Expedia Settles Tax Dispute with Chicago

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By Michael J. Bologna

Chicago’s 12-year battle with Expedia Inc. over unpaid lodging taxes has been settled, despite an Illinois appeals court ruling that purportedly ended the multimillion dollar dispute in favor of the online travel company.

A financial report filed by Bellevue, Wash.-based Expedia indicates the parties reached a “settlement in principle” two months ago. Terms of the settlement weren’t immediately available.

Chris Bonjean, a spokesman for the Illinois Supreme Court, confirmed June 29 that a three-judge panel of the Appellate Court of Illinois signed an order to vacate its decision from April 26 and then dismissed the appeal. The order, dated May 16, responded to a joint petition from both Chicago and Expedia ( Chicago v. Expedia, Inc. , 2017 BL 140313, Ill. App. Ct., No. 1-15-3402, motion granted 5/16/17 ).

As a practical matter, the order erases perhaps the most important feature of the lengthy tax dispute—the April 26 finding that Expedia and subsidiaries aren’t liable for $29.1 million in unpaid taxes and penalties for miscalculating its obligations under the Chicago Hotel Accommodations Tax (CHAT).

A source close to the litigation told Bloomberg BNA the May 16 order treats the appeals ruling as if it never happened.

Settlement Revealed

The joint petition to vacate is likely related to the settlement in principle reached just as the appeals court was about to issue its ruling. In a recent 10-Q quarterly report filed with the Securities and Exchange Commission, Expedia disclosed it had reached a settlement with Chicago on April 25, one day before the appeals court published its decision.

Bill McCaffrey, a spokesman for Chicago’s Law Department, said the city couldn’t comment on the legal dispute. Expedia spokeswoman Victoria Cagliero didn’t respond to a request for comment.

Bloomberg BNA has filed an information demand on Chicago under the Illinois Freedom of Information Act, seeking documentation of the settlement between the city and Expedia. Chicago has reached settlements with other defendants in the case, including Orbitz Inc. and Travelocity.com Inc., which were acquired by Expedia. Chicago also reached a settlement with The Priceline Group, which operates the travel website Priceline.com.

Chicago originally filed suit against the OTC defendants in 2005, alleging violations of the CHAT. The CHAT is calculated at 4.5 percent against the gross rental or leasing charge.

Retail or Wholesale?

The city alleged the OTCs must calculate the CHAT on the higher retail rate paid by consumers for hotel rooms, rather than the discounted wholesale rate negotiated between OTCs and hotels. The OTCs have always asserted they weren’t obligated to collect Chicago’s tax on the markup—the difference between the retail rate and the wholesale rate that includes their facilitation and service fees.

Chicago won at the circuit court level on a motion for summary judgment. The court found the OTCs were “operators” under the CHAT and their fees were part of the gross rental charge, taxable under the tax ordinance. The court later stipulated damages of $29.1 million.

The appeals court stood clear of any debate over the OTCs’ role as operators under the CHAT ordinance, and focused on the nature of the facilitation and service fees received by the OTCs. The panel ultimately found the fees aren’t paid for renting or leasing a hotel room. Rather, consumers pay such fees to compensate the OTCs for “prenegotiation services.” In this context, the court said the OTCs’ fees aren’t subject to the CHAT because they aren’t linked to the applicable gross rental and leasing charge paid by consumers.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the order is at http://src.bna.com/qpF.

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