May 9, 2006 - San Antonio has become the first Texas city to take on several large, popular online hotel booking agencies in a federal lawsuit alleging that they have not fully paid hotel occupancy taxes, City Attorney Michael Bernard said Monday.

The lawsuit claims that 16 online agencies -- including Expedia.com, Hotels.com, Travelocity.com and Orbitz -- paid taxes on wholesale room rates, not the higher retail rates charged to consumers.

The practice has shorted the city about $10 million in hotel occupancy tax revenues since 1999, Bernard said.

"If we're losing millions and millions of dollars, that means the online companies are simply lining their pockets with tax dollars that have been paid by the consumer, that are due to the city of San Antonio but are not being remitted," Bernard said at a news conference.

The 16.75 percent tax imposed on each hotel and motel room is a combination of a 6 percent state tax, 1.75 percent county tax and 9 percent local tax.

The city uses its percentage to help fund arts and cultural events, pay for Convention Center projects and maintain historic landmarks. The tax provides about two-thirds of the convention and visitor facilities revenue fund.

The city is losing money because the online booking agencies are keeping some of the taxes they collect, Bernard said. For example, an agency negotiates a wholesale price of $70 per room and charges the consumer $100. It then collects the occupancy tax at the higher rate, but pays it based on the wholesale rate, keeping the difference, he said.

"The law says the room is taxed on the retail amount," Bernard said. "Taxes across the board in Texas are based on the retail amount."

He stressed that the city is not suing individual hotels, just the online booking services.

Art Sackler, executive director of the Interactive Travel Services Association, an organization that represents several Internet travel operators, said the lawsuit is based on misconceptions of what online travel companies do. They don't sell, rent, reserve blocks of or control hotel rooms, he said, but merely create a marketplace between buyers and sellers.

"The service fees in question are the companies' attempt to make money as intermediaries and not hotel operators," Sackler said, adding that he was confident that his clients would prevail in the case.

Bernard countered that the online companies, in the eyes of the state comptroller's office, are "in essence an agent of the hotel."

Other U.S. cities, including San Diego, Los Angeles, Philadelphia and Atlanta, have filed similar lawsuits. Sackler said San Antonio and the other cities will lose money if the lawsuits are successful.

"Hotels will lose bookings," he said. "With fewer rooms rented, the city gets less taxes."

By Laura E. Jesse and Melissa S. Monroe

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