NEW ORLEANS – In a class action brought by 173 Texas municipalities, a federal appellate court has ruled that the cost of occupancy tax on a hotel reservation in Texas need not be included in the fees charged by online travel companies like Expedia and Orbitz.

The Nov. 29 U.S. 5th Circuit Court of Appeals order explains that in regard to the Texas online occupancy tax on  hotel rooms, “The OTC retains its service fee as compensation for its  online services. Therefore, although the hotel determines the discounted room rate, an OTC decides the total amount the traveler pays when booking through the OTC’s website. The OTC later forwards the amount of  the discounted room rate and applicable taxes to the hotel, which remits  the taxes to the taxing authority. The OTC is the merchant of record in the transaction with the traveler.”

Because the lower court judgment was vacated, the 173 Texas cities lost the years-long court battle to collect unpaid Texas online occupancy taxes on hotel rooms booked through online travel websites.

The city of San Antonio, Texas, on behalf of itself and all other similarly situated Texas municipalities filed the class action against Hotels.com LP; Hotwire Inc.; Trip Network Inc., doing business as Cheaptickets.com; et al.

As explained in the order issued by the U.S. Fifth Circuit Court of Appeals on Nov. 29, “When a traveler chooses to book a room through an OTC [online travel company], it requests a reservation on the traveler’s behalf. If the hotel chooses not to make a reservation available, the OTC cannot make the reservation. If the hotel issues the reservation, it does so in the traveler’s name, and the OTC forwards a confirmation to the traveler.” 

In July 2011 a jury determined that “...the retail rate paid the OTC by the traveler, rather than the discounted room rate the OTC pays the hotel, is subject to the hotel occupancy tax,” according to the order. 

The cities appealed that ruling and the court battle continued. In 2013, $55,146,489 in unpaid taxes, interest and penalties were awarded to the cities. 

According to the order, the “OTCs then pursued a renewed motion for judgment as a matter of law, or alternatively, motion for new trial; the court denied both motions on 20 February 2014. Two years later, the court issued an amended final judgment of $84,123,089 to include increased penalties, as well as the taxes and interest that had accrued since the first judgment in April 2013.”

The appellate court vacated that judgment and found in favor of the travel companies, explaining that “Cities concede OTCs have been collecting taxes on the discounted room rate paid to the hotel, and the hotels have been remitting them. Because the only monetary amounts at issue in this class action are those not included in the scope of the hotel occupancy tax base, as limited by our above holding, OTCs are not liable.”  

The case was heard before judges James Dennis, Rhesa Barksdale and Edith Brown Clement.

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