Online Travel Companies Stung for $460,000 Judgment

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By Michael J. Bologna

Oct. 21 — The nation’s largest online travel companies, including Expedia Inc., Orbitz LLC, Priceline.com Inc. and Travelocity.com LLC, will pay the village of Lombard, Ill., nearly $460,000 under a judgment resolving claims they cheated the village out of lodging taxes for more than a decade ( Vill. of Bedford Park v. Expedia Inc. , N.D. Ill., No. 13-5633, 10/19/16 ).

But the OTCs skirted liability for unpaid taxes sought by 12 other municipalities in the same action.

Judge Matthew F. Kennelly of the U.S. District Court for the Northern District of Illinois approved a stipulated final judgment Oct. 19 imposing damages on six OTC defendants. He stipulated, however, that Lombard can’t collect on the judgment until the defendants exhaust their appeal rights.

The lion’s share of the judgment will be paid by Bellevue, Wash.-based Expedia, the corporate parent to Orbitz and Travelocity, and two additional defendants: Hotels.com L.P. and Hotwire Inc. Expedia’s final bill comes to $386,000. Priceline is on the hook for $73,000.

Expedia officials told Bloomberg BNA they wouldn't comment on the judgment.

Deceptive Business Model

During the litigation, Lombard accused the OTCs of developing a deceptive business model, designed in part to withhold a portion of the taxes due under the village’s Hotel Operators’ Occupations Tax Act. The OTCs’ “merchant model” amounts to a distribution strategy that uses 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 suit 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.

The OTCs, however, lost on this question of the taxability of the markup with regard to Lombard four months ago. On June 20, Kennelly granted Lombard’s motion for summary judgment on liability.

Lombard was the sole survivor in a much larger lodging tax action involving 13 Illinois municipalities. In the same June 20 opinion and order, Kennelly dismissed demands for unpaid lodging taxes brought by Bedford Park, Warrenville, Oak Brook Terrace, Oak Lawn, Orland Hills, Willowbrook, Arlington Heights, Burr Ridge, Des Plaines, Orland Park, Tinley Park and Schaumberg.

Owners and Operators of Hotels

Kennelly’s decision analyzed the specific language in each municipality’s lodging tax ordinance against the operating model employed by the OTCs. Kennelly largely accepted the travel company’s argument that the municipalities’ ordinances didn’t apply to them because the duty to collect occupancy taxes is imposed only on owners and operators of hotels, and OTCs don’t own, operate or manage hotels.

“Although the evidence reflects that online travel companies manage the consumer’s experience with the hotel reservation and booking process and require consumers to process any changes or cancellations through them, this does not amount to operating a hotel,” Kennelly wrote in a portion of the opinion referencing Arlington Heights’ ordinance.

Kennelly added, “the evidence indisputably shows, for example, that online travel companies do not choose what amenities hotels provide; they do not employ staff to clean or service hotel rooms; and they do not provide any services to transient guests when they are staying in hotels. They cannot be said to ‘operate' hotels.”

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

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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