Cities Sue Online Travel Companies for Hotel Taxes

(MoneyWatch)  The City of Atlanta is suing Travelocity, Orbitz, Expedia and 14 other online travel companies in Georgia Supreme Court for millions of dollars in unpaid hotel taxes. And the lawsuit is growing in popularity. Several officials contend that city coffers were raided by the online travel sites and filed similar cases in Los Angeles, Philadelphia, Miami and Chicago.

According to court filings, the online companies contract with hotels and motels for a number of rooms at a negotiated wholesale rate. The online companies then determine their profit margin and set the retail rate the consumer will pay. After booking a room, the companies then return the wholesale rate, plus the estimated tax on that rate, to the hotel. Meaning if they buy a $100 room for $50, but charge $80 to consumers they still only pay tax on the $50.

No hotel and occupancy tax is being paid on the difference between the wholesale rate and the retail rate, Bill Norwood, a lawyer for the city, told the Atlanta Journal-Constitution. But Kendrick Smith, a lawyer for the online companies, said that because the Internet-based firms do not buy or rent hotel rooms, they are not subject to the tax. "We're not hotels," he said. "We can't collect taxes."

A decision is expected in the next few months and while it would only affect Georgia directly, it could create a legal precedent and spur other cities to file suit.

Is this a sticky ethical situation or just a case of cities looking for any avenue to make up money in a recession? You can't blame cities for trying, but it's unclear how the legal cases are going to end. And at the end, how much will the lawyers get?