Online travel agencies including Expedia, Hotels.com, Orbitz, Travelocity and Priceline.com have requested that a recent Texas court decision be sealed because it discloses details about the fee structures they use to sell hotel rooms.
The OTAs earlier this month lost a $20.6 million decision over the share of transient-occupancy taxes they owe to municipalities and other local taxing authorities. In their latest petition, their lawyers argue that details contained in court documents filed in that case could trigger additional lawsuits by cash-starved cities around the U.S. looking to further benefit from what is expected to be a rebound in hotel-room demand.
“Defendants object to the disclosure of their confidential information and request that the court temporarily place the conclusions under seal,” OTA lawyers wrote in a document filed with the court on July 5.
They petitioned the court to temporarily seal such documents, including the actual decision, to give all parties a chance to be heard before the documents are made public.
“Defendants request the court adopt a similar procedure, and do so immediately as to minimize the burden on defendants in having to seek relief in various courts around the country where they expect the conclusions to be filed” as supporting evidence of other taxing authorities’ claims, they wrote.
The judge has not ruled on the request.
Both Priceline and Orbitz declined to comment on the request. Hotels.com, Expedia and Travelocity did not respond to requests for comment.
The documents were disclosed as part of a July 1 ruling in which the City of San Antonio and the class of cities it represented were awarded $20.6 million in their 5-year-old case against Hotels.com, which is an Expedia affiliate, and other online travel sellers.
In his 67-page decision, Judge Orlando Garcia included details suggesting that the OTAs were sometimes, in effect, charging consumers for the tax by imposing a surcharge, which they then kept. For example, he noted, in addition to their mark-ups, Travelocity, Hotels.com and Expedia generated a surcharge that they calculated by multiplying their mark-ups by the local tax rate.
In late 2008, Travelocity eliminated this surcharge but boosted its transaction service fee to 5.5% from 2.6% of the room rate, according to the documents.
Such disclosures are all the more relevant at a time when both OTAs and cities are looking to benefit from a combination of a travel-spending resurgence and consumers’ increasing use of the Internet for bookings. U.S. online gross hotel bookings for the leisure and unmanaged travel segment rose 8% last year, to $29.4 billion, and will surpass $35 billion next year, according to a November report by research firm PhoCusWright.
That means that with cities charging transient-occupancy taxes in the 10% range and OTA markups at about 20%, there could be $700 million a year in dispute.
Still, the OTAs’ real concern over public disclosure of the documents might be less about judicial concerns and more about competition, both within the OTA industry and with hotel suppliers, said Forrester Research principal analyst Henry Harteveldt.
In fact, Harteveldt said he was “surprised” the judge had released such fee details in the first place.
“The OTAs are concerned that this will give hotels more negotiating room with them on new contracts,” Harteveldt said. “Another layer has been peeled back from the onion.”
Such concerns are illustrated by the fact that, according to the July documents, Expedia and Hotels.com refused to do business with InterContinental Hotels Group because IHG insisted that they break out, or “unbundle,” service fees and taxes.
The petition to seal the documents, first reported by the online news service Tnooz on July 8, marks the latest salvo in a battle between OTAs and municipalities that dates back at least five years. San Antonio, which charges a 9% tax on hotel-room bookings, filed the case in May 2006 on behalf of itself and “other similarly situated Texas municipalities,” alleging that the OTAs and their affiliates failed to pay enough room-occupancy taxes to the cities. The primary defendant was Dallas-based Hotels.com.
At issue is the fact that OTAs calculate the amount of tax they owe cities as a percentage of the wholesale amount they pay the hotel for the room, not on the amount they charge consumers for the room. San Antonio, representing 172 other Texas cities, including Dallas, Houston and Austin, argued that under this model, the OTAs had failed to pay their share of occupancy taxes.
Since then, the battle has heated up. OTAs have lobbied Congress to exempt them from hotel occupancy taxes, insisting that they owe taxes only on the amount they actually paid for the room. They argue that any money they charge above and beyond that is their fee for making the sale. In the brick-and-mortar world, they argue, travel agents and other third-party intermediaries don’t pay taxes on the discounts they get from hotel companies.
Hoteliers have voiced concern that exempting the OTAs would unfairly shift a huge tax burden to them.
The San Antonio ruling contradicts several previous court decisions. In February 2010, a Los Angeles Superior Court judge dismissed a claim by Anaheim, Calif., that OTAs owed the city $21 million. The previous month, another judge ruled in the OTAs’ favor against the city of Houston’s claim that its occupancy tax should apply to markups.
The Interactive Travel Services Association, a Washington-based trade group representing the OTAs, did not respond to requests for comment last week on either the case or the request to seal the documents.
Last year, Expedia booked 79.7 million room nights worldwide, up 14% from a year earlier. Priceline.com booked 92.7 million rooms, a 52% jump over 2009. Orbitz booked about 3 million rooms, while Travelocity does not reveal its sales figures.
The fact that so much is already public knowledge about the OTAs’ business model and sales figures appears to support Harteveldt’s theory that the OTAs’ request that the documents be sealed is more about market share than about taxes. If so, that might make their petition a moot point.
“I can understand why they’d like to keep the details confidential, but I don’t see what good it’ll do going forward,” Harteveldt said. “The information is out there, and any community that decides to attack the OTAs on the subject of taxation certainly is going to use this in terms of calculating potential damages.”