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Federal Appeals Court Rules in Favor of Online Booking Agencies
in Kentucky Over Hotel Occupancy Tax Battle

Posted by Zach Lowe
December 22, 2009

Reprinted with Permission by The AmLaw Daily

A federal appeals court handed the online hotel booking industry another major victory today in its fight against municipalities seeking to apply local hotel occupancy taxes to the online bookers.

In a victory for Skadden, Arps, Slate, Meagher & Flom partner Darrel Hieber--one of a few lawyers who has dominated this niche of litigation--the U.S. Court of Appeals for the Sixth Circuit ruled that Kentucky tax laws do not allow the cities of Louisville and Lexington to apply hotel room taxes to and three other booker (Hieber's main client),, and, according to a copy of the ruling and this wrap-up from the Associated Press.

The Sixth Circuit joins the Fourth Circuit, which came to a similar conclusion in January, according to Hieber and this story from our colleagues at The National Law Journal, an Am Law Daily sibling publication. Dozens of similar complaints have been filed in state and federal courts across the U.S., and few--if any--have ended with a victory for municipality plaintiffs, though many are pending. Some courts have ruled--like the Sixth and Fourth circuits--that state and local laws as written don't apply to online bookers, while others have dismissed lawsuits for lack of standing and urged governments to use administrative remedies before filing lawsuits, according to Hieber and other lawyers we spoke to.

The essence of the Sixth Circuit's ruling is this: Kentucky's tax laws regarding hotel rooms apply to brick-and-mortar facilities, not Web sites that offer booking services for customers seeking to stay at those facilities. The municipalities in Kentucky (and elsewhere) have alleged that and similar sites rent rooms at bulk rates and then charge customers a higher price to stay in those rooms. The Web sites typically pay an occupancy tax based on the lower rate at which they buy the room from the hotel, not the higher rate which they charge customers. Some plaintiff cities have alleged they are losing as much as 90 cents per room, per night because of the tax loss, according to the NLJ and court records. 

The natural solution seems to be for municipalities to rewrite their laws so they apply to and other Web sites. But that can be tricky, Hieber says. New York City did exactly that earlier this year, amending hotel tax laws to apply to "third-party travel intermediaries," according to Hieber and The Wall Street Journal. The same four defendant companies in the Kentucky case fought back and filed a lawsuit in New York trial court today, alleging that the city changed its tax code without gaining the required permission of the state government, according to Hieber and the WSJ. 

Skadden and Jones Day (another regular firm on these matters) are both involved in the New York City lawsuit, according to lawyers at both firms. (McDermott Will & Emery and the Texas-based firm Kelly Hart & Hallman are other regulars.) It appears as if they all will have a lot of work in this area going forward.


The AmLaw Daily



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