County Sues Internet Companies Over Room Tax

BERLIN – Worcester County this week filed suit in U.S. District Court against a bevy of Internet-based travel booking companies, seeking what could be millions of dollars in alleged unpaid hotel room taxes, joining a legion of other jurisdictions taking similar action in recent months.

Attorneys for the Worcester County Commissioners on Tuesday filed suit in U.S. District Court naming 14 individual plaintiffs, all Internet-based travel booking companies, under the umbrella of four major companies including Expedia, Orbitz, Travelocity and Priceline. The complaint alleges the companies have not been paying the entire amount of hotel room taxes owed on rental transactions booked in the county, largely from Ocean City.

According to the complaint, the defendants purchase hotel rooms in the area at deeply discounted wholesale prices and pay the required room tax only on the discounted rate. The Internet companies then turn around and sell the hotel rooms to consumers at normal retail rates and collect the required room tax during the transaction, but do not remit the taxes collected to the county, instead keeping the money as part of their profit.

With the suit filed on Tuesday in U.S. District Court, Worcester County joins a growing number of jurisdictions in Maryland and across the country taking similar action against the ubiquitous Internet travel booking companies. For example, Baltimore City filed a similar suit in December and Annapolis took its own action earlier this year. Nationally, several major cities including Miami, Los Angeles, Philadelphia, Atlanta, Chicago and even Las Vegas have already joined the fray.

With more and more travelers booking their vacations online through Internet companies, the potential room tax allegedly lost in the transactions could total millions of dollars. Although the difference in most cases is a couple of dollars per room, per night, the amount of room tax revenue lost in Worcester, should the county prevail in its suit, could be staggering when considering thousands of hotel rooms in the resort area and hundreds of nights. The suit filed on Tuesday does not specify an amount sought, stating only “the precise amount of all recoverable damages, penalties and/or interest will be determined at the time of trial.”

It is uncertain just how many hotel and motel rooms are booked via the Internet through the defendants and their subsidiaries, but according to the suit filed this week, the number is substantial.

“As recently as 1997, the concept of an internet travel company, an entity organized to effectuate travel plans, reservations and purchases via the world-wide-web, was virtually unknown,” the complaint reads. “In recent years, the Internet travel industry has seen explosive growth. By some estimates, more than half of all hotel bookings in the United States are made online, many through Internet travel companies owned by the defendants.”

Typically, the transactions are handled in one of two ways, either the agency model or the merchant model, and the distinction is important. Under the merchant model, which has been the method of choice in recent years, the Internet travel companies purchase rooms from hotels at lower wholesale rates, and the hotels collect and remit the room taxes based on that lower rate. The companies then turn around and sell the rooms to consumers at higher retail rates. They collect the appropriate room taxes based on the higher rates, but do not remit any of collected taxes to the taxing authority, in this case Worcester County.

“Defendants charge consumers the full hotel rental tax based on the retail rate paid by the consumers, but remit none of that amount to Worcester County,” the complaint reads. “In the course of the entire merchant model transaction, Worcester County is paid only that portion of the hotel room tax that the hotels collect and remit based on their sale of the rooms to the Internet travel companies at the lower wholesale rate.”

For example, if a vacationer paid Expedia $100 for a hotel room in Ocean City, the company would calculate the room tax it owes to the county based on that amount. However, Expedia might have purchased the room at a bulk wholesale rate of $60, and would pay the county the room tax based on the $60 amount it paid for the room.

In the above example, with Worcester County’s current room tax rate at 4.5 percent, the room tax owed on the $100 room rental would be $4.50. If Expedia, for example, paid the county the room tax it was owed for the $60 bulk purchase of the room, it would pay only $2.70 in room tax to Worcester, or 40 percent less than it should have, according to the civil suit filed this week. In essence, the online travel booking company would have pocketed the difference, or about $1.80 in the above example.

“As a result of their alleged conduct, the defendants have unjustly received and retained a benefit to the detriment of the plaintiff,” the complaint reads. “Defendants do collect the hotel rental tax from customers, yet fail to remit it to the plaintiff. Instead, the defendants pocket those collected taxes and are, therefore, unjustly enriched. Defendants’ retention of this tax violates fundamental principles of justice, equity and good conscience.”