax (San Diego Mun. Code, § 35.0114, subd.
(a)), and subjects the operator alone to the assessment process when taxes are
determined to be unpaid and owing (id., § 35.0117, subd. (a)), it does not appear to
contemplate that the city treasurer may assess an intermediary such as an OTC for
unpaid transient occupancy tax.
     San Diego contends the entire amount paid by the customer, presumably
including any portion of the markup within the exclusive control of the OTC
above that set by the hotel, is subject to the tax because that amount is charged
“for the privilege of Occupancy” within the meaning of the ordinance, and no
lesser amount will gain that privilege for the customer. (San Diego Mun. Code,
§ 35.0103.) This contention, however, fails to acknowledge that the relevant
ordinance identifies the taxable amount as the rent “charged by the Operator”
(ibid.)—and the only such amount involved in online room rental transactions is,
as we have seen, the wholesale room rate plus any portion of the markup set by the
hotel pursuant to the contractual rate parity provisions or otherwise. Thus, it is the
wholesale room rate plus the hotel-determined markup, exclusive of any
discretionary markup set by the OTC, that is “charged by the Operator” and
subject to the tax.7

7       In practice, the distinction we are drawing between the portion of the
markup set by the hotel pursuant to contractual rate parity provisions and the
portion unilaterally set by the OTC may be chimerical. Market forces are likely to
ensure that the room rate charged by an OTC is seldom significantly higher than
the rate a hotel charges to its customers directly.



                                          8
     San Diego further contends that even though the OTCs do not qualify as
operators within the meaning of the ordinance, they are liable for the tax under
various contractual and statutory theories. We are unpersuaded.
     San Diego first asserts the OTCs are liable for assessment of room tax
because they are agents of the hotels for purposes of charging and collecting the
tax. It points to the hearing officer‟s finding, unchallenged in this litigation, that
“[t]he OTCs serve as the hotels‟ agents in assuming essentially (or absolutely) all
of the marketing, reservation, room price collection, and customer service
functions as to those Transients who book online through the OTCs.” San Diego
also cites the Court of Appeal‟s statement that “[t]he OTC collects the rent on the
hotel‟s behalf” and the OTCs‟ acknowledgment that they “serv[e] as an
intermediary” in “facilitating a guest‟s payment to the hotel for the hotel‟s
furnishing of sleeping accommodations.” By virtue of this function, San Diego
contends the entirety of what the OTCs collect is deemed collected on behalf of
the principal.
     That the OTCs act as hotels‟ agents or intermediaries for the limited purpose
of charging and collecting the rent, however, does not subject the OTCs to
assessment as an operator or make any undifferentiated portion of the charge
representing the amount unilaterally set by the OTCs “Rent charged by the
Operator.” As noted, the hotels set the parity or floor rate the OTCs must charge
the visitor, but do not control or determine any additional amount the OTCs may
charge for their services, a circumstance that refutes any suggestion the OTCs are
the hotels‟ agents for purposes of setting and collecting such discretionary
additional charges.
     San Diego also cites contractual provisions by which the OTCs agree to be
responsible for any taxes assessed by any governmental authority on the markup,
to collect and remit room tax, and to assume liability to San Diego for nonpayment

