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Governments Seek To Recoup Tax Money They Claim Is Theirs

Atlanta among U.S. cities suing online travel companies  Sep 09, 2008

The city of Atlanta 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 is seeking to recover the hotel and occupancy taxes from 17 Internet travel reservation companies, including Expedia,,, 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, for example, is 7 percent. The tax, like others nationwide, was enacted into law as a way to generate money that could be used to promote tourism.

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 claims against 18 online travel companies.

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

The cases are being litigated at a time when more and more people are making their hotel reservations online. In May, the National Leisure Travel MONITOR reported that leisure travelers now use the Internet to book travel reservations 56 percent of the time, up from 19 percent in 2000.

On Monday, the Georgia Supreme Court heard arguments on whether it should dismiss the city of Atlanta’s case or allow it to proceed toward trial.

The high court must determine whether, before filing suit in March 2006, the city should have assessed how much in taxes the online companies owed, provided the companies with written notice and, if the amount were in dispute, allowed the city’s License Review Board to hold a hearing.

The court is reviewing a ruling last year by the state Court of Appeals, which said the city should have gone through that process. If allowed to stand, the ruling would be an enormously lucrative victory for the online companies because a three-year statute of limitations would bar the city from pursuing taxes collected by the online companies early this decade.

So far, no judge in Georgia has ruled on the underlying issue at the heart of the dispute: whether cities are losing a certain amount in taxes 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 the room rate, plus taxes and services fees. They return the “wholesale” rate, plus the estimated tax on that rate, to the hotel.

No hotel and occupancy tax is being paid on the difference between the wholesale rate and the retail rate, Bill Norwood, a lawyer for the city, said Monday.

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

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

Justice Robert Benham provided Smith with a hypothetical of an online company charging a customer $100 for a room, even though its markup was $50. On which rate are taxes collected? he asked.

The $50 rate paid by the online company to the hotel, Smith answered. He added that the rates negotiated between the hotels and the online companies are confidential.

Justice George Carley then noted that walk-in customers pay the entire 7 percent tax rate on the regular room rates. But if online companies are only collecting taxes on the wholesale rates, “the city does get gypped,” he said.

Smith told the court that if the city wants to try and collect such taxes, it should follow the law and provide the online companies with an estimate of how much they owe — not go to court represented by “contingency-fee” private attorneys.

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

In a telephone interview, Art Sackler, executive director of the industry’s trade group, the Interactive Travel Services Association, said the city’s lawsuit is counterproductive. The online companies’ business model is good for consumers because it allows them to mix and match hotel prices and 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, said that Atlanta uses the hotel tax money to promote tourism.

“The city can use, say, of $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 to see it,” Pope said. “When the city is deprived millions of dollars of this revenue, then you can see how important this tourism money is.”

Atlanta among U.S. cities suing online travel companies

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