Hotel Booking Sites Paid $23.6M to Settle Chicago Tax Suits

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By Michael J. Bologna

Expedia Inc. and three other online travel companies paid $23.6 million to the city of Chicago under four confidential settlements, ending more than a decade of litigation focused on the e-commerce companies’ alleged failure to pay city lodging taxes.

Previously sealed documents obtained by Bloomberg BNA under a freedom of information search reveal Expedia struck an $18 million agreement with Chicago on April 25. Expedia’s subsidiaries Hotels.com LP and Hotwire Inc. also participated in the settlement.

The settlement came just one day before the Appellate Court of Illinois issued a ruling that absolved Bellevue, Wash.-based Expedia of any liabilities to the city for an alleged pattern of miscalculating tax obligations under the Chicago hotel accommodations tax (CHAT). Expedia was facing a $29.1 million bill for unpaid taxes and penalties heading into that decision ( City of Chicago v. Expedia, Inc. , Ill. App. Ct., 1st Dist., No. 1-15-3402, 4/26/17 ).

The same tax litigation triggered three previous confidential settlements, in July 2014 with other defendants, including Orbitz LLC, Priceline.com Inc., and Travelocity.com LP. Under those agreements, Orbitz paid the city $1.55 million, Priceline paid $2.6 million, and Travelocity paid $1.48 million.

Bill McCaffrey, a spokesman for Chicago’s Law Department, confirmed that all of the defendant OTCs have reached settlements with the city and now apply the 4.5 percent CHAT on the full retail room rate charged to consumers. A central question in the 12-year tax dispute involved whether the tax should be calculated against the higher retail rate paid by consumers or the discounted wholesale rate negotiated between OTCs and hotels.

Payments to Outside Counsel

McCaffrey said Chicago was represented by outside counsel throughout the litigation. Carol Gilden, a partner with Cohen Milstein Sellers & Toll PLLC, served in that capacity.

Under Chicago’s retention agreement with Cohen Milstein, the city agreed to provide a 30 percent contingent fee on any judgments or settlements reached with the defendants. On that basis, the settlements triggered payments totaling $7.08 million to Cohen Milstein.

McCaffrey issued a brief statement to Bloomberg BNA, saying Chicago was “pleased” to “favorably resolve the litigation with Expedia for a payment of $18 million to the city.” The settlement covers the period of 2005 through 2014.

Victoria Cagliero, a spokeswoman for Expedia, expressed satisfaction with the settlement even though the appeals court was prepared to waive its liabilities.

“We, like all other travel companies sued by the City of Chicago, settled with the city prior to the court of appeals deciding the case,” Cagliero said in a statement provided to Bloomberg BNA. “We are pleased with the court’s decision, which reinforces our long-standing position that, as has been the case in so many other cities, our services are not subject to hotel taxes.”

Strange Outcome

The outcome in the Chicago case may be one of the strangest from the nearly 100 lodging tax lawsuits filed against the OTCs by municipalities and states across the country.

Chicago originally filed suit in 2005, alleging the OTCs violated the CHAT. While Chicago said the OTCs must calculate the CHAT on the higher retail rate paid by consumers for hotel rooms, the OTCs asserted that 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.

Travelocity, Orbitz, and Priceline chose to settle after a June 2013 circuit court ruling that granted partial summary judgment in favor of Chicago. Expedia continued to litigate, and the court eventually stipulated damages of $29.1 million.

On appeal, the court focused on the nature of the facilitation and service fees received by the OTCs. The three-judge panel April 26 found the fees aren’t paid for renting or leasing a hotel room. Rather, the court said consumers pay such fees to compensate the OTCs for “prenegotiation services"—the OTCs’ markup fees aren’t subject to the CHAT because they aren’t part of the applicable gross rental and leasing charge paid by consumers.

Unbeknownst to the court, Chicago and Expedia settled the case the day before its decision was published. Less than two hours before publication, the parties filed a joint emergency motion to dismiss in light of the settlement. Two weeks later, Chicago and Expedia filed a motion to vacate the decision as mooted by the settlement.

‘It Never Happened’

The effort to vacate the ruling triggered a new drama, with Priceline returning after a hiatus of nearly three years. On May 11, Priceline sought to intervene, arguing the court’s ruling should be retained as a matter of tax law. Counsel for Priceline reasoned the decision had implications for the other defendants in the case.

“Thus, if the court’s April 26, 2017 decision holding that the CHAT does not apply to OTCs becomes final and non-appealable, then Priceline will be entitled to a refund of taxes paid, and its obligations to pay CHAT on a go-forward basis will cease,” the company wrote in its petition for intervention.

Moreover, Priceline argued the court’s opinion provided guidance to all Illinois municipalities regarding their lodging tax ordinances. The company emphasized that “such guidance is essential to prevent overreach by the city and other localities that will inevitably lead to future administrative and judicial proceedings at great expense to the public.”

The appeals court quickly denied Priceline’s petition. On May 16, the court dismissed Expedia’s appeal and vacated its April 26 decision. The opinion was removed from the docket. An attorney close to the litigation said the order treats the appeals ruling as if it never happened.

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

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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