Cities Sue Online Firms Over Unpaid Hotel Taxes Washington, D.C., has joined dozens of other cities in going after online travel websites for what they claim are tens of millions of dollars in back taxes on hotel bookings. After years of court battles, online travel companies and cities agree that hotel laws need to be updated.
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Cities Sue Online Firms Over Unpaid Hotel Taxes

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Cities Sue Online Firms Over Unpaid Hotel Taxes

Cities Sue Online Firms Over Unpaid Hotel Taxes

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Some other news: Washington, D.C., has joined dozens of other cities that are suing online travel companies. They say they're owed tens of millions of dollars in hotel taxes.

Danielle Karson reports.

DANIELLE KARSON: Like millions of Americans, Jerome Hicks, an assistant property manager in Rockville, Maryland, makes all his hotel and plane reservations on the Internet.

Mr. JEROME HICKS (Property Manager): I get more results that way. I get more accurate availability, you know, as opposed to relying on an agent - who I got to call back; they got to call me back. No phone tag: I eliminate the middle man, and go right to what I need.

KARSON: Small wonder that online travel has grown to such a huge industry. Expedia, Priceline and Orbitz raked in more than $7 billion last year. But dozens of cities across the country say they're not getting a fair share of taxes from those 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.

Jack Evans chairs the D.C. City Council's Finance and Revenue Committee.

Mr. JACK EVANS (Chair, Finance and Revenue Committee, Washington, D.C. City Council): A number of other jurisdictions have filed lawsuits against travel companies in order to collect the tax. So we've just, essentially, joined with them to do that.

KARSON: 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: Say you book a hotel room online and pay a hundred dollars. The Internet site pays the hotel a discounted price - say, $80 - and pays taxes on the lower rate. The online travel companies pocket the difference, and call it a service fee.

Andrew Weinstein is a spokesman for the Interactive Travel Services Association, an industry trade group. He says Web-based companies are no different from human travel agents or other intermediaries.

Mr. ANDREW WEINSTEIN (Spokesman, Interactive Travel Services Association): 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. 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.

KARSON: And that's the problem for Laura Baughman. She's a lawyer with the firm Barron and 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.

Ms. LAURA BAUGHMAN (Attorney, Barron and Budd): They are providing information to the consumer about the rate they're collecting. They're performing a service the hotel usually does, and they are required to pay tax on the full amount that they've charged.

KARSON: Online travel companies and cities have been battling it out in the courts for years. The rulings have been a mixed bag. The deciding factor has often been the language of local tax laws, which leads to the one thing both sides can agree on: Most hotel tax laws were written years before the Internet, and need updating.

David Lazarus is a reporter for the Los Angeles Times, who's been following the legal battles.

Mr. DAVID LAZARUS (Reporter, Los Angeles Times): Municipalities are going to have to catch up with the fact that they're living in a digital world, and they're going to have to make their tax systems accommodate that.

KARSON: Stuck in the middle of all this are the hotels. Marlene Colucci is with the American Hotel and Lodging Association.

Ms. MARLENE COLUCCI (American Hotel and Lodging Association): Our fear is, is in these lawsuits, what happens is that the cities are going to try and 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.

KARSON: Meaning that hotels may have to cough up more taxes for the cities, many of whom are now strapped for cash. But if online companies do start having to pay out tens of millions of dollars in hotel taxes, consumer reporter Lazarus expects they would almost certainly pass along those new costs to their online customers.

Industry spokesman Weinstein put it this way: There's no free lunch.

For NPR News, I'm Danielle Karson.

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