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ATLANTA � The city of Atlanta is suing 18 discount online travel companies � including Hotels.com, Expedia Inc., Orbitz and Travelocity.com � claiming that they could owe the city millions of dollars in unpaid taxes. The complaint, filed Wednesday in Fulton County Superior Court, claims that the online companies routinely charge local hotel-motel taxes to customers who reserve rooms online. But, according to the suit, the online firms pocket that money instead remitting those tax dollars to the city or county government where the hotel or motel is located. The complaint also claims that what taxes the online companies do pay when they purchase blocks of hotel rooms at steep discount prices fall far short of the amounts they really owe based on the room rates they charge their online customers. The city’s complaint mirrors potential class action litigation filed last year against the same defendants on behalf of several north Georgia municipalities. That suit is pending before U.S. District Judge Harold Murphy in Rome. Atlanta City Attorney Linda DiSantis said Wednesday that online travel companies potentially could owe the city millions of dollars in unpaid taxes. “Whether it gets to tens of millions of dollars we won’t know until we get into discovery,” she said. But recovering the unpaid taxes � which are used to support Atlanta’s tourist industry and market the city as a go-to destination � is important “because of the amount of money we think we are losing,” DiSantis said. “If you think of this industry getting a bigger market share, as we are assuming they would, we need to get the problem corrected.” Edward Kendrick Smith, a Jones Day partner in Atlanta who is defending the online firms in the federal suit in Rome, could not be reached for comment. Deborah Stone, a partner at Jones Day in Dallas, who is co-counsel with Smith in the Rome litigation, said she was unaware of the new litigation by the city of Atlanta and declined to comment on the Fulton County complaint. But in court pleadings in Rome, defense attorneys have denied that the online reservation firms � which pay hotel-motel taxes on the wholesale rates they pay to reserve blocks of rooms they then make available online � owe any additional taxes. The companies are not subject to paying the tax on room reservations they broker at the markup price because they are not, in fact, hotels, according to the pleadings. “The companies provide a nontaxable service, facilitating booking, to guests, and do not provide or furnish transient accommodations,” one defense pleading states. DiSantis said that city officials first became aware of the potential tax issue after learning that other large cities with significant tourism industries had initiated their own litigation to recoup tax dollars from the online reservation firms. Currently, there are similar suits pending in Los Angeles, Philadelphia and Chicago, in addition to the one in north Georgia. The Atlanta suit, City of Atlanta v. Hotels.com, 2006CV114732 (Fulton Sup., March 29, 2006), claims that the online companies collect sufficient taxes from their customers based on the marked-up value of the rooms they rent online. But they keep the designated tax dollars instead of forwarding them to the municipalities that levied them, the suit alleges. The online companies “retain for themselves a portion of what should be paid as tax as part of their own profit,” the suit states. In addition, the suit claims, “When defendants act as merchants renting previously purchased rooms at a markup, defendants do not remit any taxes on the markup portion of the price.” Moreover, the online companies “carefully hide their failure to remit all appropriate taxes from their own customers � when, in fact, the defendants are pocketing a significant portion of the taxes the customers have paid,” the suit claims. THE HOTEL-MOTEL STATUTE L. Lin Wood, who with Powell Goldstein partners John Bielema Jr. and Gregory Worthy are representing the city of Atlanta, explained that if an online reservation company buys a block of rooms at $50 a room and then leases those same rooms for $75 each, the online firm � in a practice common throughout the industry � pays hotel-motel taxes only on the wholesale room rate it has secured. But, Wood explained, each online firm bills each customer for taxes based on the room’s online markup price. The difference “is, in effect, pocketed by the online company, which, as a practical matter, is taking tax revenue owed to the city of Atlanta and turning it into profit for the online company,” Wood said. “That flies in the face of the fact that the [hotel-motel] statute and ordinance are designed to collect the tax on the full value paid for the room.” The city also has enlisted attorneys C. Neal Pope and Michael Lee McGlamry of the Columbus firm Pope, McGlamry, Kilpatrick, Morrison as co-counsel in the litigation. The suit also claims that the online companies, in public filings with the U.S. Securities and Exchange Commission, have acknowledged that they pay taxes only on the wholesale room rates they negotiate with the hotels. They do not pay taxes on the portion of room rental rates they retain as profit, according to the suit. According to Bielema, some of the online firms have set aside reserves of cash in the event that they are ordered by the courts to pay taxes on the markup value of the rooms they rent online. Bielema also suggested that, contrary to the online companies’ claims, they routinely perform all the functions of a hotel operator by handling online hotel marketing, advertising, reservations and sales and should be treated as such by the governmental taxing authorities. Wood said that if the city is successful in its suit, “It’s not going to impact the amount of money ultimately paid by any hotel guest who comes to visit the city. � At the end of the day, it’s simply a matter of having these online companies appropriately pay all the tax owed on the full value of the room.” CITIES AND COUNTIES SUE Atlanta is the largest Georgia municipality seeking to dun the online travel reservation companies for unpaid tax dollars. Last November, the cities of Rome, Dalton, Cartersville and Cedartown, and Fulton and Hart counties, sued the same online firms in U.S. District Court in Rome in City of Rome v. Hotels.com, 4:05-CV-249 (N.D. Ga.). “Additional cities and counties are coming on line as well,” said plaintiffs’ attorney Robert Lamar of the Atlanta firm Lamar Archer & Cofrin. Among his co-counsel in the litigation are Robert Brinson, Rome’s city attorney for 37 years and his law partner, former Georgia Supreme Court Chief Justice Norman Fletcher � both former presidents of the Municipal Attorneys Association of Georgia � and Hart County attorney Walter Gordon, former president of the state’s county attorneys association. Like the Atlanta suit, the federal litigation in Rome accuses the online discount travel firms of both underpaying local hotel-motel taxes and of misappropriating taxes they billed to online customers. But it also accuses the firms of underpaying local sales taxes that also are levied on hotel and motel rentals. Lamar said that the “brick-and-mortar” hotels from which the online companies have rented blocks of rooms at wholesale rates are watching the litigation with interest. The hotel-motel industry, he said, has become concerned that the online industry practice of not paying taxes on the reservations they make gives them an unfair competitive advantage over the hotels and motels that are paying taxes on the retail room rental price. Like the city of Atlanta, Lamar said, “We don’t know for 100 percent certain” that the online firms are billing customers for taxes based on their markup rentals. But circumstantial evidence suggests that they are, he said. If someone books a room online in Atlanta, where sales and motel taxes total 15 percent of the price of a room, the online firms generally bill 17 percent in taxes and fees, he said. But for hotels in another jurisdiction where the sales and motel taxes run 12 percent, the online fees drop to 14 percent, he said. R. Robin McDonald is a reporter with the Fulton County Daily Report, a Recorder affiliate based in Atlanta.

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