County, Web Companies Plan To Settle Lawsuit

BERLIN – The lawsuit
filed last year in U.S. District Court by the Worcester County Commissioners
against a bevy of Internet-based travel booking companies, seeking what could
amount to millions of dollars in alleged unpaid hotel room taxes, was dismissed
last week as the two parties near a formal settlement of the case.

In January 2009, the
Worcester County Commissioners filed suit in U.S. District Court naming 14
individual plaintiffs, all Internet-based travel booking companies under the
umbrella of four major firms including Expedia, Orbitz, Travelocity and
Priceline. The complaint alleged the companies had not been paying the entire
amount of hotel room taxes owed on rental transactions in the county, largely
from Ocean City.

For over a year, the
case muddled through the complex legal system until both sides reached an
agreement in principle to settle the suit late last month.

Attorney for the
defendants, J. Stephen Simms, of Simms and Showers in Baltimore, submitted a
letter to the court seeking a formal dismissal of the case.

“The parties are pleased
to announce they have reached a settlement in principle and working towards
finalizing a formal settlement agreement,” the letter reads.

As a result, U.S.
District Court Judge Marvin Garbis last week granted the parties request to
formally dismiss the case in order to allow the settlement process to move
toward a conclusion.

“The court has been
advised by counsel for the parties that the above action has been settled,
including all counterclaims, cross-claims and third-party claims if any,” the
judge’s order reads. “Accordingly, this action is hereby dismissed with each
party to bear its own costs unless otherwise agreed.”

Simms said this week he
was not at liberty to discuss the terms of the settlement as it has not yet
been consummated. He did say, however, both parties are moving toward a final
settlement and the terms are being tweaked and fine-tuned. Outside attorneys
representing Worcester County in the suit could not be reached for comment.

It remains uncertain
just what the terms of the settlement might mean for Worcester County. The
original complaint did 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.”

While it is uncertain
just how many hotel and motel rooms are booked in Worcester County, more
specifically Ocean City, via the Internet through the 14 defendants, the number
is reportedly substantial. According to the original complaint, more than half
of all hotel bookings in the U.S. are made online through the Internet travel
companies owned by the various defendants in the case.

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

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.

Worcester County is just
one of many jurisdictions in Maryland and across the country to file suit
against the ubiquitous Internet travel booking companies in the last year or
so. For example, Baltimore City filed suit against the same defendants shortly
before Worcester County filed its action and the two jurisdictions piggybacked
on much of the pre-trial activity. However, Baltimore’s suit against the
defendants has not been resolved.

Following Baltimore and
Worcester County, the city of Annapolis also filed suit against the Internet
travel booking companies over the same room tax issue, but that case has not
gone to trial nor has it been settled. Nationally, several major cities
including Miami, Los Angeles, Philadelphi, Chicago, Atlanta and Las Vegas took
similar action against the defendants and those cases are at various stages of
the legal process.