                                           9
or underpayment of the tax. These provisions allocate responsibility as between
the hotels and the OTCs for properly assessed room taxes but, like the other
contractual terms discussed above, they do not in themselves create such liability;
only the ordinance can do that. The same reasoning defeats San Diego‟s assertion
it is entitled as a third party beneficiary of the hotel-OTC contracts to tax the
OTCs for the entire markup: Even assuming San Diego is a third party beneficiary
of the contracts, a question we need not address, the contracts cannot expand room
tax liability under the ordinance.
     Neither Civil Code section 2777 nor Civil Code section 2344 assists San
Diego. The former statute provides that “[o]ne who indemnifies another against
an act to be done by the latter, is liable jointly with the person indemnified, and
separately, to every person injured by such act.” (Civ. Code, § 2777.) But San
Diego fails to cite any decisions holding that a taxing authority may invoke an
indemnity agreement to impose an assessment on a party not otherwise subject to
assessment under the statute in question. Civil Code section 2344 provides that
“[i]f an agent receives anything for the benefit of his principal, to the possession of
which another person is entitled, he must, on demand, surrender it to such
person . . . .” But as we have seen, the circumstances that the OTCs act as agents
for the hotels in renting rooms, providing customer service, and collecting and
remitting to the hotels the rent and room tax on all transactions, and that, as
between themselves, the hotels and the OTCs may contractually allocate to the
OTCs responsibility for unpaid room tax, cannot expand the reach of the
ordinance and, in particular, do not subject an entity other than an Operator to
assessment of the tax and penalties (San Diego Mun. Code, § 35.0117, subd. (a)).




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                                DISPOSITION
    The judgment is affirmed.
                                        WERDEGAR, J.


WE CONCUR:

CANTIL-SAKAUYE, C. J.
CHIN, J.
CORRIGAN, J.
LIU, J.
CUÉLLAR, J.
KRUGER, J.




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See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion In re Transient Occupancy Tax Cases
__________________________________________________________________________________

Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 225 Cal.App.4th 56
Rehearing Granted

__________________________________________________________________________________

Opinion No. S218400
Date Filed: December 12, 2016
__________________________________________________________________________________

Court: Superior
County: Los Angeles
Judge: Elihu Berle

__________________________________________________________________________________

Counsel:

Daniel F. Bamberg and Jon E. Taylor , Deputy City Attorneys; Kiesel Boucher Larson, William L. Larson,
Thomas H. Peters, Paul R. Kiesel; Baron & Budd, Laura J. Baughman, Thomas M. Sims; McKool Smith,
McKool Smith Hennigan, Steven D. Wolens, Gary Cruciani; Greines, Martin, Stein & Richland, Irving H.
Greines, Kent L. Richland, Cynthia E. Tobisman and David E. Hackett for Plaintiff and Appellant City of
San Diego.

Colantuono, Highsmith & Whatley, Michael G. Colantuono and Ryan Thomas Dunn for League of
California Cities and California State Association of Counties as Amici Curiae on behalf of Plaintiff and
Appellant City of San Diego.

Skadden, Arps, Slate, Meagher & Flom, Darrel J. Hieber, Stacy R. Horth-Neubert and Daniel M. Rygorsky
for Defendants and Respondents Priceline.com Incorporated and Travelweb LLC.

Jones Day, Elwood Lui, Brian D. Hershman and Erica L. Reilley for Defendants and Respondents Expedia,
Inc., Hotwire, Inc. Hotels.com, L.P., and Hotels.com G.P., LLC.

K&L Gates, Nathaniel S. Currall; Kelly Hart & Hallman, Brian S. Stagner and Chad Arnette for
Defendants and Respondents Travelocity.com L.P., and Site59.com, LLC.

McDermott Will & Emery, Elizabeth Herrington, Jessica A. Mariani and Jeffrey A. Rossman for
Defendants and Respondents Orbitz, LLC, Trip Network, Inc., doing business as Cheaptickets.com and
Internetwork Publishing Corp. doing business as Lodging.com

Julian M. Baum & Associates and Julian M. Baum for Society of Travel Agents, Inc., as Amicus on behalf
of Defendants and Respondents.
Counsel who argued in Supreme Court (not intended for publication with opinion):

Kent L. Richland
Greines, Martin, Stein & Richland
5900 Wilshire Boulevard, 12th Floor
Los Angeles, CA 90036
(310) 859-7811

Darrel J. Hieber
Skadden, Arps, Slate, Meagher & Flom
300 South Grand Avenue, 34th Floor
Los Angeles, CA 90071
(213) 687-5000
