Feb. 9, 2006 - The city of Bellingham has filed a federal lawsuit against a host of Web sites that offer cheap hotel rooms, hoping every city and county in the state can recoup tax money lost to the online brokers.

However, Washington State Department of Revenue officials say the city will withdraw the lawsuit at its request over concerns the issue should be resolved administratively, not through the courts.

The lawsuit, filed in Seattle's U.S. District Court, names Web sites including Hotels.com, Priceline.com, Travelocity.com and Orbitz.com as defendants. If it's granted class-action status by the court, 176 cities and counties across the state collecting the lodging tax could join as parties to the lawsuit.

Court documents filed on behalf of the city outline how the Web sites offer customers hotel rooms at cheap prices by buying rooms in bulk. The lawsuit contends the companies pay lodging taxes at the bulk rate rather than the high retail rate their customers pay, cheating cities and counties out of money through an "illicit tax evasion scheme."

The lawsuit mirrors similar cases across the country as other counties and cities try to collect lodging taxes from online brokers.

However, it remains unclear if the city's lawsuit will be moving forward. The city may drop its lawsuit in the next few weeks, said Mike Gowrylow, a spokesman for the state Department of Revenue. He said state officials only learned of the city's lawsuit after it was filed in federal court.

"It raised a major concern for us," Gowrylow said. "We don't think federal judges should determine the applicability of state sales and hotel and motel taxes."

Dean R. Brett, a Bellingham lawyer representing the city in the lawsuit, declined to comment on Gowrylow's claim or the case Wednesday.

Currently, officials from several states are meeting to talk with online hotel brokers about how tax obligations affect their companies.

As of now, Washington state officials have yet to decide whether selling the reservation to a third party represents the actual rental of a hotel room, or if customers are paying for the service.

Even if state tax officials determine the brokers should pay more in lodging taxes, it remains unclear how the companies would know how to pay, Gowrylow said. There is no uniform tax rate across the nation for renting hotel rooms, giving companies the challenge to track rates for each city and county in the country, he said.

"It's an emerging issue," Gowrylow said. "There's some feeling this is additional tax revenue that local governments should be getting. It's premature to bring federal lawsuits to solve this issue."

Reach Jon Gambrell at [email protected] or call 715-2263.

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Copyright (c) 2006, The Bellingham Herald, Bellingham, Wash.

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