SAN ANTONIO, Texas (Legal Newsline)--Nearly a dozen popular online hotel booking services were hit with a verdict from a Texas jury recently, but the industry is still calling it a victory.
On Oct. 30, a federal jury in the Western District of Texas found that online hotel booking services like Hotels.com and Expedia should have been collecting more hotel occupancy taxes for payment to Texas cities. The jury awarded $20 million to more than 170 municipalities in the Lone Star State.
However, the jury did not find convincing evidence that the booking services were collecting additional taxes and keeping the money for themselves, so they awarded no punitive damages.
"We see it as a glass half full," said Andrew Weinstein, spokesperson for Interactive Travel Services Association. "We are happy the jury did not award punitive damages. The cities were asking for $40 million, claiming the online services maliciously withheld taxes."
Weinstein said the claim that these companies are collecting and keeping the tax monies is a myth.
"It's a myth propagated by plaintiffs' attorneys, but we think that myth has been put to bed for good now," he said in a recent interview.
According to the lawsuit filed in May 2006, online booking companies underpaid transient occupancy taxes by paying taxes only on wholesale room rates rather than the actual retail rates charged to customers who book their hotels online.
The online wholesalers purchase rooms at discounted rates and then make a profit by reselling the rooms to consumers at a higher retail rate. For example, if a company like Expedia.com pays $70 for a hotel room but later resells it for $100 plus taxes, then the company will only remit taxes for the lesser amount.
The online companies claim they only connect consumers with good deals on rooms, the same way offline travel agents or tour operators do. Fees from traditional travel agents, tour operators and other middlemen have never been taxed.
"This entire industry has systematically withheld taxes for years, and not just in Texas," said lead plaintiff's attorney Steven Wolens of McKool Smith in a press release. "The business practices for which the defendants were found liable are the same actions that these companies engage in throughout the U.S."
But Weinstein said trial lawyers have been misleading the municipalities across the country.
"These claims are not based on law, but on the greed of plaintiffs' attorneys," he said.
In the long run, these lawsuits would not only hurt the online travel business, but the traveling public through higher rates and teh tax-collecting entities themselves if hotel rooms remain empty, the ITSA states on its Web site.
The city of San Antonio was the first Texas city to sue the hotel retailers, and eventually 172 additional Texas cities joined the class-action - including Beaumont, Port Arthur, Groves and Bridge City in Southeast Texas. The city of Houston was the only major Texas city not to join in San Antonio's suit, choosing to file its own suit instead.
The San Antonio defendants were Expedia, Hotels.com, Hotwire, Lodging.com, Orbitz, Priceline.com, Site59.com, TravelNow.com, Travelocity.com, TravelWeb and Cheaptickets.com.
The four-week trial before Judge Orlando Garcia of the U.S. District Court for the Western District of Texas concluded following five hours of deliberations by a jury of seven men and five women.
There have been at least five other similar suits around the country, in which municipalities sought to recover unpaid occupancy taxes, but the San Antonio case is the first to reach a jury verdict, Weinstein said.
Weinstein mentioned a settlement in an Illinois suit filed by the city of Fairview Heights, in which 80 percent of money went to attorney fees.
After a four year court battle against 13 online travel companies, the city received a $315,000 settlement. But after payments to lawyers and other expenses, the city was left to collect just over $56,000.
When Fairview Heights first filed suit in 2004, it intended to act as class representative on behalf of other Illinois municipalities. But defendants had the case moved to federal court, where it failed to gain class certification.
In all the lawsuits, the main issue has been the question of whether the online companies had "control" of hotels under city ordinances.
The Texas jury said the companies did have that control.
But in a statement released after the verdict, defendant Expedia said it "strongly disagreed" with the jury's verdict that online travel companies "control hotels" in Texas.
"We believe the verdict is unsupported by the facts of the case and the law," Expedia stated. "We believe the verdict is contrary to the plain language of the ordinances at issue and the clear evidence from hotels that testified that online travel companies do not, in any way, control hotels."
Weinstein said the services don't provide specific room assignments, such as on a particular floor or with a certain view.
"We don't control that, you have to call the hotel directly," Weinstein said.
Expedia and the other defendants plan to appeal the verdict to the Fifth Circuit Court of Appeals.
"We are confident that we are well positioned on appeal," Weinstein said, especially since a previous case was dismissed by the Fourth Circuit, ruling that the companies were not the same as hotels, motels and inns under the ordinances.
But just days after the Texas verdict, Florida Attorney General Bill McCollum sued Expedia and Orbitz, claiming the companies were not paying all the taxes due to the state.
"Counterproductive travel and tourism policy would be particularly self-defeating in the worst recession in the past 80 years," states the ITSA Web site. "ITSA will continue its efforts to educate policy makers all over the country to the dangers of these tax initiatives."