Expedia, Inc., et al., Respondents, Priceline.com Incorporated, et al., Plaintiffs,v.The City of New York Department of Finance, et al., Appellants.BriefN.Y.October 9, 2013New York County Clerk’s Index No.: 650761/09 STATE OF NEW YORK COURT OF APPEALS EXPEDIA, INC., HOTELS.COM, L.P., HOTWIRE, INC., ORBITZ, LLC, TRIP NETWORK, INC. (d/b/a Cheaptickets.com), TRAVELOCITY.COM LP, AMERICAN SOCIETY OF TRAVEL AGENTS, INC., Plaintiffs-Respondents, -and- PRICELINE.COM INCORPORATED and UNITED STATES TOUR OPERATORS ASSOCIATION, Plaintiffs, -against- THE CITY OF NEW YORK DEPARTMENT OF FINANCE and THE CITY OF NEW YORK, Defendants-Appellants. APPELLANTS’ REPLY BRIEF MICHAEL A. CARDOZO Corporation Counsel of the City of New York Attorney for Defendants-Appellants 100 Church Street New York, New York 10007 Tel: (212) 356-2114 E-mail: alipkin@law.nyc.gov jowolf@law.nyc.gov ANDREW G. LIPKIN JOSHUA M. WOLF, of Counsel. TABLE OF CONTENTS Page TABLE OF AUTHORITIES ………………………………………………… ii INTRODUCTION ………………………………....………………………… 1 ARGUMENT ………………………………………………………………... 1 POINT I PLAINTIFFS’ ARGUMENTS FOCUS ON A CAUSE OF ACTION NOT BEFORE THIS COURT, AND DEPEND UPON FACTS NOT IN THE RECORD ……………………………... 1 POINT II PLAINTIFFS MISJUDGE THE SCOPE OF THE ENABLING ACT BECAUSE THEY SELECTIVELY QUOTE THE STATUTORY TEXT OF THE ENABLING ACT’S SUBDIVISION 1-A ………………………………………….. 8 POINT III THE CITY HAS NEVER CLAIMED “UNFETTERED AUTHORITY” TO IMPOSE A TAX ………………………………... 11 CONCLUSION ……………………………………………………………… 13 i TABLE OF AUTHORITIES CASES Page Brooklyn Union Gas Co. v McGoldrick, 270 AD 186 [1st Dept 1945] ………………………………………... 3 n.3 Carey Transp., Inc. v Perrotta, 34 AD2d 147 [1st Dept 1970] ………………………………………. 3 n.3 Castle Oil Corp. v City of New York, 89 NY2d 334 [1996] ………………………………………………… 3 n.3 Kiamesha Concord, Inc. v Chairman of Bd. of Supervisors, 166 AD2d 70 [3d Dept 1991] ……………………………………….. 3 n.3 People v Cook, 34 NY2d 100 [1974] ……………………………………………. 3 n.3, 11 RKO-Keith-Orpheum Theatres, Inc. v City of New York, 308 NY 493 [1955] ..………………………………………………… 3 n.3 Tarquini v Aurora, 77 NY2d 354 [1991] ………………………………………………… 3 n.3 United States Steel Corp. v Gerosa, 7 NY2d 454 [1960] …………………………………………………. 3 n.3 STATUTES/RULES Local Law 43 of the Laws of 2009 ……………………………………… passim NY CPLR 3211[a][7] ……………………………………………………….. 3 NY Tax Law § 1105[e] ……………………………………………………… 12 NY Tax Law § 1116[a] ……………………………………………………… 12 NY Unconsol. Ch. 288-C, § 1[1] ………………………………………….. 8-10 ii iii STATUTES/RULES (continued) Page NY Unconsol. Ch. 288-C, § 1[1-a] ………………………………………... 8-10 NY Unconsol. Ch. 288-C, § 1[3] ……………………………………………. 5 NY Unconsol. Ch. 288-C, § 1[5] ……………………………………………. 12 NYC Admin. Code § 11-2501 [2009] ……………………………... 6 n.4, 13 n.5 NYC Admin. Code § 11-2502 [2009] ……………………………... 6 n.4, 13 n.5 INTRODUCTION Defendants-appellants the City of New York and City of New York Department of Finance submit this reply brief in further support of their appeal seeking an Order: (i) reversing the decision and order of the Appellate Division; (ii) confirming the constitutionality of Local Law 43 of the Laws of 2009, an amendment to the City’s hotel room occupancy tax; and (iii) remanding this matter to the trial court for further proceedings in order to address count II of Plaintiffs’ complaint, which is still pending below.1 In the interest of unnecessary repetition, the City respectfully refers the Court to Appellants’ Brief in support of the appeal for a recitation of the facts and law that are relevant to the proper disposition of this case. ARGUMENT POINT I PLAINTIFFS’ ARGUMENTS FOCUS ON A CAUSE OF ACTION NOT BEFORE THIS COURT, AND DEPEND UPON FACTS NOT IN THE RECORD The central flaw in Plaintiffs’ analysis is that it attempts to merge count I of the complaint with count II of the complaint, and in the process inappropriately 1 Capitalized terms used herein have the same meaning as used in Appellants’ Brief in support of the appeal, dated January 30, 2013. 1 relies upon facts that have not been established in the record. 