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In re Tax Appeal of Priceline.Com, Inc.

Supreme Court of Hawaii

March 4, 2019

IN THE MATTER OF THE TAX APPEAL OF PRICELINE.COM, INC., ET AL., Petitioners/Taxpayers-Appellants-Appellees-Cross-Appellants,
DIRECTOR OF TAXATION, STATE OF HAWAI'I, Petitioner/Appe11ee-Appel1ant-Cross-Appellee.

          APPEAL FROM THE TAX APPEAL COURT (T.X. NO. 13-1-0269 AND CONSOLIDATED CASES: 13-1-0261 through 13-1-0270, 14-1-0001 through 14-1-0010, and 14-1-0243 through 14-1-0251)

          Paul Alston Ronald I. Heller Pamela Bunn for petitioners/taxpayers-appellants-appellees-cross-appellants

          Gary Cruciani, pro hac vice Steven D. Wolens, pro hac vice Kenneth T. Okamoto Robert A. Marks Cynthia M. Johiro Warren Price III Hugh R. Jones for petitioner/appellee-appellant-cross-appellee



          POLLACK, J.

         This case is a consolidated appeal from twenty-nine General Excise Tax assessments levied by the Director of Taxation of the State of Hawai'i against five online travel companies based on car rental transactions that took place in Hawai'i between January 1, 2000, and December 31, 2013. The online travel companies contend that the majority of the assessments are barred because they have already litigated their General Excise Tax liability for the years in question to final judgment in a previous case. They further argue that the rental car transactions should qualify for a reduced General Excise Tax rate that is calculated based only on the portion of the proceeds that they retain because rental cars are "tourism related services" within the meaning of a statutory income-reducing provision. The Director of Taxation of the State of Hawai'i responds that the State cannot be estopped from collecting taxes it is legally owed based on a previous litigation and that the rental car transactions must be taxed at the full rate because no income-reducing provision applies.

         We hold on review that, because our precedent does not permit the actions of a specific government official to impede the fundamental sovereign power of taxation, the assessments are not barred and may be considered on the merits. We further hold that rental cars are tourism related services and the assessed transactions qualify for the reduced General Excise Tax rate based only on the portion of the proceeds that the online travel companies retained.

         I. BACKGROUND

         A. The OTCs' Business Model

         The taxpayers in this case are five online travel companies[1] (the "OTCs") that provide services similar to those of a traditional travel agent through their respective public websites.[2] The OTCs maintain databases of up-to-date information about travel-related services offered by third-party providers, including airline flights and car and hotel rentals. Travelers accessing the websites can view availability and price data for services associated with a destination and make reservations through the OTCs rather than contacting service providers directly. The OTCs negotiate and contract with service providers to secure reduced pricing in exchange for providing global marketing and supplying a mechanism for connecting customers with excess inventory.

         In the transactions at issue in this case, the OTCs utilized a business method called the "merchant model."[3] In a merchant model transaction, a customer makes a single payment to an OTC for all purchased services at the time of the reservation--typically as a credit card charge processed through the OTCs website. The OTC appears as the merchant of record for the credit card transaction. This payment--called the "gross income" or "gross receipts"--includes at least two components: the base price for services set by contract between the OTCs and service providers, [4] which the OTCs remit to the service providers, and an amount that the OTCs retain as compensation for facilitating the transaction.[5] See Hawaii Revised Statutes (HRS) § 237-3 (2017) (defining "gross income"). Some of the transactions at issue in this case also included a "tax recovery" charge representing the estimated amount of taxes the service providers would pay on the transaction, which the OTCs also forwarded to the service providers.[6] No component of the gross income is explicitly designated to satisfy the OTCs' own tax obligations.

         The OTCs do not disclose the total amount of gross income collected in each transaction to service providers and do not inform customers of the separate cost of each component of the payment. Consequently, only the OTCs know how much money they retain in each merchant model transaction.

         With respect to vehicle rentals, merchant model transactions are further divided into package and stand-alone transactions. In package transactions, customers purchase multiple travel-related services simultaneously through the OTCs for a single payment. A customer may reserve an airline ticket or hotel room at the same time as a rental vehicle, for instance. The OTCs separate the base rate for each included service and forward that amount to the appropriate service provider. A stand-alone transaction, by contrast, involves only a rental vehicle reservation from a single service provider. All of the OTCs engaged in package transactions during the years at issue in this case, but only, Inc. and Hotwire, Inc. also offered stand-alone car rentals as a standard business practice.[7]

