Cities Fight for Court Discount After Tax War With Online Travel Giant

What was once an $84 million tax judgment against Hotels.com is now a $2 million costs bill for the cities that had sued it. The Supreme Court waded into the 15-year entanglement Wednesday.

(Image by Rodrigo Salomón Cañas from Pixabay via Courthouse News)

WASHINGTON (CN) —  Forecasting another defeat for municipalities that accused Hotels.com of shortchanging them on occupancy taxes, the Supreme Court appeared ready Wednesday to make them pay over $2 million in court costs.

The appeal turns on the discretion judges have when it comes to reducing or denying a cost award to the prevailing party.

While the courts of appeal are split on the issue, Chief Justice John Roberts questioned in oral arguments Wednesday whether that division has thus far caused any problems. “For something as minor as cost, which is a minor thing in 90-whatever percent of the cases, I do think the different courts of appeals follow different practices, and I’m not sure it’s caused a real problem,” Roberts remarked.

In the underlying court battle, San Antonio and more than 170 other Texas municipalities fired the first shot in 2006, saying their revenues were suffering because the likes of Hotels.com, Expedia and Priceline had been paying hotel-occupancy taxes based on wholesale rates that they struck with operators, rather than the full freight that end consumers paid.

Three years later, that lawsuit resulted in a $20.5 million jury verdict for the municipalities. By the time the final judgment was entered in 2016, additional penalties and interest brought the total award to $84.1 million. 

But victory was short lived. After the Fifth Circuit reversed a year later, those municipalities wound up with a $2 million bill for the court costs that online travel booking companies had faced. San Antonio asked the federal court to refuse or reduce the bill, but the court said the power to alter bond costs escaped it. The Fifth Circuit affirmed, creating a circuit split that the Supreme Court agreed to settle in January.

Speaking on behalf of San Antonio at the Supreme Court’s virtually held arguments Wednesday, attorney Daniel Geyser of Alexander Dubose & Jefferson said federal law “authorizes district courts to exercise discretion in denying or reducing taxable costs.”

For Hotels.com, however, David Salmons of Morgan Lewis argued that the city overstated the circuit split, and that if there is a split it has not caused any adverse consequences for the 30 years it has existed. He argued that the appellate court is the only court that has the power to determine whether a party that loses on appeal must pay court costs to the winner.

The federal rule in question, he said, “identifies the limited costs that may be taxed on appeal, and finds the appellate court alone, to decide the party’s entitlement to those costs, unless that court orders otherwise.”

San Antonio’s Geyser maintained that other courts of appeals generally follow the same practice: deferring such issues down to the district court.

“It works well there,” he said. “There’s no reason that a district court can’t handle these collateral fact-bound cost issues. What will create a problem is bifurcating the process. I haven’t heard an articulable basis for distinguishing the kinds of issues that the appellate court should handle versus the kinds of issues that the district court should handle.”

Justice Clarence Thomas then questioned the attorney on whether this case, wherein there were significant court costs, was somewhat of an outlifer. 

“Can you other than your case, can you point to any other case recently in the Fifth Circuit where this has caused a significant problem?” Thomas asked.

Geyser said one other case in which there were significant costs was cited in his brief.

Justice Sonia Sotomayor asked Geyser what stopped the cities from raising the question about the bond on costs before the Fifth Circuit’s reversal. She questioned if the case hinged on a problem of due process, with Geyser seeming to agree.

“It’s effectively a Catch-22,” he told Sotomayor. Essentially, the law says the appellate courts are the only ones that can exercise discretion over court costs, but send questions over the rulings to the district court whose “hands are bound, he said, “by the Fifth Circuit’s unique understanding of the rule.”

Roberts appeared perplexed, though, when Salmons argued that the proper method for a party to dispute court costs would be on appeal in their merits briefs.

“That strikes me as awful tough,” Roberts said. “They’re in their merits brief, and they’re making all the arguments about why they should win. And then they end with a footnote saying, oh, by the way, if we lose, you know, we think we’re going to pay too much on the bond. That’s asking a lot.”

Sotomayor clarified the timeframe.

“You are basically saying the only practical time to raise this is at the point that a winning party files a bill of costs with the Court of Appeals. That the losing party has an obligation to raise to the Court of Appeals. Any equitable considerations, it has to change the allocation of costs, is that correct?” Sotomayor asked.

Salmons confirmed. 

Justice Stephen Breyer seemed to think the federal rule needed more clarity. 

“If I were in the court of appeals writing the rule I would say, we follow the rule here… we tax costs accordingly taxed. And part two of the rule says: if there is a disagreement about the appropriateness of the amount sought in these categories, the district court will resolve it.”

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