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Expedia, Orbitz & Travelocity lose $20 million lawsuit to San Antonio.

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After four weeks of listening to testimony, a federal jury decided on Friday, that leading online travel companies were liable for failure to pay over $20 million in hotel occupancy taxes.

In a landmark jury trial,  the City of San Antonio and 172 Texas cities won $20.6 million verdict against 11 of the largest online travel booking companies, including Expedia,  Travelocity, Priceline & Orbitz.

San Antonio claimed that online reservations companies charged customers sales tax based on the retail rate, though only remitted taxes to the city on the negotiated wholesale price. 

The online companies had argued that they do not buy and resell rooms.   Rather, they said that they negotiate a lower price, from the hotels, based on the value of the marketplace that they create for consumers to find hotel rooms.  The markup, according to the companies, is a service fee.  If the jury had concluded that the markup was on the service and not the price of the hotel, they would have found that the companies had paid the correct amount of taxes.  This was not the case.

In closing arguments,  attorneys for San Antonio asked jurors for $40 million in punitive damages in addition to the $20 million in under paid taxes, claiming that the companies knew for several years that they owed the taxes and decided instead to pocket the money.   The jury denied the city's request for punitive damages.   The verdict, however, will substantially increase when penalties, interest and attorney's fees are added in.

In a somewhat contradictory statement,  Michael Bernard, attorney for San Antonio said, "We're not treating the online companies any worse or differently than anybody else."  "They collect the tax and that's the only thing we are seeking."

The city of San Antonio collects a 9 percent tax on hotel and motel occupancy and spends the revenue on arts and cultural events, including the Convention Center projects and renewal and maintenance of historic landmarks.      

"This entire industry has systematically withheld taxes for years, and not just in Texas," said lead trial attorney Steven Wolens, of the national law firm McKool Smith. "The business practices for which the defendants were found liable are the same actions that these companies engage in throughout the U.S."

The jury's decision hinged on the issue of whether the companies facilitating the bookings, had control over the hotel rooms. Under the ordinance, if the jury had found that the companies were not "controlling hotels" they would have had to find for the online companies.

After the trial, Bill Reid, a lawyer with Diamond McCarthy out of Austin,  said the jury's verdict, "speaks pretty clearly to the conduct of the online travel companies."  Simultaneously, Ricardo Cedillo, the lead lawyer for the online companies, stated that the companies do not agree with the verdict and will appeal.  

Expedia said in a statement that the verdict is unsupported by the facts of the case and the law.  "The verdict is contrary to the plain language of the ordinances ... online travel companies do not, in any way, control hotels and is inconsistent with the five Federal Courts ... that have already ruled in favor in similar cases."

The Expedia family of companies which include Expedia.com, Hotels.com and Hotwire.com were found responsible for approximately 70% of the award.

According to Expedia,"the plaintiffs, in this case, have received more than $75 million in tax dollars through bookings with the online travel companies since 2000."   The City of Anaheim, California won an administrative proceeding that resulted in a $21.3 million award, for back taxes, interest and penalties, against online travel companies.   

In a press release, the law firm of McKool Smith said, "The Anaheim decision is believed to be the first authoritative ruling that supports the stance of more than 40 other municipalities and governmental entities from across the nation that have filed claims seeking a larger share of hotel occupancy taxed collected by online travel companies."

Online commentators agree that the reservation companies should pay what they are "legally responsible for," though believe that these cases represent indirect tax grabs by cities facing tough economic conditions. Ultimately, though, it is the consumer who pays - as  online companies pass the increased costs, associated with the verdict, to travelers.  Many more verdicts against online travel companies are likely,  as states and municipalities with occupancy taxes follow suit.

Sources:

San Antonio Express News   

McKool Smith http://www.mckoolsmith.com/news-68.html 



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3 comments on Expedia, Orbitz & Travelocity lose $20 million lawsuit to San Antonio.

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By ParentCoach on November 01, 2009 at 01:57 am

Interesting article.   I hadn't heard about this before.   Wonder where it will lead to and how much impact it will have on the companies - if any?   Amazing what happens when we are in an economic recession.    Economic recession = government changes it's behavior in so many ways.   I highly doubt these suits would have been filed if the economy wasn't in such a poor state.   The government caused this recession by not paying enough attention to what was going on, on Wall Street and now main street has to pay.   It's a pretty sad state of affairs.

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By JJFCPA on November 01, 2009 at 01:59 pm

This is a situation that I have seen before where a consulting firm negotiated with a large travel agency that they used for employee travel to get lower rates than published ones. At the end of the year, the agency rebated the difference to the Firm. During the year, the Firm would charge the clients normal out of pocket expenses, but never shared the rebate. This too was caught.

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By Credo on March 29, 2013 at 04:44 pm

I`m in a vacuum on this one, I hadn't heard about this lawsuit before.

Great article, but I`d keep my eye on this one, because the online companies will certainly appeal the case.

Credo

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