Jun. 2, 2006 - It's become a common practice: Travelers use third-party Web sites like Travelocity.com or Expedia.com to make hotel reservations instead of contacting hotels directly. But while booking over the Internet has made it quicker and easier for customers to compare prices, states and municipalities now face the complicated question of how to collect tax on rooms rented through online travel companies. 

The city of Houston may soon join a host of other cities in the state and across the country that have sued travel Web sites over taxes they say are owed but have not been remitted -- as much as $2 million annually in Houston. After a setback in late April -- the firm chosen by the city to move ahead with the lawsuit backed out -- City Attorney Arturo Michel said he hopes to ask the City Council to approve a contract with a different law firm sometime this month. 

"We still plan on proceeding with it," Michel said. "We'll keep an open mind, but we've had a lot of good lawyers looking at it, and I'd be surprised if something happened that would change our minds." 

Earlier this month, the city awarded a contract to MBIA MuniServices Company to audit hotels around the city. The dispute revolves around whether online travel companies that buy rooms from hotels and sell them to consumers at marked-up prices are required to pay hotel-occupancy taxes on the difference in price. 

The Internet complication 

Hotels in Houston remit 17 percent in hotel-occupancy taxes (often called HOT), based on the price at which they sell rooms. Those funds help the city promote tourism and are a key source of money to pay off debt on Reliant Stadium, Toyota Center, Minute Maid Park and the Hilton Americas convention hotel. But some lawyers say the tax should be paid on the price at which the customer buys the room from the third-party Web site, not the wholesale rate paid by those companies. 

The quandary is just one example of how the Internet has complicated business. 

"Part of the problem here is that like a lot of our tax laws, the hotel tax law was created before there was an Internet," said Texas Deputy Comptroller Billy Hamilton. "So the law simply didn't contemplate it." 

Not so, said former state Rep. Steve Wolens, a lawyer who is representing several cities in lawsuits against online travel companies. He said both Texas and Houston law are very clear: Any person controlling a hotel room is required to collect and remit the tax. He said that whether the Web site operators actually own the hotel rooms is irrelevant. "They control the rooms and therefore they have to collect the tax," he said. 

Wolens, whose firm hopes to be hired to sue on behalf of the city, estimates Houston is owed about $2 million annually for the last five years. Wolens, who began pushing the issue in late 2004, has filed lawsuits on behalf of Los Angeles, San Diego and San Antonio. Philadelphia, Atlanta and Chicago also have filed suits. 

'Service fees' not taxable? 

Art Sackler, director of the Interactive Travel Services Association, which represents travel Web sites, argues they do not have to pay the tax because the price markup represents a service fee. Companies charge customers for the convenience of finding them an affordable, available hotel room, he said. "Those service fees are not -- on the law or on the facts -- subject to the tax," Sackler said. 

His industry is frustrated with the lawsuits, he said, because some were filed without any attempt to talk out the issue with travel companies. "We're extremely confident that once we would have a chance to chat with anyone who is in a position to be looking at this, we'll be able to easily demonstrate that there are no taxes due on our service fees, no taxes being collected and withheld," Sackler said.

"The city of Houston so far has been very responsible in this manner, approaching it in just the right way: having discussions with us." Houston has been considering legal action for months, but plans to sue fell through in late April when a Houston law firm the city had chosen bowed out of the project. The firm did not return calls for comment, but Michel said the move was sparked by a memo that City Controller Annise Parker issued to City Council members, expressing doubt that a lawsuit would be worth the city's time and money. "It is my belief that there is no clear, irrefutable basis for pursuing this issue further at this time," Parker wrote on April 11.

Indeed, several cities across the country that considered legal action have decided against it. But Mayor Bill White said Houston will continue to push for a lawsuit. The city plans to negotiate a contingency fee, so it will be financially responsible to a law firm only if unpaid taxes are recovered. [email protected] 

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