Houston loses tax suit against online travel companies

By Michelle Massey | Mar 1, 2010

HOUSTON -- The city of Houston is the latest Texas city to lose its battle to collect additional hotel taxes from online booking sites like Expedia and Hotels.com.

In late January, a Texas trial court judge granted a summary judgment motion and dismissed Houston's allegations that the online travel companies were liable for the Texas hotel occupancy tax on their compensation from consumers.

Generally, online travel companies purchase unused hotel room inventory and then sell those rooms to consumers at a marked-up price. The online travel company pays the hotel occupancy tax on the discounted rate that it purchased from hotels and not on the rate charged to its consumers.

These companies, such as Expedia, Travelocity, Orbitz, Hotels.com, and Priceline, have sold billions of dollars in hotel rooms to consumers world-wide with the potential tax liability exceeding $100 million.

The companies maintain they do not control the hotels but provide a convenient means for travelers to compare and make hotel reservations through the Internet.

In 2006, the city of San Antonio and 172 other Texas municipalities filed a class action against the online booking services. After a four week trial in the Western District of Texas, in October 2009 the jury awarded $20 million to the municipalities.

However, the travel industry considered the verdict a win because the jury did not award punitive damages. The case is currently in the appeals process with the Fifth Circuit Court of Appeals.

"These claims are not based on law, but on the greed of plaintiffs' attorneys," said Andrew Weinstein, spokesperson for the Interactive Travel Services Association.

According to court documents, Houston's legal department learned of these lawsuits from attorneys "who were pitching this notion" across the country.

Against the recommendation of its controller, the city of Houston filed a similar suit against the online travel companies in 2007 in the 270th Judicial District of Houston, court papers state.

The controller sent memos to the mayor and the city council stating that the lawsuit lacked merit and suggested that if the city decided to continue with the lawsuit it should not risk attorneys' fees and proceed only on a contingency fee basis.

The lawsuit alleged that the hotel occupancy tax applies to the revenues the online travel companies earn for their services and not just the amounts that are paid to Houston's hotels.

On Jan. 19, one of Houston's trial court judges, Judge Brent Gamble, granted the defendant's motion for summary judgment, dismissing Houston's claims against the online travel companies. The motion argued that Texas' and Houston's ordinances are clear and irrefutable; the amount taxed is the amount "paid to hotels."

Regarding the Houston decision, Weinstein states, "A summary judgment of this type shows that the language of Texas law is clear on this issue: online travel companies are not hotels, and they should not be liable for hotel taxes.

"This ruling comes on the heels of a decision by the Sixth Circuit Court of Appeals to throw out similar allegations last month, making it the second appellate-level court to do so, and it continues to expand the number of judgments and courts who have similar claims. We are heartened and gratified that the court issued this summary judgment, and we look forward to working with Houston and other Texas municipalities to promote travel and tourism through cooperation, not litigation."

Last week, online travel companies saw another major development with a decision from Los Angeles Superior Court Judge Carolyn B. Kuhl who ruled that online travel companies were neither "operators" nor "managing agents" and therefore, were not required to pay the tax. Judge Kuhl's decision overturned a $21 million tax assessment by the city of Anaheim against online travel companies.

Darrel Haieber, a Skadden Arps lawyer who argued the case on behalf of the online travel companies, commented on the ruling, "The issue at the heart of the case is simple: Because online travel companies do not own, manage or operate hotels, they are not liable for hotel occupancy taxes. We are pleased the Court, after careful consideration, agreed that the plain meaning of this type of occupancy tax statute does not cover online travel companies."

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