Online Travel Companies Contest Hotel Room Taxes

by Glen Shapiro, LawAndTax-News.com, New York

27 July 2009

Several legal battles involving US online travel companies (OTCs) have led to success on the part of State and local tax authorities wishing to recover back taxes on hotel rooms which they believe were underpaid. Recent developments represent defeats for Expedia, a market leader in many hotel markets.

Hotels pay local room taxes based on the sum paid by the OTC which excludes the OTC profit margin. Lawyers for the respective tax authorities argue that the travel companies owe hotel occupancy taxes based on the higher retail price. Lawyers for Expedia argued that, because it did not own or operate hotel rooms, it could not be subject to the tax. Lawyers for the online travel companies further argued that traditional agencies have used the same pricing methods for years without paying the tax.

The Georgia Supreme Court has ruled that Expedia must pay hotel room taxes on the full amount it charges to its customers. However the Court noted that liability for tax could be changed if Expedia had had different contract conditions. This would require Expedia to disclose to the hotel the amount being paid by the customer for each room night and is contrary to Expedia's business model.

A California court has ruled that Expedia and Hotwire must pay in to court a disputed USD34m hotel room tax assessment to the city of San Francisco before challenging the assessment. Expedia has announced that it was making the required payment in order to continue the appeal. This creates an awkward precedent for Expedia and other OTCs in view of the number of disputes in the pipeline with other California cities; the same judge is hearing several other similar cases in Los Angeles, San Diego and Anaheim involving the major OTCs.

New York City has approved a bill that will require OTCs to pay the room tax on the retail room rate received by an OTC. The effective date for the legislation is September 1, leading to the possibility that New York City may not demand back taxes before that date. Future legal arguments may revolve around whether New York City has the authority to extend its tax to OTCs.

The state of Washington has ruled that Expedia is liable for USD184m in a consumer class action case with regard to service charges. Expedia will probably appeal this case, but other OTCs with a terms of service provision similar to Expedia's prior to December 2006, may be subject to similar class action claims, which also strengthen the claims for underpaid back-taxes on room rates. The industry will continue using the appeal process to contest the claims.

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