         B. The 2015 Travelocity Case

         Prior to 2011, the OTCs filed no tax returns with and paid no taxes to the State of Hawai'i on merchant-model transactions that resulted in the purchase of services rendered within the State. See, L.P. v. Dir. of Taxation, 135 Hawai'i 88, 95-96, 346 P.3d 157, 164-65 (2015) . In 2011 and 2012, the Director of Taxation of the State of Hawai'i (the Director) issued two sets of "Notice[s] of Final Assessment of Additional General Excise And/Or Use Tax" to each OTC.[8] See id. at 93, 346 P.3d at 162. The Director retroactively assessed the OTCs for unpaid General Excise Tax (GET)[9] on the gross income from transactions from 1999 to 2011 that resulted in hotel room rentals within the State of Hawai'i, as well as interest and penalties for failing to file and non-payment.[10] Id. at 92, 346 P.3d at 161.

         The OTCs appealed the assessments to the tax court, arguing, inter alia, that they were not subject to GET because their business activities did not take place in Hawai'i as the authorizing statute required. Id. at 98-99, 116, 346 P.3d at 168-69, 185 (citing HRS § 237-13 (Supp. 1999) [11]). On August 15, 2013, the tax court entered final judgment finding the OTCs liable for the full amount of the assessed GET. Id. at 92, 346 P.3d at 161. The Director and OTCs filed cross appeals, and this court granted transfer. Order,, LP v. Dir. of Taxation, No. SCAP-13-0002896, 2013 WL 6822079 (Haw. Dec. 24, 2013).

         On March 17, 2015, this court issued an opinion affirming in part and vacating in part the tax court's final judgment. Travelocity, 135 Hawai'i at 127, 346 P.3d at 196. The court first determined that the OTCs' merchant hotel room transactions constituted "sufficient 'business and other activities in the State' to impose the GET" because the OTCs actively solicited and contracted with Hawai'i hotels and Hawai'i consumers to profit from the sale of occupancy rights that were wholly exercised in Hawai'i. Id. at 105, 346 P.3d at 174 (quoting HRS § 237-13).

         The court went on to hold, however, that the assessed transactions qualified for GET apportionment under a related statutory provision because the rented hotel rooms were "transient accommodations . . . furnished through arrangements made by a travel agency ... at noncommissioned negotiated contract rates" for which the "gross income [was] divided between the operator of transient accommodations . . . and the travel agency." Id. at 106, 113, 346 P.3d at 175, 182 (quoting HRS § 237-18(g) (1993) (emphasis omitted)).[12] Accordingly, the court held that the OTCs were liable for GET and associated interest and penalties based on only the amounts they retained from the assessed transactions and not the gross income. Id. at 113, 346 P.3d at 182.

         The court therefore remanded the case to the tax court to make a final determination of each OTC's GET liability under the ruling. Id. at 127, 346 P.3d at 196. The tax court entered a set of Stipulated Final Judgments on Remand on September 21, 2015, establishing each OTC's GET liability.

         C. The Present Case

         On December 9, 2013, while the cross-appeals of the tax court's initial judgment in Travelocity were pending, the Director issued a new set of "Notice[s] of Final Assessment of Additional General Excise And/Or Use Tax" based on the gross income from the OTCs' merchant rental car transactions from 2000 to 2012.[13] This was followed on July 18, 2014, by an additional set of GET assessments based on the gross income from the OTCs' 2013 merchant rental car transactions.[14]

         1. The Tax Court Proceedings

         Upon receiving the merchant rental car GET assessments, the OTCs filed timely notices of appeal to the tax court. The appeals were consolidated, and prior to trial the Director and OTCs filed cross-motions for partial summary judgment.

         a. The Director's Motion for Partial Summary Judgment

         On May 9, 2016, the Director filed a motion seeking a ruling that the OTCs were liable for GET on the gross income from all merchant rental car transactions in the State of Hawai'i from 2000 to 2013, as well as interest and penalties for failing to file and non-payment. The Director first contended that, under our precedents, the assessment of taxes, penalties, and interest are presumed correct, making it the OTCs' burden to disprove the accuracy of the challenged assessments. (Citing Travelocity, 135 Hawai'i at 114-15, 346 P.3d at 183-84.) The Director then argued that Travelocity was dispositive as to the GET's applicability to the OTCs' merchant rental car transactions because the rentals constituted business and other activities in Hawai'i under HRS § 237-13 in the same manner as the OTCs' merchant hotel room rentals. (Citing 135 Hawai'i at 103-05, 346 P.3d at 172-74.)

