Jul. 21, 2007 - A judge has thrown out an Orange County lawsuit aimed at forcing online travel companies to pay higher hotel taxes, county officials learned Friday.

With the dismissal, Orange County becomes the latest in an increasingly long line of local governments -- including Miami-Dade, Duval and Leon counties in Florida, and Atlanta, Los Angeles and Philadelphia elsewhere -- who have so far failed to convince courts that Internet hotel-booking agencies are systematically underpaying local taxes.

Big money is at stake, particularly in Orlando, which has more hotel rooms for rent than any city in the country except Las Vegas.

Auditors have calculated that Orange County misses out on at least $5.5 million a year in hotel taxes because of online bookings. And that money comes out of a pot that local officials hope to use to pay roughly half of the estimated $1.1 billion cost of building a new arena and performing-arts center and remodeling the Florida Citrus Bowl.

Lawyers for Orange County say they expect to appeal the ruling, which was issued earlier this week.

"I think everybody feels like anything we can do to increase or protect the tourist development tax, we ought to be doing," County Attorney Tom Drage said.

The dispute involves the prices online companies use to calculate the amount they must pay in taxes.

Businesses such as Expedia, Travelocity and Hotels- .com typically negotiate bulk rates with hotels for a large number of rooms. They then turn around and offer those rooms to travelers at a higher price -- an average of 25 percent higher, according to some estimates.

The companies, however, pay taxes on only the lower rate.

Industry officials argue that the hotel taxes shouldn't apply to the higher prices that they charge consumers because that price reflects the cost of a service -- helping a customer find a cheap hotel room -- rather than the cost of the hotel room itself.

"What we're doing is providing the service of a facilitator, an intermediary, that permits you to rent your own hotel room," said Art Sackler, executive director of the Interactive Travel Services Association, a Washington-based industry trade group.

But Orange County and other local governments contend that online companies should pay taxes on the higher retail rate. After all, they say, that's the price the user of the room pays.

In its lawsuit, which specifically targets leading online travel companies Expedia and Orbitz, the county asked Circuit Court Judge Cynthia Mackinnon to step in and declare that the higher room rate is taxable.

But in a one-page ruling, Mackinnon tossed out the case, siding with lawyers for the two companies, who argued that lawsuit shouldn't be allowed to proceed because Orange County hasn't exhausted all of its options -- most notably, trying to audit the companies.

Representatives for Expedia and Orbitz declined comment. But Sackler, whose trade group represents the two companies, said of the ruling: "The courts are all saying essentially what we've been saying: that [local governments are] suing first and asking questions later."

Usher L. Brown, an attorney representing Orange, said the county opted to go straight to court to save the expense of protracted audits.

"We want to cut out the middle man," Brown said.

County officials acknowledged they were disappointed with Mackinnon's ruling. But they noted that she did not address the underlying question of whether online companies are paying enough in taxes.

"She didn't say that we weren't right," Drage said.

Jason Garcia can be reached at [email protected] or 407-420-5414.

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