Travel Companies Claim Room Tax Suit Flawed

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 this week filed a motion to dismiss the case, citing several problems with the county’s complaint including a slippery definition of a hotel.

In January, attorneys for the 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 multiple Internet-based travel booking companies, claiming there are insufficient grounds for the action. According to the motion, the county’s complaint errs because it loosely includes Internet travel companies such as Orbitz or Expedia, for example, in its definition of a hotel. State law allows Worcester County and other jurisdictions around the state to impose a room tax on a charge for accommodations paid to an actual hotel, but the defendants in the lawsuit claim Worcester is erroneously attempting to extend that law to impose a room tax on the Internet travel companies named in the lawsuit.

“In fact, Worcester County’s own complaint distinguishes between hotels, which the county now calls in its brief ‘brick and mortar’ hotels, and online travel companies,” the motion to dismiss filed on Tuesday reads. “The county’s sleight-of-hand in now arguing the defendants are some kind of ‘virtual hotel’ should be rejected as improper and implausible.”

Simms’ motion to dismiss the case claims the transactions between the Internet travel companies named in the suit and their customers fall outside the county’s ability to impose the room tax. Because the transactions are not made between the guests and the hotels, they are not subject to the room tax, making Worcester’s suit implausible.

“The defendants are not liable for hotel rental tax on the amounts charged to their customers and retained by the defendants because those are not charges paid to a hotel or made by any hotel in Worcester County,” the motion reads.

The defendants use an example in the county’s complaint to illustrate their point. If an online travel booking service receives $2,000 from a customer, $1,500 of which is passed on to the hotel providing the room, Worcester County would receive $67.50, or 4.5 percent of the amount actually paid for the room which is subjected to the room tax. However, the county is also claiming it is owed 4.5 percent on the entire $2,000 for the transaction, or $90.

“If the $500 retained by the defendants in the county’s example were considered to be paid for sleeping accommodations, that would imply the defendants are providing their services for free,” the motion to dismiss reads. “Such a result is clearly illogical.”

The defendants’ motion to dismiss the case also cites geographic problems with the county’s lawsuit. Because the transactions between the vacationing public and the Internet travel booking companies do not literally take place in Worcester, the county’s effort to impose the room tax on the portion of the transaction retained by the defendants.

“The transaction between the defendants and their customers does not occur within Worcester County, and thus, Worcester County may not impose and obligation on the defendants to collect the hotel rental tax,” the motion reads. “For this reason alone, the county’s claims must be dismissed. The hotel rental tax is a sales tax, and the sale at issue occurs outside Worcester County.”

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 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.