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The Hotel Tax Collection Battle Between Municipalities and Online
 Booking Companies Wages On Across the Country in Both
 State and Federal Courts
By Robyn L. Minor, The Daily News, Bowling Green, Ky.McClatchy-Tribune Regional News

August 20, 2009 - Online hotel booking companies are seeking to dismiss a suit filed in Warren Circuit Court over local taxes collected for motel rooms.

A hearing is set in early September for the motion.

The battle between municipalities in other states and the online hoteliers wages on in both state and federal courts.

At the center of Bowling Green's case is the difference between the local sales tax that companies collect from customers and what is remitted to the city, according to Zach Kafoglis, of the Cincinnati law firm, Rendigis, Fry, Kiely and Dennis.

Using the example of a $100 motel room, Kafoglis said a person walking in off the street would be paying $4 in taxes to the city. (That doesn't include the $2 for the county's special SKyPAC tax).

Those who purchase that same $100 room online still would be paying $4 toward the city. But the online sales site would only turn in the tax on what it personally paid for the discounted room. If the site paid $70 for the room, it would turn in $2.80 and pocket the difference, Kafoglis said.

"The consumer is under the impression that they are paying that tax," he said. "But the companies are pocketing the difference.

"Estimates are that between $500,000 and $1 million would be owed to Bowling Green," Kafoglis said. "When you look at all motel rooms sold this way across the country, it becomes billions of dollars. The reservation services are fighting this like mad because it goes back as far as 10 years."

Louisville and Lexington filed a similar suit in U.S. District Court and Bowling Green had considered joining that case. But the judge dismissed it before the city could join in, saying that the online services should not be collecting the taxes because they are not a bricks and mortar establishment.

Louisville and Lexington are appealing that dismissal.

"Nationally, these cases are moving forward," he said. "There have been a few select cases dismissed, but most of the cases that have gone forward have similar (ordinances) to Bowling Green, Louisville and Lexington."

The state of Texas has a class action lawsuit filed against the sites.

According to the Texas Municipal League, in approving the status of class action, a judge in May ruled that Web-based hotel companies have been paying city hotel occupancy taxes on the "wholesale" price of rooms (the price at which the rooms are obtained from the hotel), but not paying taxes on the "retail" price of the room (the price paid by the customer). Doing so appears to be a violation of most municipal hotel occupancy tax ordinances.

In June, the Atlanta Business Journal reported the Georgia State Supreme Court ruled in favor of the city of Columbus that sued Expedia Inc., which also had only been remitting city motel taxes based on the wholesale rate it paid for rooms. Atlanta has similar lawsuits pending against 17 online travel companies, the newspaper said.

As for the companies saying they are collecting a certain tax rate and then only turning in a portion of that to municipalities, Kafoglis said he's not sure if there are any criminal implications.

Darrel Hieber, an attorney for Skadden Arps, with offices across the country, is representing entities.

"I also have been filing briefs on behalf of some of the other defendants," Hieber said.

He has been battling the lawsuits in multiple courts across the country.

"This (ordinance) is the exact language to what the Fourth Circuit Court ruled as a matter of law and dismissed the case because it said we weren't similar to hotel, motels and inns," Hieber said.

Kentucky cities ordinances are the same and the federal court in Louisville recognized that as well.

"Both courts were clear in their rulings that if the locality wants to extend its tax to online companies, the remedy is to go to the legislature and broaden the language and not go to the courts," he said. "We think if the court follows the U.S. Court of Appeals (ruling for Pitt County, N.C.) or the Western Kentucky division of U.S. District Court that it should rule in our favor."

Vicki Fitch, executive director of the Bowling Green Area Convention and Visitors Bureau, is following the case closely since her budget is derived from motel taxes.

"We are hopeful the city's lawsuit with the online hotel booking companies will result in recovering uncollected transient room taxes for Bowling Green and positively affect the outcome of other similar lawsuits around the country," Fitch said.


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