Thursday, November 17, 2005 | The San Diego City Council will join a lawsuit that, if successful, would force Web-based travel agencies to pay hotel taxes at the room rates charged to customers, a deputy city attorney said Wednesday.
Internet travel companies such as Expedia, Travelocity and Orbitz currently pay a 10.5-percent tax on the discounted rate they pay to the hotels. The city argues that the travel firms should be applying the tax to the rates they charge their customers.
For example, if a San Diego hotel room is sold on an Internet travel site for $100, but the hotel charges the site only $80 for the room, the hotel tax is assessed on the $80.
Municipalities typically collect what’s known as a transient-occupancy tax, or T.O.T., off of hotel rates.
Deputy City Attorney Don Shanahan said that if the city wins the complaint, more than $30 million could be awarded to the city of San Diego, depending on how far back the city can claim it was not getting its fair share. The city would also make more money going forward by capturing more T.O.T. dollars in the future, Shanahan said.
For fiscal year 2006, the City Manager’s Office estimated that the city’s day-to-day budget will garner $67.3 million in T.O.T. revenue. Tourism is the third largest sector of the local economy, the San Diego Regional Chamber of Commerce’s economic research bureau reports.
A spokesman representing the Web-based travel industry said the municipalities were misconstruing their businesses’ relationships with hotels to make up for their own poor financial situations.
Travel sites do not purchase rooms wholesale from hotels before turning around and hawking them to Web customers, said Art Sackler, the executive director of the Interactive Travel Services Association. Instead, the travel sites levy a surcharge on the hotel for providing a service, meaning the increment between what the Web agency pays in T.O.T. and what the actual guest pays is not part of the hotel room’s price, he said.
At no time do agencies like Orbitz own the hotel room, Sackler said.
“It’s not a wholesale-retail situation, they’re wrong on the facts,” he said. “They are really laboring under the misunderstanding of how this merchant model works.”
Shanahan said it was apparent that city governments like San Diego were losing out on potential T.O.T. monies as more and more travelers turn to the Web to book their trips, and that the hotel-travel site relationship was the reason.
The cities better be careful what they wish for, Sackler said, because the online sites provide a valuable promotional service that fills up otherwise empty rooms. Without sites like those he represents, cities would lose hotel tax money because there wouldn’t be as many filled beds.
California Hotel & Lodging Association president Jim Abrams said that hotels do not see any of the extra money that is tacked on by Web travel sites and that raising the assessed value of the rooms, as San Diego officials want to do, was “unconstitutional.”
“That said, we are watching this case very closely,” Abrams said.
Calls placed to the Dallas-based attorney representing the city of San Diego were not returned as of press time.
San Diego will be joining the city of Los Angeles’ class action suit as a lead plaintiff, although the class has not been certified by the presiding Los Angeles Superior Court judge, Shanahan said. Also, the suit, which was originally filed against a number of defendants, has been broken up in to multiple suits so that each travel site has its own case, according to a Los Angeles City Attorney’s Office spokesman.
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