2 Count I of Plaintiffs’ complaint questions the City’s authority to amend the HROT, and seeks a declaration that Local Law 43 “exceed[s] the scope of the Enabling Legislation” and that “it is invalid and cannot be enforced” (R.96-97). Count II of Plaintiffs’ complaint, on the other hand, asserts that even if Local Law 43 is constitutional on its face, the factual characteristics of Plaintiffs’ particular business models fail to trigger the operative language of the HROT as amended by Local Law 43, which therefore does not apply to them (see R.97-98). The City only moved to dismiss count I of the complaint because, among other reasons, there are factual issues that have yet to be resolved with respect to count II. For example, while Plaintiffs pleaded certain factual allegations in the complaint, there is no evidence in the record establishing such factual issues as the structure of each of Plaintiffs’ individual business operations (R.81-85 (describing Plaintiffs’ businesses generically, as “online travel companies that also offer travel planning and booking services to travelers primarily over the internet”)), the nature of the fees allegedly charged by Plaintiffs for booking a hotel room (R.85-86 (offering the conclusory allegation that Plaintiffs charge their customers “fees and/or markup” in order to “compensate them for their services”)), or whether such 2 Plaintiffs deny this (Resp. Br. at 35 n.5), but a careful review of the causes of action as pleaded, the nature of Plaintiffs’ arguments in their brief, and the language used in the Order of the Appellate Division, which was misled by this tactic, leads to no other conclusion. 2 fees are a “condition of occupancy” as is required for Local Law 43 to be applicable (R.85-87 (asserting that “[t]he amounts the Plaintiffs earn for facilitating the booking of hotel rooms are not a ‘condition of occupancy’ ”)). Inasmuch as count II of the complaint implicates these issues of fact—the answers to which are likely to differ substantially among the individual Plaintiffs (see Resp. Br. at 83, ¶ 24)—count II was therefore not properly the subject of a motion to dismiss under CPLR 3211(a)(7). Accordingly, in analyzing the facial constitutional challenge in count I of Plaintiffs’ complaint, the City’s approach has been to focus on the plain language of Local Law 43 through the lens of the authority granted by the plain language of the Enabling Act (see City Br. at 13-30). In short, the City views count I of the complaint as exclusively a matter of statutory interpretation, without regard to the character or even existence of any fees charged by Plaintiffs. That approach finds support in myriad Court of Appeals and Appellate Division cases addressing constitutional challenges to taxing statutes on the grounds that they exceeded the scope of certain State authorizing legislation.3 3 See Castle Oil Corp. v City of New York, 89 NY2d 334, 339 [1996] (noting that “th[e] case turns on a straightforward question of statutory interpretation”); Tarquini v Aurora, 77 NY2d 354, 358-60 [1991]; People v Cook, 34 NY2d 100, 104-13 [1974]; United States Steel Corp. v Gerosa, 7 NY2d 454, 458-60 [1960]; RKO-Keith-Orpheum Theatres, Inc. v City of New York, 308 NY 493, 497-99 [1955]; Kiamesha Concord, Inc. v Chairman of Bd. of Supervisors, 166 AD2d 70, 71-73 [3d Dept 1991]; Carey Transp., Inc. v Perrotta, 34 AD2d 147, 148-49 [1st Dept 1970]; Brooklyn Union Gas Co. v McGoldrick, 270 AD 186, 189-93 [1st Dept 1945], aff’d sub. nom., Brooklyn Union Gas Co. v Joseph, 298 NY 536 [1948]. 