Expedia, Priceline and Orbitz Rejoice at Hotel Tax Rollback

Online travel agencies Priceline, Expedia, Orbitz, Hotwire, Hotels.com and Trip Network celebrated when a Los Angeles Superior Court judge overturned an earlier decision making the online companies liable for $21.3 million back hotel taxes and penalties to the city of Anaheim. (Although Anaheim is in Orange County, they moved the case to Los Angeles so it could be handled with similar cases.)

Judge Carolyn Kuhl decided to put aside last year's decision by an administrative-hearing officer which argued the online travel agencies owed the city in back hotel taxes. The case is considered to set a precedent for those cities around the country who have filed lawsuits against online travel agencies not paying their fair share of city hotel taxes.

The problem for cities occurs when online travel agencies purchase a block of rooms from a hotel, let's say at $50, and then sells them online to customers for $75. The companies only pay taxes on the wholesale rate to the city, not the rate they actually charged someone. Cities see the companies as pocketing the difference, which can be up to millions in tourist hotspots.

The companies argued they do not operate or manage hotels, so their fees cannot be considered "rent" under the tax law.

The decision will send shockwaves across the country, including doing damage to lawsuits filed by cities similarly reliant on transient occupancy tax.

I think for many cities struggling with the recession and budget shortfalls, the lawsuit wasn't a bad idea. Recouping up to $20 million in back taxes seems worth pursuing when cities are executing mass layoffs and cutting back on services. However, our laws have yet to catch up to the technology surrounding us. Until lawmakers understand the shadowy world of e-commerce a little better, they won't understand how to collect the revenue many cities and taxpayers believe is owed to them.