         Anticipating the OTCs' counter-argument based on their earlier administrative protests, the Director asserted that no income-reducing provision applied to the merchant rental car transactions. Specifically, the Director argued that "the income-reducing provision in HRS § 237-18 (f)[15] that applies to 'tourism related services' simply does not encompass" the merchant rental car transactions based on legislative history and principles of statutory construction.

         Lastly, the Director argued that the OTCs are subject to penalties under HRS § 231-39(b)[16] for their undisputed failure to file returns or pay GET on their merchant rental car transactions because they had not demonstrated the failure was "due to reasonable cause and not due to neglect." (Citing Travelocity, 135 Hawai'i at 113, 346 P.3d at 182.)

         On July 26, 2016, the OTCs filed an opposition to the Director's motion for partial summary judgment. Directing the court to their own cross-motion for partial summary judgment, discussed below, the OTCs argued that the assessments for tax years 2000 to 2011 were barred under the doctrine of res judicata due to GET liability for those years having been litigated to final judgment in Travelocity.

         The OTCs then contended that the Director had misapprehended this court's statements in Travelocity about the presumption of a tax assessment's correctness; only the calculation of the amount of tax owed is presumed correct, the OTCs asserted, and questions of law regarding application of a tax are reviewed de novo. (Citing 135 Hawai'i at 114, 346 P.3d at 183.) The OTCs pointed out that our precedents indicate tax statutes should be interpreted strictly with ambiguity resolved in favor of the taxpayer. (Citing In re Fasi, 63 Haw. 624, 629, 634 P.2d 98, 103 (1981) .)

         The OTCs then argued that the assessments should be vacated because they failed to apply the GET apportioning provision for "tourism related services" under HRS § 237-18(f). The OTCs asserted that vehicle rentals fall squarely within the conventional conception of tourism related services and disputed the Director's interpretation of legislative history and application of statutory construction principles. Lastly, the OTCs argued that genuine issues of material fact existed as to which OTCs filed or paid GET during the years in question, and the determination of penalties should therefore be deferred until after the resolution of the partial summary judgment motions.

         b. The OTCs' Cross-Motion for Partial Summary Judgment

         On July 7, 2016, the OTCs filed a motion seeking a judgment that the GET assessments covering 2000 through 2011 were barred by res judicata because the Director had previously assessed and litigated the OTCs' GET liability for those years to final judgment in Travelocity.[17] Relying on a range of federal cases, the OTCs argued that established "hornbook principles" of law make clear that a taxpayer's liability for a single type of tax during a single tax year gives rise to a single cause of action. The OTCs contended the doctrine of res judicata should therefore bar all claims or defenses that were brought or could have been brought in the previous proceeding to establish their GET liability.

         The OTCs further argued that the Director was aware of and could have included the merchant car rental transactions in the first action, pointing to the assessed hotel room transactions in Travelocity that also included a car rental as part of the purchased package. Public policy also weighed in favor of applying res judicata, the OTCs concluded, because the doctrine serves to promote finality, relieve parties of the cost of multiple lawsuits, conserve judicial resources, and encourage reliance by preventing inconsistent decisions.

         On July 26, 2016, the Director filed an opposition to the OTCs' cross-motion for partial summary judgment. The Director argued that the OTCs' res judicata argument fails because the OTCs did not file GET returns and Hawai'i tax statutes treat non-filers in "a different and more punitive manner than taxpayers who file returns." Applying res judicata would encourage tax fraud, the Director continued, by requiring the Director to guess what undisclosed business activities a non-filer has conducted in Hawai'i. The Director further pointed out that article VII, section 1 of the Hawai'i Constitution prohibits the surrender or suspension of the taxing power, and that this court has held that estoppel defenses do not apply to the fundamental sovereign power of taxation. (Citing Dir. Of Taxation v. Med. Underwriters of Cal., 115 Hawai'i 180, 194, 166 P.3d 353, 367 (2007) .)

         Additionally, the Director asserted that no Hawai'i court had ever recognized res judicata as a defense to taxation and that the OTCs had not met the technical requirements of the doctrine as applied by Hawai'i courts in any event. Lastly, the Director argued that even if res judicata was an available defense under the circumstances, summary judgment was inappropriate because genuine issues of material fact existed as to whether the Director knew about the OTCs' merchant rental car transactions at the time of Travelocity and thus could have included them in the prior proceeding.

