At least seven lawsuits by US cities have been filed against the major US online agencies since late 2004, over their alleged failure to remit to governmental authorities the full tax on the retail rate when the online agencies take hotel bookings and sell room nights on a merchant basis.
The City of Los Angeles kicked off what is growing into a flurry of litigation against online hotel sellers in December 2004.
The City of Philadelphia then filed its complaint in July 2005. And, late last year, five other lawsuits, including one by the City of Chicago, have been going through the courts. A number of major US-based online agencies, such as Expedia and Priceline, are named as defendants.
The lawsuits are seeking to collect what could be a bucketful of hotel taxes that the cities claim are owed but unpaid.
The lawsuits allege that the online travel agencies act as agents of the hotel or serve as hotel operators when they obtain net rates or merchant deals from hotels and rent them to consumers. In doing so, the suits allege, the online agencies fail to remit hotel occupancy or sales taxes based on the full retail room rate, which includes their mark-up.
The cases challenge the essence of the online agencies’ merchant-hotel business model.
The lawsuits are a big problem for the online agencies, many of whom are believed to be putting millions of dollars in reserves in case they lose.
All the suits, with the exceptions of those filed by Philadelphia and Chicago, seek to be certified as class actions on behalf of municipalities statewide. That means other cities would be able to join the plaintiffs in seeking to collect more taxes from the online players.
Some of the suits allege the defendants use deceptive practices in that they collect taxes on the retail rate, remit taxes on the net rate they get from hotels, and keep the difference.
The Interactive Travel Services Association, in Washington DC, serves as a spokesperson for the online agencies. Executive director Art Sackler stated that the suits stem from the plaintiffs misunderstanding of the merchant model.
The way the hotel business actually works, Sackler said, is that hotels offer rooms through the online travel seller, which simply acts as a broker, remitting to the hotel the negotiated rate plus the hotel occupancy taxes due on that rate. The online agency then charges clients additional service fees, which ITSA insists are not subject to room taxes.
Both sides have expressed confidence in their positions, but the issue of Internet travel sellers’ tax liabilities may not end up with a one-size-fits-all answer because local tax laws in the US vary widely as to how they define the role and consequent tax liabilities of online agencies regarding hotel taxes.