Cities pursue hotel taxes from online bookings

The city of Atlanta on Monday asked Georgia’s highest court for permission to continue pursuing a high-stakes lawsuit that claims online travel companies are illegally pocketing millions of dollars in hotel tax revenue.

The city wants to recover hotel and occupancy taxes from 17 Internet travel reservation companies, including Expedia, Travelocity.com, Hotels.com, Priceline.com and Orbitz. But the online companies contend they are not obligated to pay and, even if they were, the city should have pursued the taxes administratively before filing suit.

Online travel companies are under legal assault throughout Georgia —- and across the nation —- as cities seek to recoup tax money they claim is rightfully theirs. The hotel and occupancy tax for Atlanta hotel and motel rooms is 7 percent.

Much of the revenue is used to promote tourism. Last year, the city collected $45 million in hotel taxes, with $32 million going to the Georgia World Congress Center, the Georgia Dome and the Atlanta Visitors and Convention Bureau.

The cases come at a time when more people make hotel reservations online. In May, the National Leisure Travel MONITOR reported that the Internet was used to book travel reservations 56 percent of the time, up from 19 percent in 2000.

A Muscogee County Superior Court judge recently held hearings to determine whether Expedia must pay hotel and occupancy taxes to the city of Columbus. A federal judge in Rome is overseeing a lawsuit that seeks class-action status on behalf of cities seeking hotel taxes from 18 online companies.

In San Antonio, a federal judge has allowed a class-action case on behalf of cities in Texas to go forward against online travel firms.

On Monday, the Georgia Supreme Court heard arguments as to whether it should dismiss Atlanta’s suit or allow it to proceed toward trial.

The court is reviewing a ruling last year by the state Court of Appeals that gave the online firms an enormous legal victory, dismissing the suit. The appeals court said that Atlanta should have estimated how much in taxes the online companies owed, provided the companies with an assessment and allowed its License Review Board to consider any disputed claims before it filed the suit in March 2006.

So far, no judge in Georgia has ruled on the issue at the heart of the dispute: whether cities are losing tax revenue each time a hotel or motel room is booked and paid for through the Web-based companies.

According to court filings, the online companies contract with hotels and motels for a number of rooms at negotiated “wholesale” rates. The online companies determine a markup and set the “retail” rate the consumer will pay. The online companies accept credit-card payments for this “retail” room rate. The companies also charge unspecified taxes and services fees.

The companies give the hotel the customer’s payment for the “wholesale” room rate plus hotel and occupancy tax on that rate. No tax is being returned on the difference between the wholesale rate and the retail rate, Bill Norwood, a lawyer for the city, said Monday.

Kendrick Smith, a lawyer for the online companies, said that because the Internet-based firms do not own hotel rooms, they are not subject to the tax.

“We’re not hotels,” he said. “We can’t collect taxes.”

Justice George Carley questioned whether tax payments were being avoided. Walk-in customers pay the entire 7 percent tax rate on the room they pay for, the justice noted. But if online companies are only collecting taxes on the wholesale rates and not the room rate advertised online, “the city does get gypped,” he said.

Smith said if the city wants to try to collect such taxes, it should follow the law and provide the online companies with an estimate —- not rush to court represented by “contingency-fee” private attorneys.

“This is a [tax] collection lawsuit,” Smith argued. “They want a lot of money.”

But lawyers for the cities contend that following the administrative process is an exercise in futility.

In the federal case in Rome, U.S. District Judge Harold Murphy temporarily halted that lawsuit in May 2007. In the meantime, Murphy said, the cities must estimate, assess and try to collect hotel taxes from the online travel companies.

Last week, lawyers for the cities asked Murphy to lift the stay. They said the online companies are not providing enough information to allow the cities to conduct proper assessments.

Over the past year, the online travel companies have lobbied the Georgia General Assembly to try to get the hotel occupancy tax law rewritten in their favor, said the cities’ motion, filed Sept. 4 in U.S. District Court in Rome.

In a telephone interview, Art Sackler, executive director of the industry’s trade group, the Interactive Travel Services Association, called the cities’ lawsuits counterproductive. The online companies’ business model is good for consumers because it allows them to mix and match hotel prices and it is good for hotels and cities because it facilitates tourism, he said.

“They’re trying to do something that would kill or damage this goose that has laid the golden egg,” Sackler said.

But C. Neal Pope, a lawyer for the city of Atlanta, said hotel taxes also promote tourism.

“The city can use, say, $5,000 of this tax revenue to send a team of Atlanta people out to bring in an event like a softball tournament or a concert that could bring in hundreds or thousands of people into the city,” Pope said. “When the city is deprived millions of dollars of this revenue, then you can see how important this tourism money is.”