3 Plaintiffs turn that well-established approach to statutory interpretation on its head. While Plaintiffs often begin an argument in their brief by referencing certain language of either the Enabling Act or Local Law 43 itself, the discussion quickly degenerates into Plaintiffs’ conclusory allegations in the complaint regarding the factual characteristics of their business operations in a misguided attempt to use such allegations to demonstrate that Local Law 43 is unconstitutional. Plaintiffs’ brief is saturated with instances of this tactic. For example, at the outset Plaintiffs claim that Local Law 43 exceeds the scope of the Enabling Act, not because of any language cited within Local Law 43 itself, but because Plaintiffs assert that the law in effect imposes the tax “on fees for assisting a consumer in finding a hotel and making a reservation, which are not rent or charge ‘for the room,’ and requir[es] third-party intermediaries to remit and collect this tax” (Resp. Br. at 4). Plaintiffs ignore that the issues of whether Plaintiffs’ fees constitute “rent or charge ‘for the room,’” or whether any online travel company is required to collect and remit the HROT, are issues that lack evidentiary support in the record (id.). The same approach is then repeated in Plaintiffs’ description of the first question presented on appeal, where Plaintiffs assert that the City lacked authority to adopt Local Law 43 under the Enabling Act, not because of any language of Local Law 43, but because: “either (a) these service fees should not be deemed ‘rent or charge . . . for [the] room’ under the express terms of 4 the applicable Enabling Legislation; or (b) a third-party intermediary does not fit within the express scope of ‘the owner of the hotel room occupied or [] the person entitled to be paid the rent or charge’ under the Enabling Legislation” (Resp. Br. at 5.) Contrary to Plaintiffs’ claim, the Enabling Act is altogether silent on the matter of whether Plaintiffs’ service fees should be deemed to be “rent or charge” for a hotel room, or whether an online travel company fits within the definition of a “person entitled to be paid the rent or charge” (see NY Unconsol. Ch. 288-C, § 1[3]). Those issues are the subject of count II of the complaint, which remains pending in the trial court. Plaintiffs’ erroneous method of attack is then reprised at the outset of the argument section of their brief, where they continue to assert Local Law 43’s unconstitutionality by claiming that it “imposed a tax on the basis of an online travel company’s fees, which are not rent or charge ‘for [a] room’ within the ordinary meaning of that phrase” (Resp. Br. at 23 (emphasis omitted)). Indeed, this same misguided approach is repeated throughout Plaintiffs’ brief (see Resp. Br. at 23 (claiming, “[t]he Enabling Legislation did not expressly authorize the City to either (i) impose a tax on an online travel company’s service fees in the guise of ‘rent or charge . . . for [the] room’; or (ii) require an online travel company to collect the occupancy tax and pay a portion of it”); Resp. Br. at 24 (discussing one provision of Local Law 43 by noting that, “[t]his so-called ‘additional rent’ is 5 the fee a travel intermediary retains for its services after it has transferred the real ‘rent’ to the hotel operator . . . that is not consideration for the use and occupancy of a hotel room.”); Resp. Br. at 28 (describing Local Law 43’s new definition of “rent,” before challenging such definition on the basis that “fees to provide information about a hotel or to facilitate a reservation of a hotel room are not ‘rent or charge for [a] room’ within the meaning of the Enabling Legislation . . . [t]hey are fees for services provided outside the room, not amounts paid for use and occupancy of the room”); Resp. Br. at 30 (claiming that the City lacked authority to impose a tax on “ ‘service and/or booking fees,’ as provided for in Local Law 43 . . . because such fees are not consideration for a room; they are for services provided to assist travelers in selecting a hotel and making reservations”); Resp. Br. at 33-35 (stating that the Enabling Act did not authorize the City to require “room remarketers” to collect and remit a portion of the HROT because room remarketers such as Plaintiffs are “neither the ‘owner[s]’ of hotel rooms nor the ‘person[s] entitled to be paid the rent or charge’ for a hotel room”).4 4 In light of Plaintiffs’ assertions, it is important to reiterate that Local