Monthly Archives: August 2015



Online Travel Companies Must Pay Sales Tax, D.C. Appeals Court Rules

Updated at 4:59 p.m.

Online travel companies such as Expedia and Travelocity are on the hook for more than $60 million in back sales taxes after a Washington appeals court ruled Thursday that the companies are liable for sales tax on hotel rooms they sell through their websites.

The three-judge panel of the D.C. Court of Appeals rejected the travel companies’ argument that the only taxable transaction was between the customer and the hotel. The court said that the D.C. government can tax the difference between the actual cost of the room, which the hotel receives, and the higher rate the travel companies charge the customer in order to make a profit.

“[T]he meaning of the statute is clear: by imposing tax on the ‘sale or charge . . . for any room . . . furnished to transients by any hotel,’ the sales tax statute is taxing the sales transaction by which a customer purchases a hotel room in the District of Columbia,” Judge Corinne Beckwith wrote for the court. “The OTCs’ retail margins are a part of that sale.”

Last year, the travel companies—Expedia Inc., LP, Hotwire Inc., Orbitz LLC,, and LP—and the city reached an agreement on how much money in back sales taxes the companies would owe if they lost on appeal. According to that agreement, the companies will owe more than $60 million for hotel room sales between 1998 and 2011.

In announcing the agreement last year, the Office of the Attorney General said that if the city prevailed, the monetary recovery would be largest ever for the District through a case that was litigated.

“This is a huge victory for the District’s taxpayers, and it ensures that online travel companies have to follow the same rules as everyone else,”  D.C. Attorney General Karl Racine said in a statement.

Darrel Hieber, a partner at Skadden, Arps, Slate, Meagher & Flom, argued for the online travel companies. He also could not immediately be reached for comment.

The District charges a sales tax of 14.5 percent on the gross receipts of hotel room sales. The online travel companies argued that the hotel, which furnished the room, was the only taxable vendor when it came to sales taxes. The city countered that the tax should apply to the sale or charge for any room furnished by a hotel, even if the seller—in this case, the online travel companies—did not actually furnish the room.

The court found that the city’s interpretation of local tax law was reasonable. Beckwith wrote that “an examination of the District’s sales tax provisions as a whole lends support to the District’s contention—and the well-reasoned conclusion of the trial court—that the tax is levied on the ‘sale or charge’ for the service, rather than on the provision of the service itself.”

The court also rejected the online travel companies’ argument that it would be unfair to force them to pay back taxes, given the city’s delay in pursuing legal action.

“It is clear from looking at the OTCs’ statements to investors and to the SEC that the OTCs understood, since at least 2002, that they might owe sales tax on the full amount of their merchant model sales,” Beckwith wrote.

The ruling was not a total loss for the online travel companies. The appeals court upheld the trial judge’s ruling that the companies could not be taxed on the “sales tax reimbursement” they charged to customers, which covered the sales tax that the hotel owed for the amount of money it received from the sale of the room.

Judge Theodore Newman joined Beckwith’s opinion. Judge Roy McLeese III agreed that the travel companies were subject to the sales tax, but he wrote in a separate opinion that he would hold the travel companies liable for tax on the full amount of the sale to the customer, including the “sales tax reimbursement.”

Updated with comments from Attorney General Karl Racine.

Senate Accuses IRS of Mismanagement in Tax-Exempt Scandal


Senate Committee Report Accuses IRS of Mismanagement in Tax-Exempt Scandal

Washington, D.C. (August 5, 2015)

Leaders of the Senate Finance Committee have released a bipartisan investigative report on the scandal involving the extra scrutiny the Internal Revenue Service’s gave to applications for tax-exempt status from political groups, finding evidence of mismanagement at the agency.

Lois Lerner
(Photo: Pete Marovich/

Members of the committee were briefed by staff with authority to review private taxpayer information in a number of closed-door briefings on the findings and recommendations of the report before a vote to release the long-anticipated report.

The report found that from 2010 to 2013, IRS management failed to provide effective control, guidance and direction over the processing of applications for tax-exempt status. Top IRS managers did not stay informed about the applications involving possible political advocacy, thereby forfeiting the opportunity to provide the leadership that the IRS needed to respond to the legal and policy issues presented by these applications.

Lois Lerner, who was then the director of the Exempt Organizations unit, became aware of the Tea Party applications in early 2010, but failed to inform her superiors about their existence, according to the report. While under Lerner’s leadership, the Exempt Organizations unit undertook seven botched initiatives to make a decision on the escalating number of applications from Tea Party and other groups for tax-exempt status.  Every one of those initiatives ended in failure, resulting in months and years of delay for the organizations awaiting decisions from the IRS on their applications for tax-exempt status.

The committee also found that the workplace culture in the Exempt Organizations Division placed little emphasis or value on providing customer service.  Few of the managers appeared to be concerned about the delays in processing the applications, delays that possibly harmed the organizations ability to function for their stated purposes.

