Suit on Hotel Room Tax Urged

. October 14, 2008

By Dean Mosiman, The Wisconsin State Journal

Knight Ridder/Tribune Business News

MADISON CITY, WI, February 26, 2006. A Madison City Council member wants to sue online hotel booking companies for failing to pay city room taxes. But an online industry spokesman said all appropriate taxes are being paid and that cities don't understand how the service works.

Ald. Zach Brandon, 7th District, wants to join other cities, including Philadelphia and San Diego, in filing lawsuits to recover room taxes and ensure that future taxes are paid. Online companies such as Expedia, Hotels.com, Priceline, and Travelocity collect and pay taxes on bulk-rate, wholesale room rates, but not the higher rates they ultimately charge customers, Brandon said. "We all know they are not paying," he said. It's unclear how much money might be owed, Brandon said. Madison's 8 percent room tax generated $6.7 million in 2005.

Litigation could mean hundreds of millions to online companies nationally. San Diego's lawsuit, filed earlier this month, claims losses more than $30 million since 1999, the San Diego Daily Transcript reported.

A concern about online tax payments arose in Madison when an innkeeper briefly mentioned the situation in testimony about the room tax during budget deliberations before the Board of Estimates last fall, Brandon said.

Now, a new draft opinion by Madison City Attorney Michael May -- sought by Brandon -- says "the city has a strong argument that additional room taxes are owed by these providers." But May's opinion also says the outcome of litigation is difficult to predict and that "the city should examine carefully the pursuit of these additional revenues through a lawsuit."

Brandon said he intends to formally propose a resolution Monday asking the council to authorize litigation. The city could go it alone, hire outside counsel, or join with other municipalities in the state such as Milwaukee and Wisconsin Dells, he said.

Mayor Dave Cieslewicz supports getting any taxes that are owed, spokesman George Twigg said. "It's something we should try to do," Twigg said.

Madison and other cities don't have a case, Art Sackler, executive director of the Interactive Travel Services Association, said from Washington, D.C. Online companies correctly collect and pay tax for rooms, but also charge a service fee for putting customers and hoteliers together that's not subject to the room tax, Sackler said. "All the taxes that are due and owing on the hotel rooms are remitted back to Madison," he said. "The (service) charge is for the Web site and creating the marketplace. I would really request that Madison look very carefully at this and hear both sides of the story."

Some cities have had problems with litigation, Sackler said. Los Angeles had an initial case dismissed and had to refile a lawsuit, he said. Also, Bellingham, Wash., filed a lawsuit but withdrew it at the state's request. And Clark County, Nev., home to Las Vegas, reviewed legal arguments but declined to sue. No cases have been decided, Sackler said.

Brandon said cities have different local laws and circumstances, but that Madison's law shows that third-party intermediaries should be paying tax on the full amount charged for a room.

"You'll see all the big cities jumping on this," he said.

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