by Morton D. Rosenbaum | March 01, 2005

Los Angeles at NightThe city claims
its hotel tax coffers
have been coming
up short.

Los Angeles filed a class-action lawsuit in January against some of the biggest names in online hotel booking, alleging that the sites pocketed hotel tax money that belonged to the city.
    According to the suit, companies including Expedia,, Orbitz and Travelocity have been paying city hotels a transitory occupancy tax based on the wholesale rates at which they secure rooms, but then charging customers a tax based on the inflated retail price at which the rooms are resold. The difference, charges the suit, ends up in company coffers.
    The defendant companies, represented by the Bethesda, Md.-based Interactive Travel Services Association, claim they owe the city no tax at the point of resale, however, since they are not hotel operators themselves. “The city is trying to impose a new tax on Internet services,” challenged an official statement issued by ITSA. “Under California law, any new tax must be approved by voter referendum. This one was not.”
    Steven D. Woolens, Esq., a city attorney involved with the suit, estimated a total loss of more than $10 million in tax revenue in Los Angeles alone and called the defendants’ statement inconsistent with all precedents in tax law.
    “Under public policy, legislatures and city councils assign the duty of collecting and remitting taxes to private enterprises,” Woolens said. “That’s what the sales tax is. These are the only people I’ve seen who collect the entire tax, remit some, and keep the rest in their pockets.”
    Others consider the case far from clear-cut, however. A prominent attorney in the hospitality industry pointed to various arcane circumstances particular to the case. “For example, if Orbitz rents a room and then fails to occupy it,” the lawyer posed, on condition of anonymity, “is Orbitz then responsible for paying a tax on occupation? The questions of this case are complex.”
    While no other city has filed a similar suit against the online companies, many have been monitoring its course.
    “We’re working to educate hoteliers and our bureau peers on the importance of this issue,” said Gregory Pierce, CFO and vice president of
the Atlanta Convention & Visitors Bureau. “It will be interesting to see what happens.”