“This bipartisan investigation shows gross mismanagement at the highest levels of the IRS and confirms an unacceptable truth: that the IRS is prone to abuse,” said Senate Finance Committee chairman Orrin Hatch, R-Utah, in a statement Wednesday.  “The committee found evidence that the administration’s political agenda guided the IRS’s actions with respect to their treatment of conservative groups. Personal politics of IRS employees, such as Lois Lerner, also impacted how the IRS conducted its business. American taxpayers should expect more from the IRS and deserve an IRS that lives up to its mission statement of administering the tax laws fairly and impartially—regardless of political affiliation. Moving forward, it is my hope we can use this bipartisan report as a foundation to work towards substantial reforms at the agency so that this never happens again. ”

Sen. Ron Wyden, R-Ore., the ranking Democrat on the committee, disagreed with Hatch that the report found evidence of the administration’s political agenda influencing the IRS’s actions. “The results of this in-depth, bipartisan investigation showcase pure bureaucratic mismanagement without any evidence of political interference,” said Wyden. “Groups on both sides of the political spectrum were treated equally in their efforts to secure tax-exempt status. Now is the time to pursue bipartisan staff recommendations to ensure this doesn’t happen again.”

The report describes how the Exempt Organizations unit used not only terms associated with conservative groups such as “Tea Party” and “Patriots” to screen applications, but also terms associated with liberal groups such as “Progressive,” “Occupy” and “ACORN.”

The committee made a number of recommendations to address IRS management deficiencies. It said the Hatch Act should be revised to designate all IRS, Treasury and Chief Counsel employees who handle exempt organization matters as “further restricted.”  “Further restricted” employees are precluded from active participation in political management or partisan campaigns, even while off-duty.

The report also said the IRS should track the age and cycle times of applications for tax-exempt status to detect backlogs early in the process and allow management to take steps to address those backlogs.  In addition, the Exempt Organizations Division should track requests for assistance from both the Technical Branch and the Chief Counsel’s office to ensure the timely receipt of that assistance.

A list of overage applications should be sent to the IRS Commissioner on a quarterly basis, the report recommended. Internal IRS guidance should also require that employees reach a decision applications no later than 270 days after the IRS receives that application.  Employees and managers who fail to comply with these standards should be disciplined. Minimum training standards should be established for all managers within the EO Division to ensure that they have adequate technical ability to perform their jobs, the report suggested.

The IRS responded to the report Wednesday, saying it planned to make improvements in response to the recommendations. “We appreciate the work of the Senate Finance Committee on this extensive report, and we look forward to reviewing it along with the recommendations,” said a statement emailed by an IRS spokesperson. “The IRS is fully committed to making further improvements, and we want to do everything we can to help taxpayers have confidence in the fairness and integrity of the tax system. We have already taken many steps to  make improvements in our processes and procedures, and we are pleased to have other suggestions from the committee to help us in our continuing effort. Throughout this, the IRS has cooperated with Congress and other investigators. The agency has produced more than 1.3 million pages of documents in support of the investigations, provided 52 current and former employees for interviews and participated in more than 30 Congressional hearings on these issues.”

Issuance of the report was delayed for more than a year after the IRS belatedly informed the committee that it had not been able to recover a large number of potentially responsive documents that were lost when Lois Lerner’s hard drive crashed in 2011, the committee noted.

The report acknowledged that the IRS functioned in a politicized atmosphere following the Supreme Court’s Citizens United decision in 2010, which put pressure on the IRS to monitor political spending. Employees in the Tax Exempt and Government Entities Division, including Lerner, were aware that the IRS had received an increasing number of applications from organizations that planned to engage in some level of political advocacy. “Yet senior IRS executives, including Lerner, failed to properly manage political advocacy cases with the sensitivity and promptness that the applicants deserved,” said the report. “Other employees in the IRS failed to handle the cases with a proper level of urgency, which was symptomatic of the overall culture within the IRS where customer service was not prioritized.”

As a result of these failings, a number of Tea Party and other political advocacy groups waited as
long as five years to receive a decision from the IRS, according to the report. These delays negatively affected applicants in many ways, including inability to gain tax-exempt status within their state until the IRS issued a determination letter; significant time and financial cost to respond to lengthy and burdensome IRS questions; ineligibility for grants and other financial support that require IRS documentation of tax-exempt status; decreased donations; and financial uncertainty about whether the organization would owe a tax liability if the IRS determined that it did not meet the criteria for tax-exemption.

After experiencing these problems, numerous organizations withdrew their applications for tax-exempt status, while some organizations ceased to exist altogether.

“The consequences of the IRS’s actions in singling out organizations based on their name and subjecting them to heightened scrutiny, substantial delays, and to burdensome and sometimes intrusive questions are far reaching and troubling,” said the report. “Undoubtedly, these events will erode public confidence and sow doubt about the impartiality of the IRS. The lack of candor by IRS management about the circumstances surrounding Lois Lerner’s missing emails may only serve to reinforce those doubts.”