Courts say online travel companies can't be taxed

WASHINGTON (Legal Newsline) - In the last month, various courts around the country have dismissed cases brought against online travel companies for avoiding hotel occupancy tax ordinances.

In February alone, the Kentucky Supreme Court, a federal court in Tennessee and a state appeals court in Pennsylvania all affirmed that local jurisdictions in those states cannot impose taxes on online travel companies, such as Priceline, Expedia and Hotels.com, for their reservation services.

Kentucky's high court flat out denied a motion to rehear a case against a group of online travel companies.

The state Court of Appeals, which dismissed the case last April, agreed with a circuit court's decision that Kentucky's enabling statute does not include online travel companies in the definition of those who have to pay the transient taxes.

In the Tennessee case, the U.S. District Court for the Middle District of Tennessee granted summary judgment on the merits for the online travel companies against a class action brought by 73 counties and 56 municipalities.

Judge Aleta A. Trauger, in his Feb. 23 opinion, said it was up to the cities to rework the current tax laws if they want to be able to go after the companies for taxes.

"It is ultimately the role of the state legislature to enact revenue statutes that clearly state the scope and application of the tax laws and, upon identifying any potential revenue shortfalls in their application, to address those perceived shortfalls by appropriate legislation," Trauger wrote.

In the Pennsylvania case, a state commonwealth court affirmed an order by the Philadelphia County Court of Common Pleas denying the city of Philadelphia's appeal from a decision of the city's tax review board concluding that Expedia was not subject to the city's hotel room rental tax.

Judge Patricia A. McCullough, in her Feb. 2 opinion, said Expedia does not "operate" hotels, and therefore are not liable for a tax on their services.

"The hotel, not Expedia, controls the access to the room and any amenities. Indeed, the Philadelphia Code's definition of 'operator' certainly infers ownership or control of the premises," the judge wrote.

Joseph Rubin, president of the Interactive Travel Services Association, said he is pleased that the three courts properly interpreted the law.

ITSA describes itself as "the voice" of the online travel companies and the companies that power the travel industry.

"We hope other municipalities will recognize this clear trend, and will read these thorough, well reasoned opinions," Rubin said in a statement.

"As demonstrated by these strong opinions, there is little basis for the litigation that some states and localities have pursued that ends up simply wasting taxpayer resources."

Rubin said he urges other local jurisdictions that are exploring such cases to do their own, independent research before filing lawsuits.

The three actions, he said, show "how precarious these cases really are."

But those states aren't the only ones in which online travel companies have been targeted for unpaid taxes. And some haven't been nearly as nice.

Last year, a Florida lawmaker asked Attorney General Pam Bondi to crack down on the companies and force them to pay back millions in taxes.

In his letter to Bondi, Rep. Rick Kriseman, a Democrat from St. Petersburg, asked her to prosecute companies like Expedia and Orbitz. He pointed to documents from the online travel companies showing that they have worked to avoid paying the taxes for years.

The documents were released by a Georgia appeals court last January. They show that lawyers and accountants for the online travel companies believed they could be required to pay hotel taxes in Florida and that Expedia, for one, was keeping money on hand to pay any uncollected taxes it might owe.

Kriseman said the documents are "evidence enough" that the attorney general should prosecute the case and collect more than $400 million in unpaid state taxes.

In 2009, former Florida Attorney General Bill McCollum sued Expedia and Orbitz for unfair trade practices.

A group of Texas cities, in a lawsuit filed in May 2006, claimed the 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 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 claimed they only connected 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.

On Oct. 30, 2009, a federal jury in the Western District of Texas found that the online companies 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 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.

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