Expedia Wins Lodging Tax Dispute With Illinois Towns

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By Michael J. Bologna

Online travel companies (OTCs) won a major victory against Illinois municipalities seeking millions of dollars in unpaid lodging taxes after a federal appeals court found their local ordinances impose no duty to collect and remit such taxes on the e-commerce firms.

The U.S. Court of Appeals for the Seventh Circuit Nov. 22 granted summary judgment to the travel websites operated by Expedia Inc., Priceline.com Inc., Travelocity.com LLC and Orbitz LLC in litigation with 13 Illinois municipalities ( Vill. of Bedford Park v. Expedia, Inc. , 7th Cir., Nos. 16-3932 & 16-3944, 11/22/17 ).

For more than a decade, the towns and villages have accused the OTCs, also referred to as online travel agencies (OTAs), of developing a deceptive business model designed to withhold a portion of the taxes due under each community’s lodging tax ordinance. The court examined subtle differences in each municipality’s ordinance, but ultimately found the OTCs don’t own hotels or hotel rooms and couldn’t be compelled to comply with the ordinances.

“But none of the municipal ordinances place a duty on the OTAs to collect or remit the taxes, so the municipalities have no recourse against the OTAs. The OTAs are entitled to summary judgment against all of the municipalities,” Judge Sara Darrow wrote on behalf of the three-judge panel.

The ruling was a particular blow to the Village of Lombard, Ill., which previously won a $460,000 judgment against the OTCs. The other municipalities in the litigation include Bedford Park, Warrenville, Rockford, Oak Lawn, Orland Hills, Willowbrook, Arlington Heights, Burr Ridge, Des Plaines, Orland Park, Tinley Park, and Schaumberg.

Last year, U.S. District Court Judge Matthew F. Kennelly dismissed 12 of the defendant municipalities in response to the OTCs’ motion for summary judgment. Lombard, however, was permitted to proceed and eventually extracted a $460,000 judgment. The Seventh Circuit upheld the bulk of Kennelly’s ruling, but reversed on the question of Lombard’s eligibility for purportedly unpaid lodging taxes.

Lombard village president Keith Giagnorio didn’t immediately respond to a request for comment on the court’s ruling.

Merchant Model

Stephen Shur, president of an industry trade group known as the Travel Technology Association, declined comment but noted the Seventh Circuit is continuing a pattern in which courts have held the OTCs harmless for local hotel and motel taxes.

As with hundreds of similar lawsuits across the country, the Illinois municipalities challenged the OTCs’ “merchant model”—a distribution strategy that uses their third-party websites to offer hotel rooms, instead of offering that inventory directly from a hotel or a travel agent. The hotels generally offer their inventory to the OTC merchants at a discount.

The critical issue in the litigation was whether the OTCs should remit taxes calculated against the higher retail rate paid by consumers, or the discounted wholesale rate negotiated between OTCs and hotels. OTCs have successfully argued in various courts across the country that they aren’t obligated to submit taxes to states and municipalities on the markup—the difference between the retail rate paid by consumers and the lower wholesale rate OTCs provide to hotels.

No Ownership

Evaluating the issue de novo, the Seventh Circuit noted lodging tax ordinances generally impose a duty to collect and remit taxes on owners and operators of hotels. To determine whether the OTCs could be viewed in this light, the court broke the 13 municipal ordinances into three buckets: ordinances that impose a duty to collect and remit on “owners, operators, and managers of hotels or hotel rooms”; ordinances, including Lombard’s, that apply to all persons “engaged in the business of renting hotel rooms”; and, ordinances that incorporate elements of the first two groups.

With regard to the first group, the court found the OTCs hold no tax collection duties because they don’t own hotels or hotel rooms and “do not perform the function of running a hotel.”

Similarly, the court found the OTCs had no duties under the second group of ordinances involving room rentals. Darrow said the OTCs should be held harmless because “renting implies ownership.”

“As discussed, the OTAs do not own hotels or hotel rooms and they cannot independently grant consumers access to hotel rooms,” he wrote. “Therefore, they cannot rent hotel rooms to customers.”

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

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bloombergtax.com

For More Information

Text of the opinion is at http://src.bna.com/uu2.

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