The Tax Lawyer
Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Pitt County v. The Dormant Commerce Clause and State Taxation of Online Travel Companies

Jennifer Rothschild

Hotel and motel occupancy taxes have recently come under scrutiny, particularly in their application to online travel companies. Online travel companies, such as and, make various online booking arrangements for consumers. Most operate by acquiring through a sale or other arrangement hotel and motel rooms at discount rates. The rooms are then sold online to consumers at higher retail rates. The hotels and motels remit an occupancy tax on the wholesale or discount rate charged to the online agents. No amount is remitted for the higher retail rate that is ultimately charged to consumers. The controversy arises in the amount of hotel occupancy tax to be charged. Many states contend that they are entitled to the tax on the higher retail rate, while online travel companies argue that the tax is inapplicable to them.

The Fourth Circuit in Pitt County v. considered whether state hotel occupancy taxes may be applied to the amount charged by online travel companies. The court held that online travel companies are not subject to Pitt County’s hotel occupancy tax because they are not “operators” or “hotels” as used in Pitt County’s occupancy tax statute. The opinion focused solely on a statutory interpretation of Pitt County’s occupancy tax without resolving underlying constitutional issues. The court did not address whether the application of hotel occupancy taxes to online travel companies violates the dormant Commerce Clause.

The dormant Commerce Clause prevents states from interfering with interstate commerce. In Complete Auto Transit v. Brady, the Supreme Court held that a substantial nexus between the out-of-state party and the taxing jurisdiction must exist for state taxation on an interstate transaction to be held constitutional. With the critical issue of constitutionality open, state and local legislators will simply re-write hotel occupancy tax statutes to specifically include online travel companies. The inevitable result will be continued litigation on whether a substantial nexus between the online travel companies and the taxing states exists.

This Note argues that the dormant Commerce Clause does not prevent state taxation of online travel companies because the online travel companies have a substantial nexus with the taxing jurisdiction. Part I of this Note gives a thorough explanation of online travel companies and their various modes of operation. Part II discusses the facts of Pitt County v. and explains the court’s opinion. In Part III.A, the Note explores the substantial nexus requirement of the dormant Commerce Clause. Part III.B delves into the Supreme Court’s decision in Quill Corporation v. North Dakota and the bright-line physical presence rule. Part III.C discusses the current circuit split regarding whether Quill’s bright-line physical presence rule is applicable to all taxes or confined to sales and use taxes. In Part IV.A, the Note first explores the Supreme Court’s decision in Quill, and demonstrates that the bright-line physical presence rule is only applicable to sales and use taxes. Part IV.B reviews occupancy taxes, distinguishes them from sales taxes, and presents the more flexible rule applicable to a dormant Commerce Clause occupancy tax analysis. Part IV.C concludes by applying this flexible rule to occupancy taxes.

Published by
Section of Taxation,
American Bar Association
in Collaboration with the
Georgetown University Law Center

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