Baltimore sues online firms to gain hotel taxes

Federal lawsuit aims to collect $6 million from Travelocity, Orbitz, Expedia, others

December 11, 2008|By Brent Jones and Annie Linskey | Brent Jones and Annie Linskey, and

Baltimore filed a federal lawsuit yesterday to recover $6 million in taxes that officials say are owed by online booking companies such as Travelocity, Orbitz, Expedia, and others.

The lawsuit alleges that those companies provided hotel rooms to the public but failed to pay the room taxes. It also alleges that some companies did not inform their customers about the amount of their "service fees."

But an official of the trade association that represents online booking companies said those businesses do not have to pay the room tax, which he said is paid by the hotels. Art Sackler, executive director of the Interactive Travel Services Association, added that online companies do not pay city taxes on their service fee charges, which he said is the difference between the amount paid to the hotel and what the consumer pays.

"It costs many millions of dollars to establish these sites and keep them up to the minute," Sackler said. "They've got to get a return for that investment and earn some reasonable profit. But it's not for the hotel room. It's for the service of booking your hotel."

Sackler said online companies are nothing more than go-betweens for patrons looking for a reasonable rate and hotels looking to rent rooms. The city's lawsuit alleges that some of the online booking companies serve as more than an intermediary and instead purchase blocks of hotel rooms at a negotiated rate and then resell the rooms to consumers at higher prices, keeping the difference in profit.

If patrons book a Baltimore hotel room for $150 per night, for example, some online companies apply the 7.5 percent tax rate to the amount, then take a portion of the total as their fee. City officials say that through that accounting, companies are keeping tax receipts that should go to the city. Other companies charge estimated tax rates that shortchange the city, officials said.

"In these difficult economic times, we are asking the city workers to cut back, and we have to be innovative in how we do business," said Mayor Sheila Dixon.

About 30 other cities have filed such lawsuits, city officials said, and two other cities in Maryland are considering similar action. Sackler said that about a dozen of those claims have been thrown out by the court on procedural grounds and that several other cities have lost outright.

Two years ago, a Philadelphia court dismissed that city's lawsuit against online companies, ruling that the court is not in the business of original tax collections. Sackler said online companies have yet to lose such a lawsuit.

But Baltimore's city solicitor, George A. Nilson, said some cities have had success in such legal actions but that the field of law is "not yet mature."

Baltimore is seeking $1.5 million a year over four years - a total of $6 million - and subsequent taxes. Fourteen online companies are listed in the lawsuit, which says that more than half of the hotel bookings nationwide are made online.

Dixon said she realized that the city was owed money a couple of years ago when talking with other mayors at a conference.

"The Internet is new, and when you talk about the old system of collecting taxes, I don't think people took into consideration the various aspects of what you can do differently and make them apply to local jurisdictions," she said.

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