City wins tax battle against online hotel bookers: Your cost to go up soon

The price you pay for a hotel room using a Web-based travel booker like Orbitz, Expedia, or Priceline is one step closer to going up soon.

Now that times are lean and municipalities need tax money badly, a growing number of cities are jumping on a lawsuit bandwagon to wrest more taxes out of those online travel agencies. Basically, they want to collect taxes on the price customers pay for the hotel rooms, and not the insanely low wholesale price the travel agencies are paying.

In Anaheim, Calif, the home of Disneyland, a hearing officer just awarded the city $21.3 million in back taxes. If the decision holds in the courts, you can expect the cost of the hotel you book online to go up. And if judges in other cities agree with Anaheim, the Web sellers predict you'll be paying more nationwide.

Up to now, most of the tax battles have been in tourism areas that are almost laughably minor, like Muscogee County, Ga., (home of Columbus) and Pitt County, NC. If your hotel rates went up there, you'd barely notice. But this recent decision is the first time a major center for tourism, the almighty Disneyland, has scored a blow for tax collectors.

As you can imagine, Priceline & Co. are indignant about the Anaheim decision. They sneer at it and promise that the fight isn't over by a long shot. I asked Orbitz for a comment, and the Chicago law firm representing it sent me a letter describing it this way:

"The Anaheim Hearing Officer's decision is contradictory to decisions by actual courts in other jurisdictions. The U.S. Court of Appeals for the Fourth Circuit and four federal district courts have entered judgments in the online travel companies' favor that they are not liable for hotel occupancy taxes under very similarly worded local ordinances."

Translation: Anaheim's way out of its depth in reaching for this money, and it's going against precedents set elsewhere. And, I asked Orbitz, what happens if the the company loses all appeals?

"Any large damage award could drive hotel prices higher for online travel company customers and possibly, also have a negative impact on tourism for communities."

That's lawyerspeak for "If we lose this on appeal, you just might see your hotel prices rise on Orbitz."

Priceline's rep, Brian Ek, had something much the same to say--higher courts have already ruled in the online travel agencies' favor, so this battle isn't over by a long shot. Anaheim, he told me, is trying to collect taxes using an ordinance that has only been applied to hotels, and never to travel agencies like Priceline. I'd say that's proof, perhaps, that cities are trying to find any loophole they can that permits them to rake in more cash.

As to whether continued losses could mean consumers end up paying more when they book online hotel rooms, he agreed with the Orbitz lawyer. "It is certainly possible that customers will see hotel prices in Anaheim go up if the hearing officer's decision stands a court test. We don't think it will."

Ek may be right. Right now, these fights are localized, appearing like brush fires across the country. It would take a major federal decision to snuff out all these fires nationwide, and the web travel agencies are going to pour ungodly amounts of cash into making sure that happens.

If Anaheim thought it deserved more than $21 million, you can just imagine how much money the web sellers stand to lose if cities across the country went the same way--and you can just imagine how they'd offload that expense onto consumers. Fortunately, you can also imagine how much money those vacation dot-coms are willing to sacrifice to high-powered law firms to make sure the tax rules remain exactly as they are.
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