Law 43 did not impose a tax on service and/or booking fees earned by Plaintiffs, but rather changed how the tax on hotel occupancy was calculated and collected so as to include the amount of such fees within the amount of the rent paid by a customer when determining the amount of tax owed by that customer (NYC Admin. Code § 11-2501 [2009]). Local Law 43 did not transform the HROT into an income tax payable by Plaintiffs themselves. If anything, Plaintiffs were only required to remit to a hotel operator or the City any taxes they collected from their customers on the City’s behalf (id. at § 11-2502 [2009]; see also infra at 13 n.5). 6 Simply put, Plaintiffs eschew any attempt at a cogent analysis of the propriety of Local Law 43 by reference to the unambiguous authorizing language of the Enabling Act. Rather, Plaintiffs’ hope is that they can defeat Local Law 43 on constitutional grounds solely by invoking their own conclusory allegations in the complaint (see Resp. Br. at 8-9 (citing to Plaintiffs’ allegations in the complaint)). Indeed, they offer no citation to any evidence in the record establishing the facts claimed as true by Plaintiffs above. That is because this case comes before this Court from the City’s pre-answer motion to dismiss, which was made before any discovery had been completed (see R.175-77; compare with R.361 (where the Appellate Division reverses the order of the trial court, and “upon a search of the record,” declares Local Law 43 unconstitutional)). Plaintiffs were successful in their attempt to misdirect the focus of the court below, which did not cite in its Order any language of Local Law 43 that purportedly runs afoul of the Enabling Act, and yet proceeded to determine that Local Law 43 unconstitutionally “extend[ed] the hotel room occupancy tax to include imposition of the tax on the service or booking fees earned by plaintiffs in connection with hotel room reservations,” without identifying any evidence in the record supporting that proposition (R.362 (emphasis supplied); see also R.362-63 (“the plain meaning of this phrase did not encompass the service fees charged by the travel intermediaries . . . .”); Resp. Br. at 25). The Appellate Division’s Order 7 8 should be reversed and the method of statutory interpretation advanced by the City should be applied by this Court to confirm Local Law 43’s constitutionality. POINT II PLAINTIFFS MISJUDGE THE SCOPE OF THE ENABLING ACT BECAUSE THEY SELECTIVELY QUOTE THE STATUTORY TEXT OF THE ENABLING ACT’S SUBDIVISION 1-A Incredibly, Plaintiffs argue on appeal that the statutory language providing the City with the broad authority to enact a tax “such as the legislature has or would have the power and authority to impose on persons occupying hotel rooms,” does not relate to the percentage tax authorized under § 1(1-a) of the Enabling Act, but instead is limited to the flat-rate taxes that are authorized under the Enabling Act’s §§ 1(1)(a) and (b) (see Resp. Br. at 26). Plaintiffs do not offer any reasoned basis to limit that broad authorizing language to the flat-tax provisions of paragraphs (a) and (b) of § 1(1), particularly in the face of § 1(1)’s silence on the matter (see NY Unconsol. Ch. 288-C, § 1[1]). That is because there is no basis to do so. Moreover, when the relevant statutory language is read in its entirety, it is obvious that the limitation Plaintiffs attempt to conjure in their brief is nowhere to be found in the text of the Enabling Act (see Resp. Br. at 25-27). In relevant part, the authorizing provisions of the Enabling Act provide: § 1. [Authority to impose taxes] (1) Notwithstanding any other provision of law to the contrary, any city having a population of one million or more is hereby authorized and empowered to adopt and amend local laws imposing in any such city a tax in addition to any tax authorized and imposed pursuant to article twenty-nine of the tax law such as the legislature has or would have the power and authority to impose on persons occupying hotel rooms in