May 20, 2011--The city of Duluth is suing Expedia Inc., the largest online travel company on the planet.

The beef? Uncollected sales taxes the city says it's owed for hotel and motel rooms the mammoth Internet travel broker has booked in Duluth.

"It's important that everyone who owes taxes is required to pay their fair share," said Duluth City Attorney Gunnar Johnson.

But even if the city wins, it might lose. The travel booker, along with its online counterparts, might blacklist the city as it has with others who have filed similar legal challenges.

If that happened, no one could book a room in Duluth online, and the local hotels would come out as the big loser, said Todd Torvinen, chief financial officer and president of Duluth-based ZMC Hotels.

"The bigger worry is that we'll be losing out on that larger amount," Torvinen said.

A gamble

Sometimes picking a fight with Expedia can have unintended consequences.

The city of Columbus, Ga., learned that the hard way, when a court ordered the company to pay future local lodging taxes on the full price it charged customers booking rooms in the community. That victory proved hollow, when Expedia stopped listing any hotels in the city, effectively wiping Columbus off its online map.

Local hotel managers point to that case and others like it as a reason to proceed with caution on the lawsuit.

"You do have to be careful about biting the hand that feeds you," said Karen Pionk, general manager of the Sheraton Duluth.

Lisa Augustine, general manager of the Duluth Holiday Inn, said, "Everyone involved should go into this with their eyes wide open and aware of the potential consequences."

That same fear of reprisal gave pause to John Edman, director of Explore Minnesota, when a bill to go after lodging taxes at the state level was introduced in the Minnesota Legislature last year.

"We wanted to make sure the state of Minnesota wouldn't be discriminated against by online companies," Edman said, explaining why his preference is to see the issue resolved at the federal level.

But city attorney Johnson said Duluth's approach to the case will be carefully measured.

"We value our tourism industry, and we're trying to handle this in as careful of a manner as possible. But at the same time, we don't want to reward anyone for having been a bully in the past," he said.

Sharla Gardner, president of the Duluth City Council, predicted Expedia's reputation would be tarnished if it attempts to black out Duluth hotels.

"I think that any retaliation by the industry would not be looked on favorably by the public, because we all have to pay our taxes," she said. "I don't understand why these folks think they should be exempt."

Jonathan Dettmann, the lead attorney for Expedia in its defense against Duluth, did not return calls from the Duluth News Tribune, but in an answer to the suit filed in St. Louis County District Court, he contends Expedia has fulfilled all its tax obligations by reimbursing hotel operators in Duluth.

The stakes

It's difficult to gauge how much money is at stake in this legal fight.

Johnson said the city doesn't have a guess, because it's not known how much Expedia has made doing business with local hotels and motels in recent years, information the city is seeking in its lawsuit.

But Torvinen said he believed the amount is too small compared to what could be lost if the city gets blacklisted.

He estimates that about 5 percent of the rooms booked in Duluth hotels flow through companies like Expedia, a number both Augustine and Pionk agreed is probably a good ballpark figure.

Local hotels and motels collect about $56 million annually, Torvinen said, meaning online hotel bookers represent about $2.8 million of the market.

But the money the city is losing is far lower than that.

About 80 percent of that $2.8 million goes to hotels and is taxed by the city, while the 20 percent that's not taxed -- about $560,000 -- is kept by the online bookers as part of their fees. With the city's tax rate at 6.5 percent, that would mean the city is losing out on about $36,400 a year, Torvinen said.

So is that loss worth the bother?

Gardner said she doesn't know if Torvinen's estimate is accurate and suspects more money is probably at stake. But even if it is on the mark, she said: "Whether we're talking about $40,000 or $400,000, it's going to make a difference. It could mean the difference between someone getting laid off or not."

Johnson said that Expedia could be on the hook for more than a decade of unpaid taxes. And in the future, it's likely that more local rooms will be booked online through third-party brokers, he said.

Regardless of the case's outcome, City Councilor Todd Fedora noted that the city doesn't have a lot of its own money on the line for legal costs.

The city has retained the services of a Hermantown law firm for a $5,000 retainer and the promise of a 20 percent contingency if the city wins a judgment or receives a settlement from Expedia. The $5,000 initial outlay would be deducted from any future compensation the firm receives in the case.

Duluth's chances of winning the case aren't good, at least based on past court decisions.

Of the 18 cases that have been fully heard by the courts, travel companies have prevailed entirely in 15; two decisions have been split, ceding only partial victories to government plaintiffs; and only one court handed an outright win to a plaintiff, the state of South Carolina, according to the Interactive Travel Services Association, a lobbying group that represents sites like Expedia.

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