February 10, 2006 - Saying that travel Web sites aren't paying what they owe in hotel occupancy taxes in San Diego, the City Attorney's Office yesterday filed a lawsuit in Superior Court seeking more than $30 million from the sites.

The suit claims that more than a dozen Internet companies, including Travelocity.com, Priceline.com and Hotels.com, for the past five years have collected room taxes from customers based on �retail� rates, while paying the city a tax amount based on a lower, �wholesale� rate.

City Attorney Michael Aguirre said the city is losing about $6 million a year because of the companies' practices. The city collects $120 million annually from transient occupancy taxes.

For help in the case, the city has hired law firms in Beverly Hills and Dallas, which are working on a contingency that would give them 30 percent of what the city may collect. Both firms are involved in a similar lawsuit filed on behalf of Los Angeles.

Other suits have been filed in Chicago, Philadelphia and Bellingham, Wash.

This is how the cities contend that the Web-based hotel booking companies work: In San Diego, where the room tax rate is 10.5 percent, a customer finds a room discounted to $100 and pays $10.50 in room taxes on it. However, the city receives only $7.50 in room taxes, based on a negotiated bulk-rate price of $75 for the room.

�They collect on retail, they pay on wholesale, keeping the difference for themselves,� said Beverly Hills attorney Paul Kiesel.

An industry trade group disagreed.

�The suit is based on a misconception,� said Art Sackler, executive director of the Interactive Travel Services Association, whose members are targeted in the San Diego suit.

�The online travel companies don't buy, rent or otherwise sell or resell the hotel rooms,� Sackler said.

�What happens is, the hotel and the online travel company negotiate a rate for a hotel room. The hotel is setting the rate through this negotiation. The hotel also tells the online travel companies what taxes to collect,� he said. �The tax is collected on the room charge. Then there is a service fee that the online travel companies charge. And here's where the misconception comes in.�

In Las Vegas last month, Clark County officials decided not to pursue a similar lawsuit because they didn't think they could win a court battle.

According to a story in the Las Vegas Sun, the Nevada Taxation Department determined that fees charged by travel Web sites were not subject to room occupancy taxes.

Kiesel said the booking companies have acknowledged in filings with the Securities and Exchange Commission that �they're collecting taxes in such a way that some jurisdictions are disputing the way the taxes are being collected.�

�They identified the problem themselves and yet they continue to engage in that practice,� he said.

Staff writer Matthew T. Hall contributed to this report.

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