Arkansas municipalities recently won a rare legal victory against online travel companies over the taxes paid on the price of a hotel room.
For years, OTCs such as Hotels.com, Hotwire, Expedia and Travelocity allegedly shorted tax revenue to Arkansas counties, cities and advertising and promotion commissions because they remitted taxes based on the room price they negotiated with hotels. Meanwhile, they were collecting taxes from customers based on the price actually paid for the room and pocketing the difference.
Jefferson County Circuit Judge Robert Wyatt Jr. ruled Feb. 1 that the online travel companies must remit all taxes collected.
Thomas Thrash of Little Rock, an attorney who represented Jefferson County, the city of North Little Rock and the Pine Bluff Advertising & Promotion Commission in a long-running lawsuit against the OTCs, also received class-action status to represent 43 A&P commissions in the state along with all counties and cities where hotels are located.
Trash told Arkansas Business he will start working on getting information from the OTCs to determine how much tax money is owed.
“They have refused to provide any of the assessment or any of their data so that the government entities … could calculate what’s owed,” Thrash said.
Wyatt’s ruling came months after the OTCs prevailed in similar lawsuits filed in federal courts in Illinois and Texas and is expected to be appealed. Wyatt has notified attorneys that “because of the complexity of this case” he would appoint a mediator to determine damages.
Within days of Wyatt’s letter, an attorney for the OTCs challenged Wyatt’s findings. Attorney Chad Pekron of Quattlebaum Grooms & Tull of Little Rock reminded Wyatt in a letter that the plaintiffs were seeking only a declaratory judgment, meaning they just wanted the judge to say that the OTCs were in violation of the tax ordinances with the failure to remit considered a debt owed to the government agencies. Pekron wrote that “damages are not part of the case.”
Pekron declined to make any additional comment.
Tax Shortchange Alleged
At first, Arkansas cities, counties and A&P commissions may not have noticed that they weren’t receiving the full amount of taxes for the rooms booked online, Thrash said.
The OTCs have contracts with hotels to secure rooms at a discounted rate. The OTCs then market those rooms to travelers.
For example, if a traveler booked a $100 hotel room in a county that had a 12 percent tax rate, the OTC would collect $112 from the traveler, Thrash said. But the OTC might have paid only half as much for the room and, in that case, would send the hotel $56 — 50 for the room and $6 for the taxes, he said.
The OTC allegedly would keep the rest of the money, including the additional $6 that the traveler believed was tax.
In 2009, the municipalities learned of the discrepancies and attempted to assess the OTCs. “The online travel companies just refused to provide the information,” arguing they weren’t subject to the tax, Thrash said.
Thrash filed the lawsuit in 2009.
Other municipalities in other states haven’t had much legal success against the OTCs.
In November, the U.S. Court of Appeals for the 7th Circuit ruled in favor of the OTCs in a case involving 13 municipalities in Illinois. And the city of San Antonio had its $84 million class-action judgment against the OTCs thrown out by the 5th U.S. Circuit Court of Appeals.
The other municipalities typically lost their cases against the OTCs because they brought the claim for the hotel tax, said Joseph Bishop-Henchman, executive vice president of the Tax Foundation in Washington. The Tax Foundation is an independent tax policy nonprofit, and Bishop-Henchman reviewed some of the filings in the case for Arkansas Business.
The tax authorities claimed that their municipalities’ hotel tax statutes, which often were written decades ago, apply to the OTCs, “which weren’t even conceived of back then,” Henchman said.
Trash said Arkansas’ ordinances more clearly stated that they applied to the OTCs.
The ruling “is not going to impact the traveler at all,” Thrash said. “The traveler is going to pay the exact same price they’ve been paying. It’s just that the cities and counties and the A&Ps are going to get tax on the gross proceeds of the sale, instead of the net proceeds.”