The state of Arkansas has joined the long-running lawsuit against online travel companies over the taxes paid on the price of a hotel room.
In a February filing in Jefferson County Circuit Court, the state of Arkansas said it levies a 6.5% sales tax on services that include providing rooms and other accommodations. The online travel companies, however, have “either failed to collect, or collected and failed to remit,” taxes “in connection with their services of furnishing hotel rooms,” Larry Jegley, the Sixth Judicial Circuit prosecuting attorney who is representing the state, wrote in a Feb. 14 filing. He said the OTCs owe back taxes to the state.
How much the online travel companies allegedly owe the state wasn’t calculated in the lawsuit, which was brought by Arkansas municipalities in 2009, but the sum is expected to be in the millions of dollars.
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 higher price actually paid for the room and profiting from the difference.
The dispute over the future tax payments ended last year, when the Arkansas Legislature passed a bill that made it clear that OTCs have to pay state, local and tourism taxes for booking the hotel rooms. Since Oct. 1, the OTCs have been responsible for reporting those taxes.
“This applies to all rentals the companies book in the state,” Scott Hardin, a spokesman for the Arkansas Department of Finance & Administration, said in an email to Arkansas Business.
Since Oct. 1, the OTCs have paid about $2.5 million in state, city and county sales taxes and about $500,000 in tourism tax, he said, all calculated on the price actually paid by travelers.
Little Rock attorney Thomas Thrash represents Jefferson County, the city of North Little Rock and the Pine Bluff Advertising & Promotion Commission in the lawsuit against the OTCs.
He said he expects a “big recovery” for the plaintiffs. Thrash received class-action status to represent 43 A&P commissions in the state, along with all counties and cities where hotels are located, in the suit against the OTCs.
Jefferson County Circuit Judge Robert Wyatt Jr. ruled in 2018 that the online travel companies must remit all taxes collected.
The OTC companies appealed the decision to the Arkansas Supreme Court, but the state’s high court declined to take the case because there was no final order. The appeal was dismissed in January. Associate Justice Josephine Hart said in a dissenting opinion that she would have taken the case.
It’s now up to Wyatt to make a final ruling. Thrash has asked Wyatt to award the plaintiffs damages against the OTCs for not paying the full amount of taxes “since the inception of their business model,” which dates back to 1995.
Thrash said that if Wyatt approves the request, the OTCs will have to produce documents that will determine damages. He said he believes the damages are in the millions of dollars, “but we don’t know.”
Thrash said the OTCs have until next week to file a response to his request.
Ryan Younger, an attorney at Quattlebaum Grooms & Tull of Little Rock who is representing the OTCs, declined to comment.
In 2018, the OTCs challenged Wyatt’s finding. Attorney Chad Pekron of the Quattlebaum firm 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.”
If Wyatt grants Thrash’s request, the case will move to mediation with Little Rock attorney James Tilley as the mediator.
‘A Fairness Issue’
A&P commissions rely on the tax money from hotel rooms and restaurants to promote tourism in their cities or to promote the state, said Montine McNulty of the Arkansas Hospitality Association. “That’s what makes up their budget.”
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% 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 are accused of keeping the rest, including the additional $6 that the traveler believed was tax.
Thrash had said that Wyatt’s ruling isn’t going to impact the traveler “at all.” Travelers will pay the same price as they have been paying, except now the state, cities, counties and A&P commissions will receive the taxes on the gross price rather than the net proceeds.
McNulty said the plaintiffs’ case is “a fairness issue and a level playing field issue.”
The OTCs “weren’t paying taxes that were required, and a hotel was paying taxes that were required.”
The Tax Foundation in Washington, however, sides with the OTCs. “From our point of view, what the online travel companies have done is fairly legitimate,” said Ulrik Boesen, a senior policy analyst at the Tax Foundation, which is an independent tax policy nonprofit. He was unfamiliar with the Arkansas case. “It’s normally the practice that you pay an excise tax based on the wholesale price.”
Case Goes Back to 2009
In 2009, the municipalities learned of the discrepancies in the taxes and attempted to assess the OTCs.
But the online travel companies did not provide the information, arguing they weren’t subject to the tax because they weren’t hotels, according to the filings.
Thrash filed the lawsuit in 2009.
Other municipalities in other states, however, haven’t had much legal success against the OTCs. In 2017, the U.S. Court of Appeals for the 7th Circuit ruled in favor of the OTCs in a case involving 13 municipalities in Illinois.
In the cases where the OTCs won, the statutes in those states said that only a hotel has to pay the tax. The OTCs have successfully argued that they’re aren’t a hotel. But Arkansas’ statute said a provider of accommodations or a real estate management company has to pay the tax.
The OTCs “are a modern day real estate management company,” and they’re a provider of online hotel accommodations, Thrash said.
“Our statutes are probably one of the better ones in the country,” he said.