(CN) - Hotels.com and other online booking companies are not required to pay a "transient room tax" used to boost tourism in Louisville and Lexington, the 6th Circuit ruled.
The three-judge panel in Cincinnati rejected a lawsuit brought by the Louisville/Jefferson and Lexington-Fayette county governments, seeking higher taxes from online travel companies.
The online companies and local hotels negotiate a wholesale price for rooms. They then charge customers a higher retail price for the rooms, a rate that purportedly includes taxes and fees. Hotels receive the negotiated wholesale price and taxes on that discounted amount.
The counties argued that online travel companies should be taxed on the retail price, not the wholesale price.
Dismissing the case, U.S. District Judge Thomas Russell said the online companies "have neither ownership, nor physical control, of the rooms they offer for rent." And because online booking companies didn't exist when the transient room tax was enacted, the judge said Kentucky laws "have simply failed to keep up with the times."
The 6th Circuit agreed that online travel companies are not lodging providers or "like or similar accommodations businesses" under state law.
The counties countered that such an interpretation leads to the "absurd result" that counties receive fewer taxes if customers book a room online than if they book directly with the hotel.
The appellate judges acknowledged that this can happen, but said it's up to the state Legislature "to close any such potential loophole."
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