The army of lawyers that the online travel industry has dispatched for a nationwide fight against paying municipal hotel occupancy taxes can cross Tennessee off their list of states to worry about.
A Nashville federal district court judge ruled on Tuesday against a class of Tennessee cities suing Priceline, Travelocity, Expedia, and Orbitz for unpaid hotel taxes. Judge Aleta Trauger concluded on summary judgment that the state’s governing statute imposed taxes on a hotel’s operator, which she determined did not include the online booking companies.
“It adopts the points we have consistently made about how we do business and aren’t subject to the taxes at issue,” said James Karen of Jones Day, counsel to Hotels.com. Orbitz counsel Jeffrey Rossman of McDermott, Will & Emery, added that in recent decisions involving the hotel occupancy tax, “The courts are overwhelmingly finding in favor of the online travel companies.”
Trauger’s decision in the Tennessee case marks a notable development in what has become a widespread campaign by municipalities (and the various plaintiffs’ firms representing them) to extend their pre-Internet occupancy tax statutes to the online outfits. The suits claim that the Internet companies underpay on occupancy taxes by paying them on wholesale room rates, rather than what customers are charged when they book through their Web sites. The Web companies have fought hard in both courts and legislatures to avoid paying higher taxes. To date, only Minnesota, New York, South Carolina, and Washington, D.C., have passed laws or won suits that require the companies to collect and remit taxes on the basis of what customers are charged, according to Joe Rubin, president of the trade group Interactive Travel Services Association (ITSA).
Trauger’s decision on Tuesday also marked a reversal of sorts for her. When considering a motion to dismiss in March 2009, she determined that assuming the complaint was accurate, the companies could be considered operators. Cities and towns in other states cited that decision widely in their own lawsuits, according to McDermott’s Rossman.
But since then, other courts have ruled on the issue and come to a different conclusion when interpreting similar statutes. For example, the U.S. Court of Appeals for the Sixth Circuit (which oversees the Tennessee courts) ruled in December 2009 in the companies’ favor with regards to a local hotel tax in Kentucky.
Those rulings were not binding since they involved other states laws. But Judge Trauger said that decisions by the Sixth Circuit and two other courts “certainly call into question the persuasive weight that this court previously assigned” to a series of other decisions that had favored municipalities at the time of her prior ruling. And even without those new decisions, the Tennessee cities had failed on summary judgment to prove that the companies could be considered hotel operators under the state law.
Andrew Volk of Hagens Berman Sobol Shapiro, one of the lawyers for the Tennessee cities, did not respond to requests for comment.
ITSA, the online travel companies’ trade group, hailed the Tennessee decision as the latest in a string of victories in favor of the industry. On Feb. 15, the Kentucky Supreme Court declined to review a decision by a state appellate court finding for the industry. The Pennsylvania Commonwealth Court separately ruled on Feb. 2 that Expedia did not have to pay Philadelphia’s hotel tax on the fees it charges users.
Not every case is a win. The Web companies are awaiting judgment to be entered in a class action of Texas municipalities whose lawyers at McKool Smith secured a $20 million jury verdict in 2009. In the inevitable appeal, the industry will no doubt point to a Texas state appellate court ruling in October that held that the City of Houston, which opted out of the class that went to trial, could not collect taxes from the companies. “We’re cautiously optimistic things will go well in the Fifth Circuit,” said Jones Day’s Karen.
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