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The city of Atlanta is suing 18 discount online travel companies — including Hotels.com, Expedia Inc., Orbitz, and Travelocity.com — claiming that they owe the city millions of dollars in unpaid taxes. The complaint, filed last week 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 of 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, Ga. Atlanta City Attorney Linda DiSantis said last week 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 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 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 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. NO-TELL MOTEL L. Lin Wood, who with fellow Powell Goldstein partners John Bielema Jr. and Gregory Worthy are representing the city of Atlanta, explains 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 explains, 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 says. “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 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. Wood says 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.”
R. Robin McDonald is a reporter with the Fulton County Daily Report , an ALM publication based in Atlanta.

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