such city. The rates of such tax shall be either the rates contained in the following paragraph (a) or the rates contained in the following paragraph (b) . . . . *** (1-a) In addition to the tax imposed at the rates authorized in either paragraph (a) or (b) of subdivision one of this section, any local law imposing such tax may impose an additional tax on persons occupying hotel rooms in such city as provided for in such subdivision one at a rate up to six percent of the rent or charge per day for each such room. (NY Unconsol. Ch. 288-C, §§ 1[1], [1-a] (emphasis supplied).) As these provisions make clear, the phrase “such as the legislature has or would have the power and authority to impose on persons occupying hotel rooms” is undeniably applicable to the tax authorized under § 1(1-a) of the Enabling Act, and it does not even require an in-depth analysis to reach that conclusion. Rather, the phrase under § 1(1) is expressly incorporated by reference within § 1(1-a) through the use 9 of statutory language that requires the tax authorized under § 1(1-a) to be imposed “as provided for in such subdivision one” (id.). Plaintiffs, on the other hand, selectively quote the relevant statutory text in order to conceal that controlling language: As an initial matter, the snippet from the Enabling Legislation on which the City bases its argument is inapposite. The provision pertinent to the specific tax at issue on appeal states: “In addition to the tax imposed at the rates authorized in either paragraph (a) or (b) of subdivision one of this section, any local law imposing such tax may impose an additional tax on persons occupying hotel rooms in such city . . . at a rate up to six percent of the rate or charge per day for each such room.” (R.118, § 1(1-a)). This provision, which is § 1-a in the Enabling Legislation, makes quite clear that the City’s authority to tax is expressly limited to no more than 6% “of the rent or charge per day for [the] room.” (R.118, emphasis added). There is no mention in this provision of the City having the same scope of authority as the Legislature has. (Resp. Br. at 26 (using an ellipsis to omit the phrase “as provided for in such subdivision one,” before proceeding to argue that the language of subdivision one is inapplicable).) Plaintiffs’ argument should be disregarded as nothing more than a poorly executed red herring. And absent any cogent argument to the contrary, which Plaintiffs do not offer, the City’s interpretation of the Enabling Act must control and Local Law 43 must be held constitutional. 10 POINT III THE CITY HAS NEVER CLAIMED “UNFETTERED AUTHORITY” TO IMPOSE A TAX The City cites People v Cook, 34 NY2d 100 (1974), for two reasons. First, Cook stands for the proposition that the language set forth in the Enabling Act, “such as the legislature has or would have the power and authority to impose,” evidences the legislature’s intent to delegate to the City the furthest reaches of the State’s power to tax (see City Br. at 15). Second, Cook represents one case in which the Court of Appeals has held that in the context of different State enabling legislation utilizing the same language, such phrase was deemed to “embrace[] the full panoply of State power” (id. at 27-28; Cook, 34 NY2d at 112). That “broad language used in the statute itself,” in turn authorized the City to enact Local Law 43 and fill in gaps in the taxing statute not addressed or expressly provided for in the Enabling Act (Cook, 34 NY2d at 111). Yet Plaintiffs allege that the City misquotes and misreads Cook, suggesting that because the City did not underscore “the Court’s reference to ‘cigarettes, cigars or smoking tobacco’ ” as being the subject matter of the particular tax challenged in that case, the City is not only misleading the Court, but also that the City is asserting “unfettered authority” to impose a tax (Resp. Br. at 31-33, citing Cook, 34 NY2d at 112). Plaintiffs’ allegations breach all bounds of 11 reasonableness, and in addition to being entirely devoid of