Hotel Occupancy Tax Alert: online travel company suits over ...

1 November 2009

How Expedia, Orbitz, Travelocity and other online travel companies (OTCs) create huge headaches for owners and operators on their suits over hotel occupancy taxes.

Billions of dollars of hotel rooms have been sold through the online travel companies or OTCs. Generally speaking, no transient occupancy taxes (TOT) or bed taxes, have been paid on the portion of these sales kept by the OTCs when they resell the rooms to hotel guests. The exposure on these unpaid hotel bed taxes easily exceeds $100 million -- before interest and penalties.

Until now, most of the press has focused on the lawsuits brought by more than 200 local governments against Expedia, Orbitz, Travelocity and the other third party internet hotel booking companies. As many of these lawsuits now reach final resolution, some cities have announced that if they don't win against the OTCs, they will take aggressive action to collect these lost bed taxes from the hotels themselves. And OTCs have said that if they lose, they may come back against the hotels.

What is the TOT problem all about?

On October 31, 2009, the City of San Antonio won a $20.6 million verdict against 11 online travel companies

For the past decade, hotels have used a "merchant-model" to sell unused room inventory at discounted rates to online travel companies which, in turn, mark up the cost of the rooms and resell them to individual consumers. The mark-up typically consists of items characterized by the OTC as "service fees," "taxes," and/or "tax recovery charges."

It is important to understand that the online travel company, not the hotel, enters into a contractual relationship with each paying consumer.

The issue that local governments have with the OTC scenario, is that the OTC pays bed taxes on the discounted rate purchased from hotels -- not on the rate the OTC ultimately charges the consumer for the room. Assuming a 10% TOT, a guest that pays $100 to the hotel directly, would contribute a $10 bed tax to the local government's coffers. But if the OTC buys the room at discount from the hotel for $70, then sells it to the guest for $100, the local government gets only $7.00, and the $3.00 difference is "lost". Multiply this "lost" TOT by thousands of rooms over thousands of stays -- that is what local governments are seeking to recover from the OTCS, (and some are asking for punitive damages, as well.)

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