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Expedia Wins Local Hotel Booking Tax Dispute, Again

By George Khoury, Esq. | Last updated on

Expedia, and other online travel agencies, won a major victory in the fight over local hotel taxation. Thirteen cities in the state of Illinois filed a lawsuit attempting to hold the online booking sites liable for failing to withhold local hotel taxes. After the district court dismissed the cities' claims, an appeal was made to the Seventh Circuit.

Essentially, cities were trying to get the tax revenue on the difference between the actual booking price of a hotel room online and the price the hotels charge to those online travel agencies making the bookings, like Expedia, Orbitz and others. Unfortunately for the cities involved, both the district and appellate courts found that the hotel tax laws do not apply to the online travel/booking services.

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If all this talk of reservations and taxes just leads to confusion, you're in luck because the court broke it down using rather simple, even numbers.

To illustrate, assume a 5 percent tax. If a customer books a room directly with a hotel for $100 a night, the hotel collects $5 for taxes and remits that to the municipality. But if a customer books a room through an OTA [Online Travel Agency] for $100 and the hotel's room rental rate is only $60, the OTA pays the hotel $63 and the hotel remits $3 to the municipality.

In the court's example and in real life (at least in Illinois), the OTA gets to keep the difference as compensation for its marketing and reservation services.

For the booking sites, as the court explained, the action of taking a reservation does not equate to the renting of a hotel room. In fact, when booking online, you're paying for the service in addition to the room and the tax. Hotels usually are willing to offer online booking services reduced rates because these services do quite a bit of marketing as well as handle quite a bit of the logistics of taking, changing, and charging for cancelled, reservations.

Tough Legislation

The court has basically left the Illinois municipalities with three options:

  1. Accept defeat
  2. Appeal again
  3. Demand better legislation

As noted in the decision, the problem is legislative. The specific language of the local hotel tax ordinances, according to the court, cannot be extended to the OTAs. However, the desired end result could be easily fixed by the legislatures changing the law to require the tax be paid on the total price paid by the consumer regardless of where or how it was booked.

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