Friday, March 20–Travel Companies Seek Dismissal Of Room Tax Lawsuit

BERLIN – Defendants in the civil suit filed in January by the Worcester County Commissioners against a bevy of Internet-based travel booking companies, seeking what could be millions of dollars in unpaid hotel room taxes, filed a motion this week to dismiss the case citing a lack of sufficient grounds to pursue the action.

In January, attorneys for the Worcester County Commissioners filed suit in U.S. District Court naming 14 individual defendants, 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 county in bulk at deeply discounted wholesale prices and pay the required room tax to Worcester 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 transactions, but do not remit the taxes collected to the county, instead keeping the money as part of their profit.

This week, defense attorney J. Stephen Simms of Simms and Showers in Baltimore filed a motion to dismiss Worcester County’s suit against the multiple Internet-based travel booking companies, claiming there are insufficient grounds for the action. Simms’ one-page motion to dismiss is rather curt, although he later submitted a 15-page memorandum outlining the reasoning behind the motion to dismiss the case, which has not yet been made public.

“This motion seeks to dismiss the complaint filed by the County Commissioners of Worcester County for failure to state a claim upon which relief may be granted,” the short letter from Simms to the U.S. District Court judge handling the case reads.

With the suit filed in January, Worcester County joined a growing number of other jurisdictions in Maryland and across the country taking similar actions against the ubiquitous Internet travel companies of alleged failure to pay room tax. For example, Baltimore City filed a similar suit in December and Annapolis took its own action late last year. Nationally, several major cities including Miami, Los Angeles, Philadelphia, Atlanta, Chicago and even Las Vegas have already joined the fray and those cases are in various stages of the legal process.

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 by the county in January 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.”

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.