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San Diego's attempt to tax online travel companies shot down

By Jessica M. Karmasek | Sep 14, 2011

LOS ANGELES (Legal Newsline) - A California superior court last week rejected the city of San Diego's attempts to impose hotel occupancy taxes on online travel companies.

Judge Elihu M. Berle, for the Superior Court of Los Angeles County, ruled that such companies, like Hotels.com and Expedia, are neither owners nor operators of hotels.

According to a transcript of the proceedings Sept. 6, the court held that San Diego's occupancy tax ordinance did not apply to the booking services offered by the online travel companies.

"There is nothing to support the claim that the OTCs have an ownership interest in any hotel. Each has only a business relationship with the hotel. There is no sharing of profits and losses," Berle said, according to the transcript.

The court said the online travel companies also are not general agents of the hotels for proprietorship or operation purposes.

"OTCs have the right to market the limited use of hotel rooms to transients and then handle the financial aspects of the sale of the rooms," Berle said.

"The right to market a hotel room or rooms for the limited time determined by the hotel owner and for the consideration paid to the hotel by the OTC and determined by the hotel owner is an entirely different character than the right of a lessee, mortgagee, licensee, receiver or debtor in possession to run the general business of a hotel, that is, to act as the hotel's proprietor."

In issuing its ruling, the court overturned a decision by a San Diego administrative hearing officer assessing more than $21 million in taxes and penalties against the online travel companies.

It also joined a growing majority of courts nationwide that have ruled against municipalities and states in similar hotel tax cases.

In fact, this is the third California court decision ordering judgment in favor of the online travel companies.

According to the Interactive Travel Services Association, or ISTA, no court in California has ruled against the online travel companies and state courts have now overturned two separate administrative decisions holding such companies liable for the hotel tax.

Nationwide, online travel companies have prevailed in 15 of 19 cases where courts have ordered judgment, and appellate courts have affirmed four of those favorable judgments. And in two of the remaining cases, the courts ruled that the companies owe no back taxes, the group noted.

"Online travel sales provide global marketing opportunities for local tourism," ISTA Executive Director Art Sackler said in a statement.

"Municipalities and OTCs should work together to promote travel and tourism for everyone's benefit, rather than both sides' expending precious resources on futile litigation," he said.

ITSA is the trade association for online travel companies and global distribution systems, and is the industry's voice on matter of public policy.

According to its website, ITSA promotes consumer choice, access, confidence, protection and information in the world of online travel. The group says it also seeks to develop consensus among industry, consumer organizations and policy makers on issues related to consumer use of the Internet to meet their needs.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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