In December, nine Alabama cities filed suit against several internet travel companies. These nine cities include Birmingham, Huntsville, and Decatur. The defendants include such well known internet travel companies as Orbitz, Expedia, Priceline, and Travelocity.
This case is certainly one to watch as it progresses. At issue is the money collected by these internet firms from consumers as a "tax" when hotel rooms are booked. These Alabama cities assert that the internet companies failed to pay proper hotel lodging taxes. According to an article in The Montgomery Advertiser which mentions the lawsuit, it is estimated that Birmingham, alone, could realize an additional $5 million if its claim is correct.
What is the tax issue here? As any hotel guest realizes when they get their final bill, most cities impose significant lodging taxes. How do these Alabama cities claim such large and well-known travel companies have short-changed them on lodging taxes? Basically, the allegation is that these internet companies rent large blocks of rooms at discount "wholesale" rates. The internet companies then rent the rooms to individual customers at a higher "retail" rate. That is how they realize a profit. I see nothing wrong with providing a valuable service for a legitimate profit.
The problem, if the allegations are true, is that the internet companies collect the lodging tax from each customer based on the actual "retail" room rental rate. They actually charge and collect an amount listed as "tax" from each consumer. Yet, they only pay actual lodging taxes on the lower "wholesale" rate and pocket the difference. It is easy to see how these cities could gain substantial revenue if the defendants paid their lodging taxes based on the actual room rental cost of each guest. Again, this will be an interesting case to watch as it progresses. Here’s an additional point to consider: If the travel companies are ultimately successful in this lawsuit and only owe the smaller amount in taxes, does it then raise the issue as to whether they collected additional money from consumers based on the misrepresentation that is was all a "tax" charge?