Feb. 23, 2012--A multimillion-dollar dispute between Portland officials and 10 online travel sites, including Orbitz and Expedia, has landed in court.

Portland officials argue that the sites are shortchanging the city on a local 11.5 percent lodging tax -- to the tune of $5 million to $8 million and counting. The city warned the travel companies in December that it was coming after them.

Then last week, the companies fired back. They hired Portland law firm Stoel Rives to ask a Multnomah County judge to order Portland to quit trying to collect.

The companies -- some of the best-known in the industry -- are Orbitz, Expedia, Hotwire, Priceline, Travelocity, TravelWeb, Hotels.com, CheapTickets.com, Lodging.com and Site59.com. Named as defendants are the city of Portland, Multnomah County and Thomas Lannom, director of the city's Revenue Bureau.

City attorney Jim Van Dyke said this week that the issue has popped up across the country, with some jurisdictions scoring wins -- and others not.

In the local case, the travel companies want a judge to declare that the taxes do not apply to their businesses because they are not hotel "operators" under city law. Similarly, they argue in their 22-page complaint that the amount companies charge "for their travel planning and facilitation services" is not "rent" as defined by city law. Attorneys for Stoel Rives did not return messages seeking comment.

The city sees the system another way. First, here's how the tax works: Portland and Multnomah County collect the 11.5 percent tax on hotel and motel stays. So if you stay in a $100-a-night room, your tax would be $11.50. Inside Portland city limits, that tax revenue is then divided among Portland, Multnomah County and other entities.

Here's where the dispute comes in. Let's say you book a room through one of the 10 websites the city has targeted. City officials allege that a website might buy the room for $80 but sell it to you for $100. The online company would collect and pay taxes on the $80 rate, which is $9.20. So instead of getting $11.50, local governments get $9.20 -- or $2.30 less.

Van Dyke argued that the tax in both cases should be based on the $100 rate.

"They are not remitting to us the proper amount of taxes," he said. "We don't think they're calculating it correctly."

City officials estimate the amount owed at $5 million to $8 million (minus 30 percent in attorney fees should they prevail), with future revenues of $750,000 to $1 million a year.

"I am informed that there are approximately 15,000 rooms for rent each night," Van Dyke wrote in a follow-up email. "Multiplied by 365 days a year you get a possible 5,475,000 rental nights per year." Even accounting for vacancies, he said, "the numbers can add up very quickly."

Portland fired the first shot, when the City Council voted in October to hire Dallas, Texas-based law firm McKool Smith to pursue collection. On Dec. 22, city officials sent letters to each company warning that they were "initiating collection actions against you for failure to properly collect and remit transient lodging taxes."

Nearly all of the city's hotel taxes are spent by the Portland City Council on core services such as police and parks. In the upcoming fiscal year, budget officials project hotel taxes of $17.4 million, or almost 5 percent of the general fund.

City attorneys have speculated that their odds of winning are "moderate to high." But if they lose, the city won't see any of the disputed revenue -- and it will owe an estimated $400,000 in legal costs.

-- Brad Schmidt

___

(c)2012 The Oregonian (Portland, Ore.)

Visit The Oregonian (Portland, Ore.) at www.oregonian.com

Distributed by MCT Information Services NASDAQ:EXPE,