Online retailers named in L.A. tax suit

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LOS ANGELES -- A hotel occupancy tax suit filed by this city against major online travel sellers could crunch their bottom lines and challenge the standard way they sell merchant inventory.

The city of Los Angeles last month sued 18 companies, including Web giants Expedia, Travelocity, Orbitz and Priceline, alleging that they fraudulently pocketed hotel occupancy taxes that they charge consumers.

The city, which seeks class-action status for the complaint, wants restitution and other relief that could mean major tax liabilities, especially if other tax authorities around the country take similar action.

Los Angeles argument is that the online sellers rent hotel rooms to consumers and act as hotel operators when they do so, collecting occupancy taxes but remitting only a portion of whats owed.

The complaint alleges that the travel sites charge and collect taxes from occupants based on the marked-up room rates, but only remit ... tax amounts based on the lower, negotiated room rates. Defendants ... then pocket the difference.

The online agencies deny that they keep any taxes that they charge consumers. They generally say that when they sell hotel rooms on a merchant basis, the taxes and fees they charge are based on the net rate; the remainder is their margin.

One of the attorneys for Los Angeles, Steven Wolens, said that argument is a bill of goods, and there is no basis for it.

Wolens said the online travel sellers collect taxes on the retail rate, noting that they admit as much in financial disclosures and that some jurisdictions, like California, require them to detail taxes as a separate line item.

The Interactive Travel Services Association (ITSA), which includes Web travel companies and GDSs, said in a statement that the suit is wrong.

The claim that ITSA members do not remit collected taxes is false, said ITSA, speaking for at least some of the defendants. The citys hotel tax does not apply to online travel companies, which are not hotel operators and do not collect rent.

ITSA charged that Los Angeles is trying to levy a new tax on Web retailers.

Web wholesalers and retailers have encountered problems with tax authorities in several jurisdictions and are negotiating with some, but the Los Angeles case is believed to be the first one to land in court.

Some jurisdictions may also resort to legislation. In Massachusetts, for example, the governors office plans a renewed push for legislation, which failed last year, that would require online travel sellers to pay an additional $10 million to $20 million annually in hotel taxes.

This challenges the opacity of the way fees are levied right now, said Henry Harteveldt, Forrester Researchs vice president of travel research, referring to the bundling of taxes and fees.

The end result, he said, may be that the intermediary will be required to list taxes as a line item and fees as another -- and that will mean that the fees will have to come down.

Online agencies are aware of the dimensions of their potential tax liabilities. InterActiveCorp, Sabre and Orbitz have reserves to deal with the problem.

To contact reporter Dennis Schaal, send e-mail to [email protected].

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