January 24, 2010--Houston this week lost its bid to collect millions of dollars in hotel occupancy taxes from online travel sites.

Houston, like other cities around the country, sued Expedia, Priceline.com, Orbitz, Travelocity and other online booking companies, saying the city wasn't getting the full amount of taxes for each Houston hotel room booked.

Houston alleged that the companies violated its hotel occupancy tax ordinance and sought millions of dollars. The city argued that online bookers should pay taxes on what the customer paid.

But the online services argued that taxes should only be paid on their wholesale cost for the hotel room and the city had no right to tax the online service fees or the room markup.

Harris County Civil District Judge Brent Gamble this week tossed the case out of court based on arguments from the online services that include that they aren't hotels and their fees should not be subject to hotel taxes.

Hotels in Houston charge a 17 percent tax on rooms, with 7 percent of that going into municipal coffers. It uses that money to promote tourism and pay off debt for Reliant Stadium, Toyota Center, Minute Maid Park and the Hilton Americas hotel.

In 2007, the year Houston filed this suit, the city collected more than $57 million in hotel occupancy taxes.

City Attorney Arturo Michel said he will recommend that the city ask for a new trial and appeal the decision if that fails. He said no precise amount of tax loss was calculated, but it was in the millions, possibly more than $10 million for several years.

"This is an issue about how our ordinance reads. It's the actual cost paid for the room that matters," said Michel

Not the first such case

Jim Karen, a Dallas-based lawyer for Expedia, Hotels.com and Hotwire, said the Houston case is one of many filed around the country. He said courts have decided the issues in different ways, sometimes based on the different wording in tax ordinances and sometimes based on how the judges viewed the facts.

Karen said travel agencies and tour companies have provided these same kinds of services for years without being taxed.

"The cities' attitude is to take an ordinance that predated the online world and apply it to an online business. It doesn't fit," Karen said.

A class-action case in federal court in San Antonio deals with this same issue on behalf of more than 150 local Texas towns. A jury has found in part for the cities, but the federal judge there has several legal rulings to issue that could alter that case.

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