Reservations About Suing Online Hotel Brokers

July 21st, 2006 by Leave a Comment

By Jeff Edgens

Name an issue: From eminent domain to fast food, tobacco to Internet taxes, you can find an alliance of politicians and trial lawyers whose ultimate goal is to enrich and grow the legal/government cabal without actually having to vote to raise taxes.

To legitimize that goal, politicians cite a litany of sky-is-falling scenarios to grab more money from businesses, forcing firms to capitulate or hire an army of attorneys to defend themselves against such scurrilous attacks. 

New in politicians’ sights are Internet travel businesses. Cities across the nation have filed class action lawsuits against Orbitz.com, Expedia.com, Priceline.com, among the highest-profile Web sites, for not paying the same taxes on hotel rooms that a brick-and-mortar hotel would. 

Georgia cities such as Rome, Dalton, Cartersville and Atlanta have joined Philadelphia and Chicago in filing suit, piqued that they are apparently unconscionably being denied their “rightful” revenue from the hotel taxes these online hotel brokers collect. 

Brick-and-mortar hotels charge a rent for rooms and collect local occupancy taxes for the local tax jurisdiction. Online firms, which buy rooms from the brick-and-mortar hotel at a discount, pay the taxes on the discounted price of that purchase.

When the online broker sells the same hotel room to point-and-click bargain shoppers, the customer pays a slightly higher price (although still a discount from the walk-up rate).  The difference between the discounted rate received from the hotel and the Internet rate at which the online broker sells it is its profit. But cities are having a conniption because online brokers are not paying the occupancy tax based on the higher Internet price.

Cities have no qualms that this would, in essence, double-tax the online companies: one tax paid by the online company for the cheaper rate, and a second payment for the higher rate. Brick-and-mortar hotels are not subject to this double taxation on their room rates.

The heart of this argument, of course, is the years-long campaign by physical retailers to get Internet companies to pay sales taxes. But local municipalities fretting over the perceived loss in revenue choose to sue legitimate businesses for taxes these cities believe belong to them. That’s much like the Chicago adage, “Nice business you got there; hate to see something happen to it.”

Cities speculate they have lost millions of dollars in tax revenue from these legal enterprises. But attorneys say they don’t know how much the cities have “lost” until they go through the legal discovery process – using the force of law to open Internet companies’ books.

Law firms are using pejoratives against these point-and-click companies to imply wrongdoing. A suit filed by the city of Atlanta accuses online companies of “carefully hiding,” “retaining” or “pocketing” supposed tax money due the city.

Whether intentional or not, Atlanta’s attorney in the case revealed the agenda when she stated, “If you think of the industry getting a bigger share, as we are assuming they would, we need to get the problem corrected.”

There it is: That an industry is a success and gets a bigger share is a “problem.” These self-anointed guardians of the taxpayers’ pocketbook should give us pause. Attorneys in a civil suit get one-third of any settlement. Cities would get the rest; consumers would get higher taxes.

Hotels themselves pay occupancy taxes based on local ordinances. Online firms, on the other hand, are virtual marketing groups that provide a service to willing purchasers, making money by what they rent a room for online over the price they pay. Unfounded class action lawsuits such as these damage the fabric of entrepreneurship and threaten business expansion. This would result in higher prices, less online service, less competition and reduced choices for consumers. Government may get higher taxes but lower revenues when consumers reconsider a room as rates climb. 

The only justification for pointing this loaded gun in the face of legitimate business is because cities can. In hotel jargon, it’s checkout time for this spurious litigation.

Jeff Edgens, Ph.D., a native of Rome, is an Irwinton City Council member and adjunct scholar with the Georgia Public Policy Foundation.

The Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (July 21, 2006). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.

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