Cities Sue Online Travel Companies for Hotel Taxes

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The City of Atlanta is suing Travelocity, Orbitz, Expedia and 14 other online travel companies in Georgia Supreme Court for millions of dollars in unpaid hotel taxes. And the lawsuit is growing in popularity. Several officials contend that city coffers were raided by the online travel sites and filed similar cases in Los Angeles, Philadelphia, Miami and Chicago.

According to court filings, the online companies contract with hotels and motels for a number of rooms at a negotiated wholesale rate. The online companies then determine their profit margin and set the retail rate the consumer will pay. After booking a room, the companies then return the wholesale rate, plus the estimated tax on that rate, to the hotel. Meaning if they buy a $100 room for $50, but charge $80 to consumers they still only pay tax on the $50.

No hotel and occupancy tax is being paid on the difference between the wholesale rate and the retail rate, Bill Norwood, a lawyer for the city, told the Atlanta Journal-Constitution. But Kendrick Smith, a lawyer for the online companies, said that because the Internet-based firms do not buy or rent hotel rooms, they are not subject to the tax. “We’re not hotels,” he said. “We can’t collect taxes.”

A decision is expected in the next few months and while it would only affect Georgia directly, it could create a legal precedent and spur other cities to file suit.

Is this a sticky ethical situation or just a case of cities looking for any avenue to make up money in a recession? You can’t blame cities for trying, but it’s unclear how the legal cases are going to end. And at the end, how much will the lawyers get?

Tags: Online Company, Taxes, Free Trade, Financial Planning, Finance, Barbara E. Hernandez

Bay Area resident and award-winning business journalist Barbara E. Hernandez has covered tourism, real estate and personal finance. Her clients include the New York Times, Los Angeles Times, San Francisco Chronicle and Washington Post.

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1

debrossmitchell

09/09/08 | Reported as spam

Message has been deleted.
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jason.parker@...

09/11/08 | Report as spam

Key Questions--and Some Answers

The key here is to define what the $30 upcharge is (in the $50 wholesale vs. $80 retail example above). Is it a brokerage fee...? Is it part of the hotel "rent"...? Is it net profit--exactly the same profit that the hotel would gain from handling the transaction directly...?

A core factor is distinguishing between the two transactions: The original "sale" of the hotel room and the "re-sale" of that room to the end user. Is a re-seller a de-facto hotel or are they simply an agent entitled to an agent's fee?

Claiming that agents are virtual extensions of the companies whose goods and services they promote and sell would make a huge mess for travel agents. What portion of the agent's fee would you tax as a hotel when an all-inclusive vacation package is sold that covers airfare, car rental, hotel, meals, shows, tours, spa services, and a round of golf?

The agent's fee is for a service--a specific service. That service is arranging access to a hotel room, not for the hotel room itself. That's the hotel's part in the transaction.

The agent's fee covers a service associated with the hotel's providing the hotel room--it is not an inherent part of providing the room. Would you apply the same occupancy taxes to the bellhop's tip...the valet's tip?

Bottom line: the hotels use these broker-agents because doing so increases their business. Otherwise they wouldn't be using them. Doing so increases their bookings and, most importantly, their PROFITS.

States raise revenue by taxing profits...and payrolls...and property. Higher business volume increases all three of these. A hotel that increases gross income by using agents is also going to increase their payroll an, more than likely, their property holdings, too.

The state governments already enjoy more income flowing itno the public coffers from the increased business volume at the hotels and the tax revenue streams associated with that business volume. They should leave the hotels and their agents alone and focus on eradicating waste rather than looking for more ways to finance that waste.

NOTE: A review of the number of meetings held at St. Simon's Island or Jekyll Island by various Georgia governmental agencies that could have just as easily been held at a local venue will illustrate the degree of waste referred to here.
3

barbara e hernandez

09/12/08 | Report as spam

RE: Cities Sue Online Travel Companies for Hotel Taxes

Jason:

I see your point and I see how online companies find this completely unfair. However, you are talking to cities who are seeing their budgets depleted by tanking property taxes, high costs for petroleum and lower sales tax revenues.

I think this is a case of cities creating a very public spectacle to show taxpayers they are doing something. I think winning the lawsuit is secondary. But I may be biased.

b,
4

martinlock

09/30/08 | Report as spam

RE: Cities Sue Online Travel Companies for Hotel Taxes

More and more multinational companies and noteworthy business concerns are venturing into the hospitality sector owing to the sudden and remarkable spurt that this sector witnessed in the last couple of years. Most of the hotels are also tying up with Hyderabad airlines and Bangalore airlines hotels respectively, so that they have edge over their competitors as far as the bookings and popularity are concerned.