Who Doesn't Love a Hotel Discount? The Taxman
Expedia could owe $847 million in unpaid hotel taxes
by Neil A Weinberg and Patrick G Lee, Bloomberg, February 5, 2015 (excerpts)
The online booking company Expedia displaced travel agents by packaging and selling discounted airfares and hotel rooms. According to dozens of lawsuits filed from Florida to Hawaii, Expedia also shorted local governments by paying taxes on the wholesale rates it negotiated with hotels rather than on the higher rates it charged customers....
Expedia’s strategy of paying taxes only on wholesale room rates has also been adopted by other booking sites. That’s suppressed state and local government receipts by as much as $396 million a year, according to a 2011 estimate by Michael Mazerov, a senior fellow at the Center for Budget and Policy Priorities, a liberal Washington think tank. Revenue for the biggest online travel sites has since grown about 70 percent. In coming weeks, Hawaii’s Supreme Court is expected to hand down a decision in the biggest pending tax case. The state has appealed one part of a lower court decision finding in favor of Expedia and its rivals including Orbitz and Priceline. The travel sites have appealed another part of that decision that found them liable for some taxes. (Travelocity, which Expedia acquired in January, is also party to the appeal.) The sites sued after the state billed them to recover what assessors claim is more than a decade’s worth of lost taxes.
In 2014, Expedia accounted for about 54 percent of U.S. hotel bookings through online travel sites, according to preliminary data from Phocuswright, a travel industry research group. Losing in Hawaii could leave the company, along with its subsidiaries, on the hook for as much as $626 million in taxes, penalties, and interest through 2015, according to data and estimates compiled by Bloomberg. Expedia’s legal reserve to cover probable losses was $60 million on Sept. 30, according to a Securities and Exchange Commission quarterly filing. The company has told investors its reserves are adequate. “We believe that the ordinances at issue do not apply to the services we provide, namely the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed,” Expedia said in its SEC filing. As a third-party booker, Expedia’s lawyers claim in court filings, the company doesn’t have to pay room taxes on the markup it charges online customers. Tarran Vaillancourt, an Expedia spokeswoman, declined to comment....
In 2001 an Expedia executive wrote in an e-mail that paying taxes on wholesale rather than retail hotel rates “will add between $2-$3 million in our net profit (bottom line) next quarter,” according to a fact sheet on the litigation prepared in 2011 by the Indiana Attorney General’s office, which was sued by Orbitz and other sites after it tried to assess back taxes. The first room-tax suit on behalf of a city was filed in 2004 for Los Angeles, according to Steven Wolens, a principal at McKool Smith in Dallas who helped file the suit. Wolens says he first heard from “people who for a living read 10-Ks” that Expedia was setting aside cash in case it was sued by local governments over its tax payment practices. “It’s a neon light,” he says. “They’re saying, ‘We can be sued by jurisdictions, and we may have to pay.’ ”
A handful of lawyers around the country have since joined city and county attorneys filing dozens of similar suits. Wolens, who stands to earn a cut if his government clients win, represents cities in California and Texas, two counties in Florida, and the state of Hawaii against online travel sites.
New York, Oregon, and Washington, D.C., have in the past six years amended hotel tax regulations to clarify that travel websites owe taxes on retail room rates charged to customers....
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