Washington, D.C., has joined dozens of other jurisdictions across the country that are suing online travel companies for tens of millions of dollars in what they claim to be unpaid hotel taxes.
The Internet travel industry is growing fast. Expedia, Priceline and Orbitz raked in more than $7 billion last year. Revenue from hotel bookings on Orbitz alone shot up more than 10 percent to about $200 million.
Like millions of Americans, Jerome Hicks, an assistant property manager in Rockville, Md., makes all his hotel and plane reservations on the Internet.
"I get more results that way," he says. "I get more accurate availability, you know, as opposed to relying on an agent who I've got to call back. They've got to call me back. No phone tag. I eliminate the middleman and go right to what I need."
Missing Out On $10 Million A Year
But dozens of cities across the country say they're not getting a fair share of taxes from hotel bookings. In Washington, D.C., officials estimate that since 1998, the city has lost as much as $10 million a year in hotel back taxes.
"A number of other jurisdictions have filed lawsuits against the travel companies in order to collect the tax," says Jack Evans, who chairs the Washington City Council's finance and revenue committee. "So, we've just essentially joined with them to do that."
The lawsuits are all variations on the same theme: They claim that online travel sites owe tens of millions in hotel back taxes.
Here's the thinking: If someone books a hotel room online and pays $100, the Internet site pays the hotel a discounted price — perhaps $80 — and then pays taxes on that lower rate. The online travel site pockets the difference and calls it a "service" fee.
Andrew Weinstein, a spokesman for the Interactive Travel Services Association, an industry trade group, says Web-based companies are no different from human travel agents or other intermediaries.
"They don't manage any hotel rooms or inventory. An online company is charging a fee for a very different service than a hotel is," he says. "So, there's no higher tax being collected and kept by the online companies. All the money that was collected as tax on the lower rate was returned to the municipalities."
Dozens Of Cities Suing The Online Travel Industry
And that's the problem for Laura Baughman, a lawyer with the Dallas-based firm of Baron & Budd, which represents 41 cities now suing the online travel industry. She says the companies may not be putting mints on the pillows, but they do just about everything else a hotel does.
"They are providing information to the consumer about the rate they're collecting," she says. "They're performing a service the hotel usually does. And they are required to pay tax on the full amount that they've charged."
Online travel companies and cities have been battling it out in the courts for years. The rulings have been mixed. The deciding factor has often been the language of local tax laws. Both sides agree that most hotel laws were written years before the Internet and need updating.
"Municipalities are going to have to catch up with the fact that they're living in a digital world," says David Lazarus, a reporter for the Los Angeles Times who's been following the legal battles. "And they're going to have to make their tax systems accommodate that."
Hotels Are Stuck In The Middle
Stuck in the middle of all this are the hotels.
"Our fear is that in these lawsuits what happens is that the cities are going to try to collect that extra money and if they can't collect it from the online travel companies, which are not physically located in their jurisdiction, they're going to come after us," says Marlene Colucci, the executive vice president of public policy for the American Hotel and Lodging Association.
So, hotels may have to cough up more taxes for the cities, many of whom are now strapped for cash. But if online travel companies do start having to pay out tens of millions of dollars in hotel taxes, Lazarus expects they would almost certainly pass along those new costs to their online customers.
Online travel industry spokesman Weinstein put it this way: "There's no free lunch."