Grasping cities vs. online brokers

Travel marketers already paying local tax

Monday, May 15, 2006

We never cease to marvel at the efforts that some municipal governments make to increase revenues.

For example, a number of cities have filed dubious lawsuits against online travel arrangers in order to collect additional lodging taxes. Denver is considering joining the pack, but given what we know about the allegations, we hope the city resists the temptation.

When you rent a hotel through Travelocity, Expedia, Orbitz and other Internet marketers you pay the quoted price. But the marketer makes its money by paying the hotel a lower rate and pockets the difference. It's the American way.

But on which price should the lodging tax be based: What you pay the marketer, or what the marketer pays the hotel? The marketers, of course, use the latter figure. The cities are suing to collect on the former.

The issue seems arcane, but tens of millions of dollars are said to be at stake across the country.

To be sure, in many cases you don't pay the marketer directly; you pay the hotel at checkout, including all the applicable taxes on the rate. Then the hotel pays the marketer its commission. The dispute is over the "prepaid" model, when you pay the marketer the online rate plus an item called "taxes and fees." Those two charges are deliberately not distinguished from the room rate, so the arrangement with the hotel can be kept confidential.

The marketers argue - correctly, to our way of thinking - that the city is entitled to its tax only on the amount forwarded to the hotel. After all, isn't a tax supposed to be based on what the ultimate local seller, the hotel, collects in revenue? Any remainder is the commission, or profit, of the marketer, which is usually based somewhere else.

Los Angeles, Atlanta and San Antonio are among cities going to court. A federal judge in Georgia ruled last week that a class action suit pressed by cities and counties can proceed.

The Denver city attorney's office is examining the issue, but has not yet asked the mayor or city council for permission to press a suit.

It would set a bad precedent for the city to try and collect a lodging tax not only for what the hotel gets for a room, but on the commission earned by the online broker.

We'd feel differently if cities could prove that some marketers weren't forwarding all the taxes they owe based on their actual reimbursements to hotels. But that's not what the cities are claiming.