Online travel agencies won an important court decision on Tuesday, when the U.S. Court of Appeals for the Sixth District upheld a lower court decision to dismiss lawsuits brought by two Kentucky counties seeking back taxes on hotel sales and damages from the OTAs.
The Louisville/Jefferson County Metro Government sued several OTAs, with Hotels.com as the lead defendant, in 2006. The Lexington-Fayette Urban County Government joined the action in 2008. Other defendants were Expedia, Orbitz, Priceline and Travelocity.
As with other such cases, the Kentucky counties contended that OTAs owed room taxes on the difference between the wholesale rates that OTAs pay hotels and the marked-up retail rates that OTAs charge consumers.
The U.S. District Court in Louisville granted the OTAs’ motion to dismiss the lawsuit, saying the OTAs don’t own or have physical control over the rooms that they rent.
Kentucky law permitting local authorities to impose room taxes was written before OTAs existed, and the district court commented that the state’s laws have "failed to keep up with the times."
The federal appeals court in Cincinnati upheld the district court’s decision.
"The counties’ focus on the amount paid by the ultimate customer is not conclusive ... because the tax is not assessed on the occupant of a room, but rather on the entities doing business as hotels and the like," the appeals court said.
The appeals court also noted that the U.S. Court of Appeals for the Fourth District previously reached a similar conclusion that a county ordinance in North Carolina did not apply to OTAs because OTAs do not physically provide the rooms.
In contrast, the court in Cincinnati also noted that a 2009 decision by the Georgia Supreme Court reached a different conclusion that favored the city of Columbus, Ga. That city’s tax law assesses the room tax based on "the charge to the public."
Art Sackler, executive director of the Interactive Travel Services Association, applauded Tuesday's appeals court decision.
"The court's decision validates and reinforces the prior decision by the U.S. Court of Appeals for the Fourth Circuit to dismiss similar allegations," he said.
The decision is the second at the appellate court level involving OTA tax cases. Both courts concluded that the OTAs were not liable for hotel room taxes on the grounds they do not control the rooms.
"In concluding that online travel companies do not 'control' hotel rooms, "the court also raised significant doubts about a contrary finding by a jury in a lower court in San Antonio," Sackler said.
Sackler was referring to a federal jury’s conclusion in October that OTAs exercise control over hotel rooms under the terms of San Antonio tax law, and thus are liable for San Antonio’s room taxes.
The San Antonio decision is the only case among seven federal decisions that has gone against the OTAs. The OTAs are appealing the San Antonio ruling.