merit, represent nothing more than a transparent attempt to impugn the City’s credibility through distortion. As for the allegation that the City failed to identify the subject matter of the tax in Cook, Plaintiffs are simply wrong (see Resp. Br. at 32). On page 27, the City’s brief expressly notes that the constitutional challenge in Cook was aimed at “a City tax law that imposed a different cigarette tax depending on the amount of tar or nicotine a cigarette contained” (City Br. at 27, citing Cook, 34 NY2d at 110). With respect to Plaintiffs’ assertion that the City claims “unfettered authority” to impose a tax, divorced from any limitations in the Enabling Act (Resp. Br. at 31-33), the City has never suggested that its authority to impose a tax is limitless. Indeed, the City has already acknowledged that its authority to impose a tax is limited by both subject matter—the occupancy of a hotel room—and by the few express requirements set forth in the Enabling Act. (See, e.g., City Br. at 2 (“the Enabling Legislation granted to the City the same broad authority as the legislature has to impose a hotel room occupancy tax, subject to certain stated limitations”); NY Unconsol. Ch. 288-C, § 1[5] (the authority granted by the Enabling Act does not extend to imposing the tax on exempt entities under NY Tax Law §§ 1105(e), 1116(a)).) In fact, elsewhere in their brief Plaintiffs assert the exact opposite position and highlight for the Court what they characterize as the City’s concession that it is limited by certain restrictions set forth in the Enabling 12 Act (Resp. Br. at 3, 27). Still, even setting aside the inconsistencies in their arguments, it is beyond reasonable dispute that there is no merit to Plaintiffs’ misspent efforts to paint the City as taking for itself boundless authority to tax. To the contrary, despite that Local Law 43 amended the HROT in order to measure the percentage rate tax based upon the full amount of the rent or charge paid by occupants of hotel rooms, the HROT nevertheless remained a tax limited to hotel occupants.5 Plaintiffs’ arguments are meritless and the Order of the Appellate Division should be reversed. CONCLUSION As is set forth above, Plaintiffs’ brief fails to address the cause of action currently before this Court, misconstrues and misapplies the plain language of the Enabling Act, and mischaracterizes both the substance of the City’s arguments as well as its discussion of the authority therefor. That analysis, erroneously adopted by the Appellate Division below, should be rejected in favor of upholding Local Law 43’s presumed constitutionality. For these reasons, and for the reasons set 5 The Appellate Division’s Order suggests that the court believed the HROT had been amended to impose the tax directly on Plaintiffs’ income such that the HROT would have to be paid by Plaintiffs themselves (R.362 (asserting that the Enabling Act only “permitted the City to impose the tax on ‘hotel occupants’ ”), citing NY Unconsol. Ch. 288-C, § 1). That could not be farther from the truth. Local Law 43 really just changed how the amount of HROT due was calculated and collected for the purpose of applying the percentage rate tax, by including with the other rent or charges paid for a hotel room any service and/or booking fees charged that were a condition of occupancy (NYC Admin. Code § 11-2501 [2009]). Plaintiffs’ role following the enactment of Local Law 43, if any, was limited to collecting and turning over the tax to the City when it received money for a hotel room from its customers (NYC Admin. Code § 11-2502 [2009]). 13 14 forth in the City’s Brief in support of this appeal, the Order of the Appellate Division should be reversed. Dated: New York, New York April 15, 2013 MICHAEL A. CARDOZO Corporation Counsel of the City of New York Attorney for Defendants-Appellants 100 Church Street New York, New York 10007 Tel: (212) 356-2114 E-mail: alipkin@law.nyc.gov jowolf@law.nyc.gov By: /s/ Joshua M. Wolf Joshua M. Wolf Assistant Corporation Counsel