Who Doesn't Love a Hotel Discount? The Taxman
The online booking company Expedia displaced travel agents by packaging and selling discounted airfares and hotel rooms. According to dozens of lawsuits filed from Florida to Hawaii, Expedia also shorted local governments by paying taxes on the wholesale rates it negotiated with hotels rather than on the higher rates it charged customers.
The suits seek to claw back what amounts to a few dollars per room per night, but the numbers add up. If it loses appeals across the country, Expedia could face a tax bill of as much as $847 million, an analysis of court documents and tax revenue records shows. “Taxing is a zero-sum game,” says Owen Clements, chief of special litigation for the city of San Francisco, which was awarded $73.5 million by a city hearings examiner in a decision Expedia is appealing. “If we’re not getting tens of millions of dollars from the online travel companies, then other people will have to pay more” in taxes, he says.
Expedia’s strategy of paying taxes only on wholesale room rates has also been adopted by other booking sites. That’s suppressed state and local government receipts by as much as $396 million a year, according to a 2011 estimate by Michael Mazerov, a senior fellow at the Center for Budget and Policy Priorities, a liberal Washington think tank. Revenue for the biggest online travel sites has since grown about 70 percent. In coming weeks, Hawaii’s Supreme Court is expected to hand down a decision in the biggest pending tax case. The state has appealed one part of a lower court decision finding in favor of Expedia and its rivals including Orbitz and Priceline. The travel sites have appealed another part of that decision that found them liable for some taxes. (Travelocity, which Expedia acquired in January, is also party to the appeal.) The sites sued after the state billed them to recover what assessors claim is more than a decade’s worth of lost taxes.
In 2014, Expedia accounted for about 54 percent of U.S. hotel bookings through online travel sites, according to preliminary data from Phocuswright, a travel industry research group. Losing in Hawaii could leave the company, along with its subsidiaries, on the hook for as much as $626 million in taxes, penalties, and interest through 2015, according to data and estimates compiled by Bloomberg. Expedia’s legal reserve to cover probable losses was $60 million on Sept. 30, according to a Securities and Exchange Commission quarterly filing. The company has told investors its reserves are adequate. “We believe that the ordinances at issue do not apply to the services we provide, namely the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed,” Expedia said in its SEC filing. As a third-party booker, Expedia’s lawyers claim in court filings, the company doesn’t have to pay room taxes on the markup it charges online customers. Tarran Vaillancourt, an Expedia spokeswoman, declined to comment.
According to its SEC filing, Expedia has been the target of 88 lawsuits involving the room tax issue. It’s won dismissal in 23 cases; 35 remain active. The remainder have been settled, put on hold, referred to administrative proceedings, or otherwise resolved. Orbitz has had “considerable success in defending these cases,” Tim Enstice, a company spokesman, said by e-mail. A Priceline spokeswoman declined to comment.
In 2001 an Expedia executive wrote in an e-mail that paying taxes on wholesale rather than retail hotel rates “will add between $2-$3 million in our net profit (bottom line) next quarter,” according to a fact sheet on the litigation prepared in 2011 by the Indiana Attorney General’s office, which was sued by Orbitz and other sites after it tried to assess back taxes. The first room-tax suit on behalf of a city was filed in 2004 for Los Angeles, according to Steven Wolens, a principal at McKool Smith in Dallas who helped file the suit. Wolens says he first heard from “people who for a living read 10-Ks” that Expedia was setting aside cash in case it was sued by local governments over its tax payment practices. “It’s a neon light,” he says. “They’re saying, ‘We can be sued by jurisdictions, and we may have to pay.’ ”
A handful of lawyers around the country have since joined city and county attorneys filing dozens of similar suits. Wolens, who stands to earn a cut if his government clients win, represents cities in California and Texas, two counties in Florida, and the state of Hawaii against online travel sites.
New York, Oregon, and Washington, D.C., have in the past six years amended hotel tax regulations to clarify that travel websites owe taxes on retail room rates charged to customers. Lawyers are also watching an appeal brought by the city of San Diego against Expedia, which is now before California’s highest court; cases in Los Angeles and San Francisco have been stayed pending the outcome. Clements, San Francisco’s lawyer, says a decision in San Diego’s favor could trigger a new round of suits in the state: “It’s a fairness issue.”
The bottom line: Cities and states say Expedia and other online travel sites have shorted public coffers by underpaying hotel taxes.