Online Travel Agencies Win Tax Dispute in Seventh Circuit

CHICAGO (CN) – A group of Illinois cities lost their appeal to force Expedia and other online travel agencies to remit taxes on the full price paid by a customer for a hotel room.

Thirteen Illinois municipalities sued the major online travel agencies – Expedia, Priceline, Travelocity, and Orbitz – over their alleged practice of shorting the municipalities on hotel taxes.

The municipal ordinances require the hotel operator or manager to remit a percentage of the price paid by the customer for a room to the city.

When a customer rents directly with the hotel, the municipality receives a percentage of the full amount paid for the room.

But hotels usually contract with online travel agencies, or OTAs, at a lower room rate in exchange for the agency’s marketing services. The OTA then adds its own additional charges to the rate paid by the customer.

This means that the municipality does not receive a percentage of the full price paid by the customer, only the portion of the rate that goes back to the hotel.

A federal judge ruled for the travel agencies and against all but one municipality, the village of Lombard.

The Seventh Circuit affirmed Wednesday, but also granted judgment to the agencies against Lombard.

Under the plain language of the ordinances, “the OTAs are not managers of hotels – they do not supervise the affairs of hotels,” wrote U.S. District Judge Sara Darrow, sitting by designation.

“The OTAs do not perform the function of running a hotel. They perform one set of functions that a hotel does – making room reservations, processing financial transactions, and handling customer service with respect to those transactions. But that the OTAs engage in one hotel function does not transform them into operators of hotels,” Darrow said in a 16-page opinion.

The judge compared the travel agencies’ function to that of a cleaning service contracted with the hotel – while the cleaning service performs an essential function of operating a hotel, that does not give the cleaning service managerial authority.

“While the OTAs engage in one aspect of running hotel rooms – reserving those rooms for customers – that does not mean they operate hotel rooms,” Darrow said.

U.S. Circuit Judges David Hamilton and William Bauer joined Darrow on the Seventh Circuit panel.

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