Taxing Accommodations

Lawsuits challenge tax payments from online travel companies.

by / October 12, 2006 0


Local governments in Florida and elsewhere are filing suits to recover allegedly unpaid taxes from online travel companies.

Authorities in Leon County, Fla., said they just want what they think is owed them by the Internet-based travel booking industry.

"When you book a hotel and hand over a penny, where did that penny go? That's what we are going to have to determine, and it passes through a lot of hands," said Leon County attorney Herbert W.A. Thiele.

On the way toward finding out, the county has filed a class-action law suit against 11 online travel companies, alleging the companies have failed to pay more that $5 million in room taxes throughout the state.

That's about as far as clarity goes. Beyond that, the discrepancy in thinking between the county and the online travel industry is almost staggering.


Pay Up
Take the county's view as a starting place.

"We were made aware that there had been some SEC [U.S. Securities and Exchange Commission] filings by these Internet travel companies, and that there was a discrepancy on how they were charging taxes for the person who ultimately rents the hotel room," Thiele said when describing Leon County's contention that there's a difference between what companies such as Expedia, Orbitz and Travelocity pay and what the county thinks those companies should pay.

The tax in question is a tourism development tax, which in Florida can go as high as 5 percent. Leon County charges 4 percent of the room rate.

But that's not quite right, according to the online travel industry, which contends the tourism tax is not even in question.


Quick on the Draw
"This is a misunderstanding caused by cities that are too eager to pull the trigger on a lawsuit when they have been led down the garden path by class-action plaintiffs' lawyers," said Art Sackler, executive director of the Interactive Travel Services Association.

The Leon County case is but one in a growing roster of such lawsuits, according to the association. San Antonio, Chicago and Philadelphia authorities all have launched similar actions.

The misunderstanding here comes from a failure to grasp the way rooms are bought and sold online, Sackler said.

Most local governments appear to assume that the online travel services actually own the rooms they sell.

"The Internet travel agency purchases a block from a hotel chain. They buy them at a significantly discounted rate because they buy a block of rooms," Thiele said, explaining that by having "bought" the block of rooms, online retailers become the owners of those rooms and therefore bear all tax-related responsibilities.

Wrong, countered Sackler. The online booking engine negotiates a rate from a hotel chain, then acts as broker in the sale of those rooms. But the online company never owns the rooms, and while those companies collect the occupancy tax for those rooms, they do not keep the money. Sackler said the money goes from the online retailer to the hotelier, who in turn uses that money to pay whatever local taxes are due.

The picture is further muddied by the presence of another revenue source, namely the service fee collected by the online travel company. In most cases, Sackler said, governments have been suing for tax they say is owed them on those service fees.

Sackler said those fees are not part of the price of the hotel. They are independent income paid to the online companies and are not subject to the kind of hotel taxes being claimed by plaintiffs.

Though the Internet may not be causing the problem, the uncertainty surrounding its use is clouding the issue. Cities seem unclear on the financial mechanisms of online travel booking, especially in relation to who collects what tax and who pays whom in relation to the tax collected.


No Big Rewards
So far these types of lawsuits have not helped governmental authorities reap big rewards.

In past months a Philadelphia court dismissed the city's lawsuit against Travelocity, Priceline, Orbitz and others. Plaintiffs in a Chicago case took a hit when a Cook County judge threw out all of the claims against one of the defendants, and dismissed the plaintiffs' breach of contract claim against the others.

In addition to issues surrounding fees and tourism taxes, some governments have framed their case as a matter of wholesale versus retail. An online marketer makes money by buying a room at one price from a hotel chain, then selling it at a higher price to the consumer. Governments argue that taxes should be based on the higher rate paid online, while Internet marketers counter that the tax should be calculated based on the actual (lower) amount paid for the room at the hotel level.

The bottom line, Sackler said, is that governments have been too quick to litigate, trusting the class action lawyers to generate generous payoffs.

"They haven't talked to us," he said. "They haven't gotten materials from us."

That appears to be the case in Leon County.

"I have personally not had any conversations with any of the Internet providers," said Leon County's Thiele.

The travel association calls it a case of "sue first, ask questions later," and Sackler questions whether local governments are doing themselves any favors chasing this particular fox.

"We're 20 months from where the first case was filed," he said, "and so far plaintiffs have gotten nowhere."
Adam Stone Contributing Writer