by Jonathan Vatner | September 01, 2005

Romulo L. Diaz Jr.

Romulo L. Diaz Jr.

In July, just months after the City of Los Angeles filed a lawsuit against 17 online travel-services companies including Expedia, Hotels.com, Orbitz and Travelocity for missing hotel-tax revenue, Philadelphia filed a similar complaint. What bodes even worse for the travel companies: This might be just the beginning.
    Both cities claim the online travel companies remit occupancy taxes based on the wholesale rate of the room but charge consumers a significantly higher price; city officials feel their municipalities should be receiving revenue based on the higher rate.
    Michael Fantini, a partner at the Philadelphia law firm of Berger & Montague and one of two lawyers representing the city, said according to the city’s code, occupancy tax is charged on all “consideration” a person receives for renting a hotel room, including any service fees charged.
    Arguing the other side, Art Sackler, executive director of the Bethesda, Md.-based Interactive Travel Services Association and spokesperson for the online companies, claimed the services do not actually sell rooms; they simply act as a marketplace and charge a fee for that service, which should not be taxed.
    “They are providing a [shopping opportunity] with an awful lot of choice, functionality, convenience and price,” said Sackler. “The travel companies do not buy, rent, hold, control, sell or resell hotel rooms in any way.”
Romulo L. Diaz Jr., Philadelphia’s city solicitor, also is concerned with opening the public’s eyes to the online companies’ practice of tacking on a fee without informing customers.
    “I think most consumers would like to know what the hotel room cost is and how much of a fee goes to the online travel agent,” said Diaz. “If they made that information available to the public, we would not have a problem.”
    According to Diaz, the lawsuits in Los Angeles and Philadelphia are just the tip of the iceberg. As soon as Philadelphia’s lawsuit hit the press, he began fielding calls from many municipalities considering similar actions.
    The online companies have been aware of a storm brewing for some time. In financial reports filed with the Securities and Exchange Commission last year, some noted they had set aside funds to pay these taxes, in case the suits were decided against them. For instance, Hotels.com’s filing stated profits had declined in part as a result of “a provision for potential occupancy tax liability this year.”