A District of Columbia Superior Court judge denied a motion to dismiss filed by Expedia Inc., Orbitz LLC and other online hotel booking sites sued by the city, finding that the sites may have run afoul of the D.C. Code by failing to pay taxes on the full amount of rooms sold.
The D.C. attorney general's office filed suit (PDF) against seven online booking sites in March, claiming they owed "tens of millions of dollars" in unpaid sales taxes since 1998. The Web sites countered that they act as an intermediary between the hotel and the customer, so they shouldn't be responsible for paying the city's 14.5 % hotel sales tax.
Judge Craig Iscoe, in an Oct. 12 order (PDF), found that according to the allegations laid out in the city’s complaint, the online booking sites do act as the primary vendor for hotel rooms, so they can’t claim that the city is wrong in suing to recover the unpaid taxes on hotel rooms sold in Washington.
Whether the booking sites actually acted as the primary vendors is a matter for another day, Iscoe wrote, but he found that the city had made sufficient allegations to escape a motion to dismiss.
The city charges a retail sales tax on hotel rooms of 14.5%, but the online booking sites haven’t paid taxes based on the full amount of rooms. Instead, according to the complaint, a site like Expedia will pay the city taxes on the amount it pays to the hotel, which is typically a wholesale price lower than the actual price of the room.
Attorneys for the city have argued that the sites should be classified as sellers under D.C. law, and be subject to the same taxes as a hotel selling a room directly to a customer. The sites, in moving for a dismissal of the case, claimed that because the sites are not hotels and don’t directly “furnish” the rooms, the hotel sales tax shouldn’t apply.
Iscoe found that the D.C. Code requires taxes on the transaction of selling a hotel room, as opposed to maintaining the room and making it available for customers.
“Indeed, the business model, according to the District, is designed to minimize the contact between the customer and the hotel altogether,” Iscoe wrote, adding that under the booking sites’ logic, no one would be responsible for paying any taxes to the city.
The other defendants include Hotels.com LP, Hotwire Inc., Priceline.com Inc., Travelocity.com LP, and Travelscape LLC.
Lead counsel for the online booking sites, John Villa of Williams & Connolly, could not immediately be reached for comment on Monday. The attorney general’s office, through a spokesman, declined to comment.