February 25, 2011

Online Travel Companies Sue Over Hotel Taxes

Cities in 22 states have taken action against online travel companies (like Expedia, Orbitz, and Travelocity) to collect unpaid hotel taxes. In a recent decision, the New York Supreme Court dismissed part of a lawsuit filed by Expedia against New York City, finding that the city has the right to apply its hotel tax to the entire amount paid by a consumer for a hotel room, including any service fee charged by an online travel company.

The dispute hinges on whether hotel taxes should be assessed on the price the consumer pays for a room or the amount the hotel receives for it. Generally, when a consumer books a room with an online travel company, only part of the amount paid goes to the hotel. The travel company pays the hotel a discounted rate and local tax on that price. It keeps part of what the consumer pays as a service fee.

The Tax Foundation has criticized state and local taxation of online travel companies as “aggressive and unjustified.”