Tuesday, November 26, 2013

Hotel Occupancy Tax on Expedia, are brokers next to be taxed for their rentals?

Last week, the Court of Appeals, NY's highest court, ruled that "Local Law 43, a hotel room occupancy tax applicable to online travel companies", is constitutional.

At issue before the Court was the legality of the City's "authority to tax the fees they collect from their customers" in Expedia v. City of NY Dept. of Finance where this fee represents an amount, which is larger than the amount actually paid the hotel for the actual occupancy of the room.

So the question before the Court was whether the brokerage fee, on hotel occupancy, was taxable? 

This decision is most interesting to real estate professionals because they always wonder why there are rules for transient (short-term) rentals of housing. As they can see from this decision, there are rules for establishments that offer transient housing such as hotels, motels & inns in the form of the imposition of a tax, among other rules. Further there are rules for companies that "broker" those deals whereas those "brokers" have to pay a tax on their commission, among other rules. Aren’t these websites, called “room remarketers” in the applicable tax, analogous to real estate brokerage companies for landlord / tenant rentals that aren’t transient? At the least, aren’t they analogous to Airbnb in the transient setting?

In opposition, the online travel companies argued that the City was taxing “a service fee under the guise of a tax on hotel rent” and therefore the tax was improper. The Court explained that the online travel companies were incorrect. The Court stated: “[u]nder the statute, the City may tax a ‘rent or charge,’ and it may collect the tax from a hotel ‘owner . . . or . . . person entitled to be paid the rent or charge’".  Further, “the City may tax any service fee that is a ‘condition of occupancy.’”

Aren’t brokerage fees on landlord / tenant a condition of occupancy? Maybe, but maybe not. Doesn’t a condition mean that its failure prevents the result? Can a broker prevent the result? No, therein is the difference between brokerage companies and travel sites. Real estate brokers often are cut out of deals and cannot prevent occupancy in order to get paid, but instead have a claim for commission that is separate from occupancy. In fact, no Lis Pendens is available to brokers and a mechanic’s lien is only available for a lease with a term of more than 3 years for non-residential property.

However, doesn’t Airbnb do just the same as Expedia? So, will companies like Expedia try to level the playing field next by lobbying that this tax is imposed on Airbnb as well? Right now, the cost of doing business for Airbnb just got cheaper and they now have a strategic financial advantage in the City of New York. What happens next is tantalizing.