Online travel agencies are closely watching two California court cases that will determine if they have to shell out millions of dollars to satisfy hotel-tax judgments before they can appeal the assessments.
Courts have handed down conflicting decisions in recent months, primarily because some California jurisdictions have requirements known as "pay to play" or "pay first," while others do not.
On June 16, a Los Angeles Superior Court judge ruled that Expedia.com and Hotwire had to pay $35.6 million to the city of San Francisco in hotel occupancy taxes before the two Expedia Inc. companies could appeal the city's assessment.
San Francisco's chief tax counsel, Julie van Nostern, said the assessments covered the period from Q1 2000 to Q3 2008. On July 1, Expedia filed a notice that it would appeal the pay-first requirement. Van Nostern said the city would not take collection action until the appeal was decided.
Pay-first rules are an important tactical issue. If they are upheld, defendants, especially Expedia with its huge hotel business, will have to shell out substantial sums before they can appeal hotel-tax assessments.
Earlier, a Superior Court in nearby Anaheim ruled the other way. On March 30, Orange County Superior Court Judge Gail Andler ruled that online agencies could appeal the city of Anaheim's $21.3 million tax assessment without paying the tax first.
The judge did not detail her reasoning. However, one difference between the two cases is that Anaheim made a constitutional argument, while San Francisco's pay-first requirement is written into its tax code.
The two California decisions came as states, counties and municipalities across the country have been leveling assessments on major online agencies in administrative proceedings or filing suit arguing that the online agencies shortchange local governments when they remit taxes based on net rates instead of the retail rates they charge consumers for hotel rooms.
Expedia.com and Hotwire are among the online agencies that argue that they properly remit taxes on the lower net rates they get from hotels and are not liable for taxes on the higher retail rates because they merely facilitate the transaction for hotels, don't control inventory and are not hotel operators.
In Georgia, the online agencies have changed their business model as a result of hotel-tax rulings.
Even before the Georgia Supreme Court ruled 4-3 on June 15 that Expedia would be required "henceforth" to begin paying the city of Columbus, Ga.'s 7% tax on the retail rate of hotel rooms, Expedia and other online agencies ceased marketing the city's hotel rooms on a merchant basis.
The San Francisco case is not as far along in the litigation process as the Columbus case, and Expedia and Hotwire continue to use the merchant model in the much larger San Francisco hotel market.
Meanwhile, the online agencies face new challenges in New York and Canada.
New York adopted a new hotel-occupancy tax ordinance requiring that "room remarketers" remit taxes to hotels based on the net rate, just as they currently do, then pay the city directly an additional tax on their service fees or margins.
The ordinance was designed to negate the online agencies' argument that they should not be assessed taxes on the retail rate because they are not hotel operators.
In the huge New York hotel market, the new law defines room remarketer as "any person, excluding the operator, having any right, access, ability or authority, through an Internet transaction or any other means whatsoever, to offer, reserve, book, arrange for, remarket, distribute, broker, resell or facilitate the transfer of rooms the occupancy of which is subject to tax under this chapter."
In Canada, a consumer complaint, which seeks class-action status, was filed against Expedia Canada in the Ontario Superior Court of Justice seeking $47.5 million [$55 million in Canadian dollars] in general and punitive damages.
The complaint, which is thought to be among the first such suits against an online agency outside the U.S., alleges that Expedia.ca violated Canada's Competition Act and Consumer Protection Act and used deception to disguise the true nature of its taxes and service fees, concealed the amount of tax it remits to hotels and failed to disclose that its service fees do not just cover costs but include profits as well.