Cities target travel sites for unpaid hotel taxes

updated 12:35 p.m. ET Sept. 9, 2008

ATLANTA - Online travel companies are facing a flurry of lawsuits from upset city officials who say they were bilked out of tens of millions of dollars in hotel and occupancy taxes.

One of the stiffest challenges was outlined Monday in Georgia Supreme Court. The city of Atlanta claims in a lawsuit that Travelocity, Orbitz, Expedia and 14 other online travel companies owe the city "untold" millions in unpaid taxes.

The lawsuit is among a growing number filed by officials who contend that city coffers have been shortchanged by the online travel sites. Similar challenges have also been filed in Los Angeles, Philadelphia, Miami, Chicago and the tourist town of Branson, Mo.

The lawsuits are challenging the pricing scheme used by the travel companies.

Consumers are charged a rate when they book a room, and the travel sites later reimburse the hotels at a cheaper rate, allowing them to pocket service fees. The taxes are paid on that cheaper rate — and cities say they don't collect what amounts to millions in tax revenues. The companies say the exact markup rate is confidential.

That means if a travel site buys a room from a hotel at $50 and sells it for $100, the site sends the hotel taxes for the amount it paid — not the price it charged. In Atlanta, where the hotel taxes are at 7 percent, that could translate to millions of dollars in lost revenues, city attorneys said.

"The city isn't trying to recover any money that's not theirs," said Wade Tomlinson, an Atlanta attorney.

The travel sites contend that the lawsuits are baseless and that the taxes are properly paid.

"We're not hotels. We're not hotel rooms," said Kendrick Smith, a lawyer for the online sites. "We provide a service."

The companies also argue that the cities raced to the courts after trial lawyers promised them big paydays. Lawyers for the sites said Atlanta officials should have tried to resolve the problems before suing for damages.

"The judiciary can't get involved until the executive branch does something," said Smith. "They've made no effort. None. This lawsuit came totally out of the blue."

The Georgia Supreme Court could issue its decision whether to allow the lawsuit to go forward within months. The decision would only apply to Georgia laws, but an Atlanta victory could embolden other cities to launch their own challenges.

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