NACO County News: Shanahan Interviewed for article on counties seek taxes from online companies

By Charles Taylor
SENIOR STAFF WRITER

Counties and cities in several states are going after companies like Orbitz, Expedia and Priceline.com to recover hotel bed taxes they claim they’re owed.

As the economy continues to stagnate, or recover slowly, many more counties may look to the online travel companies (OTC) as a source of revenue. Perhaps hundreds of millions of dollars are at stake nationwide.

Six Florida counties and several in North Carolina have filed class-action lawsuits. They allege that the OTCs are paying taxes on the discounted wholesale room rates they pay hotels and not the higher retail rates the online companies resell them for (see sidebar).

“The counties are looking to get the difference,” said Paul C. Huck Jr., a Coral Gables, Fla. lawyer who is representing Leon, Flagler, Lee, Manatee, Pinellas and Polk counties.

NACo and other national local government associations recently lobbied successfully to block an amendment to the U.S. Senate’s Travel Promotion Act of 2009 (S. 1023) that would have preempted state and local taxing authority over online travel operators.

According to a study by the Center on Budget and Policy Priorities, the proposed amendment would have cost state and local governments $680 million in annual hotel tax receipts.

Local governments watching the issue also are encouraged by the recent outcome of a class-action lawsuit filed by more than 170 cities in Texas. Earlier this month, a federal district court jury awarded the cities $20 million for OTCs’ failure to pay hotel occupancy taxes.

“You always love it then a jury gets it right,” said Kieran Shanahan, a Raleigh, N.C. attorney who represents Wake County in its suit against the OTCs in the state’s Business Court. Buncombe, Dare and Mecklenburg counties are also suing the online room brokers. The cases have been consolidated for “discovery” purposes but probably will be tried individually in their respective counties, Shanahan said.

For some counties that are heavily dependent on tourism, however, going after the OTCs could be a fool’s errand.

Earlier this month, Clark County, Nev. – the Las Vegas area – considered taking legal action against the OTCs but decided it wasn’t worth it. Commissioners were concerned that going after the OTCs could hurt the tourism-based economy. One percent of the county’s 12 percent lodging tax goes to county government, according to a Las Vegas Review-Journal report. Five percent goes to the local tourism promotion agency, 3 percent to the state, 2 percent to schools and 1 percent to transportation.

“I’m not sure it’s in our best interest right now,” Clark County Commissioner Larry Brown told the Las Vegas Sun. “Although we are looking for revenue sources in this recessionary time, I think we may be stepping over dollars to get pennies.”

The County Commission asked county staff to look into the matter and propose legislation to clarify the tax issues.

Arthur Sackler, executive director of the Online Travel Services Association, which lobbies for the OTCs, said municipalities would do well to follow the money, much of which – in some cases – is going to the lawyers.

Sackler cited the case of the city of Fairview Heights, Ill., which waged a four-year legal battle against 13 online travel companies. The case ended in a settlement in which 80 percent of the money awarded went to attorneys’ fees. Of the $315,000 settlement, $56,733.68 went to the city, according to the Madison Record newspaper.

Sackler accuses trial lawyers of lobbying municipalities to file these lawsuits with “the promise of a pot of gold at the end of a rainbow which isn’t there.”

In the Texas case, he said, the jury did not award $40 million in compensatory and punitive damages sought by the cities. Sackler added that the highest court ruling thus far – by the 4th U.S. Circuit Court of Appeals – in a case from Pitt County, N.C. found “OTCs have no role in the day-to-day operation or management of the hotels.”

In its written opinion in Pitt County v. Hotels.com, the court stated, “A business that arranges for the rental of hotel rooms over the internet, but that does not physically provide the rooms, is not a business that is of a similar type to a hotel, motel, or tourist camp.”

Despite that, Shanahan, the Raleigh lawyer, believes the counties he represents will prevail and that the Texas case will provide ammunition.

“Testimony that was given is going to be the most helpful to the other cases. The positive that I take away from that case comes from the deposition testimony of the witnesses, in addition to the favorable outcome,” he said.

“Now we have representatives [of the OTCs] under oath making binding statements that will, I think, be helpful in other cases around the country, in addition to North Carolina.”

Expedia, and its subsidiaries hotels.com and Hotwire expressed disappointment in the Texas jury’s verdict, which the companies said wrongly found that the OTCs “control hotels” and are therefore responsible for collecting hotel occupancy taxes, the company said in Form 8-K filing with the Securities and Exchange Commission, dated Oct. 30.

Sackler said the companies plan to appeal the ruling.