         The Director's opposition also included a number of additional arguments that the merchant rental car transactions did not qualify as "tourism related services" for GET apportionment under HRS § 237-18(f). Most notably, the Director contended that certain types of rental car transactions could not be characterized as tourism related services under any definition of the term, including rentals to Hawai'i residents whose vehicles have broken down or to business persons traveling to the State or among the islands for only business purposes.

         c. Hearing and the Tax Court's Ruling

         The tax court held a joint hearing on the cross-motions on August 5, 2016. At the hearing, the tax court expressed "legitimate concern about how many times the taxpayers are going to have to come back to . . . defend general excise tax issues" and stated that "there's very little dispute that people in the world, including the tax director in Hawaii, knew that car rental services were part of the services that these online travel companies offered" prior to Travelocity. The court found, however, that this did not equate to knowledge of "actionable conduct" by the OTCs on which additional GET could be assessed. Because Travelocity and the present case were initiated through separate assessments based on "completely different activity giving rise to the alleged tax liability," the court found that the present action was not barred by res judicata.

         Turning to whether the HRS § 237-18(f) apportioning provision applied, the court found that the primary commonality among the ten enumerated examples of tourism related services in the statute was that they were part of tour packages. Citing this court's discussion of the term "tour packager" in Travelocity, the court asserted that the legislature's inclusion of "transportation included in a tour package" rather than simply "transportation" confirmed that the provision was intended to reach only services packaged together for resale by a travel agent. Accordingly, the court found that the standalone merchant rental car transactions did not qualify as tourism related services for GET apportionment under HRS § 237-18(f). The court further found that package transactions, however, in which the rental car was purchased along with at least one other service, qualified as "transportation included in a tour package" and were thus tourism related services within the meaning of the GET apportionment provision.

         On November 4, 2016, the court entered an order corresponding with its oral rulings granting in part and denying in part the Director and OTCs' cross-motions for partial summary judgment.[18] On April 25, 2017, the tax court entered a Stipulated Order and Final Judgment Disposing of All Issues and Claims of All Parties. Both the Director and the OTCs timely appealed. Prior to briefing, the Director and the OTCs each filed applications for transfer to this court. This court granted transfer on August 11, 2017.

         2. Proceedings Before this Court

         Before this court, the Director argues that the tax court erred by applying the HRS § 237-18(f) GET apportioning provision to the OTCs package rental car transactions. The Director contends that, by determining that rental cars included in package transactions were "transportation within a tour package," the court disregarded the plain language of the law by changing the term "transportation" to "rental cars" and ignoring the word "tour."

         The Director further asserts that the legislative history of HRS § 237-18(f) and other taxing provisions indicates that the legislature intended only those services in which a tourist is conveyed to a second location by another party to be included in the term "transportation," and that this meaning is reflected by standard rules of statutory construction and in the various portions of the Hawai'i Administrative Rules that employ the term. And, even were rental cars "transportation" for purposes of HRS § 237-18(f), the Director contends, the OTCs failed to demonstrate that rental cars are included in a "tour" package. The Director argues that the OTCs submitted no evidence detailing the components included in the specific assessed transactions, and thus there is no evidence in the record to create a genuine issue of material fact as to whether the transactions constituted "tour" packages.[19] An evidentiary presumption in favor of the correctness of the Director's tax assessments therefore should have been determinative, the Director contends, regardless of whether the inclusion of airfare or accommodations would qualify a transaction as a tour package.

         The OTCs in turn argue that the tax court erred by failing to find that principles of res judicata bar the Director from collecting additional assessments of a tax for tax years that have been previously litigated to final judgment. And even if these assessments are not wholly barred, the OTCs maintain, the tax court's ruling cannot stand because it failed to apply the HRS § 237-18(f) income-apportioning provision to the OTCs stand-alone merchant car rental transactions, which legislative history and principles of statutory construction confirm are "tourism related services" within the meaning of the statute.


         This court reviews the grant or denial of summary judgment de novo., L.P. v. Dir. of Taxation, 135 Hawai'i 88, 96-97, 346 P.3d 157, 165-66 (2015). "When the facts are undisputed and the sole question is one of law, the decision of the [tax court] is reviewed 'under the right/wrong standard.'" Id. at 97, 436 P.3d at 166 (quoting Kamikawa v. United Parcel Serv., Inc., 88 Hawai'i 336, 338, 966 P.2d 648, 650 (1998)) .


         In reviewing the tax court's grant or denial of summary judgment, this court applies the same standard as the trial court: "summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.", L.P. v. Dir. of Taxation, 135 Hawai'i 88, 96-97, 346 P.3d 157, 165-66 (2015) (quoting Fujimoto v. Au, 95 Hawai'i 116, 136, 19 P.3d 699, 719 (2001)). When performing this evaluation, we consider the evidence in the light most favorable to the non-moving party. Umberger ...

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