Court Decision: Online Travel Companies Must Pay Back Taxes to Hawaiʻi

Attorney General Doug Chin. Courtesy photo.

By Maui Now Staff

On Tuesday, March 17, the Hawaiʻi Supreme Court ruled that online traveling companies must pay tens of millions of dollars in back taxes to the state for hotel rooms sold over the Internet. The companies include Expedia, Orbitz, Priceline and Travelocity.

“This landmark ruling is the first time the Supreme Court ruled that online commerce may be just as subject to pay general excise taxes as local brick-and-mortar businesses,” announced Attorney General Doug Chin. “It is the result of years of effort by the attorney general’s office to collect state taxes from national companies who profited from selling Hawaiʻi hotel rooms.”

The state tax department issued tax assessments in 2010 against the travel companies for back taxes dating back to 2000. The companies refused to pay, arguing that the transactions for the hotel rooms did not occur in the State of Hawaiʻi.

The Supreme Court’s ruling upheld Hawaiʻi’s general excise tax as broad reaching, applying to “virtually any economic activity imaginable.” According to the court, the law applies to anyone who does business in the state, regardless of whether they are physically present or not.

The Court reasoned:

[I]t is clear the occupancy rights that [these companies] are selling to transients are wholly consumable and only consumable in Hawaiʻi. Even though an [online travel company’s] agreement with a transient may take place outside of Hawaiʻi, the agreement is effected with the intent that performance would occur entirely in Hawaiʻi.

The court’s ruling support the Tax Appeal Court’s judgment that online travel companies owe penalties and interests for failing to file tax returns and pay general excise tax between 2000 and 2011.