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Online travel sites ordered to pay $21 million to Anaheim

The city alleged companies including Expedia,, Orbitz and Travelocity underpaid hotel taxes. The firms say city's formulas don't make sense in the cyber age.

February 18, 2009|Tony Barboza

Online travel websites have been ordered to pay Anaheim $21 million in hotel taxes that officials say they are owed, but the companies are fighting back against the increasingly common claim that they have shortchanged cities from Los Angeles to Las Vegas.

The fight in Anaheim is the latest in an escalating debate between online travel companies and tourist-dependent cities. San Diego, for instance, alleges that it lost more than $30 million by 2006 and Los Angeles says it is losing about $10 million a year.

The travel sites, however, maintain that cities like Anaheim are trying to use old-school formulas that don't make sense in the cyber age.

Anaheim, which banks heavily on tourist dollars generated by Disneyland and the city's convention center, began legal proceedings against eight online travel companies, including Expedia,, Orbitz and Travelocity, in 2007, saying that the firms were not paying their fair share of the city's 15% hotel tax.

The city argued that the online reservation companies were paying taxes only on the wholesale price they arrange with the hotels, not the full retail price customers actually pay to book rooms online.

In a 55-page ruling handed down last week, an administrative hearing officer appointed by the city wrote that the online travel companies had been underpaying the city. He ordered them to pay back taxes, penalties and interest to make up the difference between the wholesale and retail rates in online transactions between 2000 and 2008.

Anaheim Mayor Curt Pringle said the city was trying to correct a practice in which web-based companies were paying lower taxes than others who book the same hotel rooms

"We're trying to make sure there's equity in our tax collections," Pringle said. "There shouldn't be a disparity between those who properly pay their taxes and those who try to avoid them."

The online companies, however, filed suit two days later, asking Orange County Superior Court to overturn the decision.

"We get to now go to court and have a completely neutral judge review these issues," said Brian Stagner, an attorney for Travelocity.

The travel companies argue that it is unfair for Anaheim and other destination cities to take decades-old ordinances aimed at hotel operators and apply them to the service fees that Internet firms charge to match guests with hotel vacancies.

"What we are doing is not unlike what traditional travel agents and tour operators have done for 40 or 50 years," Stagner said. "They've had tour operators and travel agents in the city for years and they've never once gone after any of them."

As booking hotel reservations online has increased in popularity over the last decade, so have disputes on how taxes should be paid to the cities.

The Anaheim case could set a precedent for disputes in other cities that rely on tourism to feed city and county coffers, from Newport Beach to Broward County, Fla. Such destinations allege that they also are being stiffed by the travel sites, while the travel companies say they are mere middlemen, and should not be taxed as if they were hotel operators.

Los Angeles has a pending lawsuit against the travel websites that dates back to 2005, when the city alleged that it lost an estimated $10 million a year because web-based companies underpaid their taxes.

In 2006 San Diego's city attorney sued a dozen online travel companies, accusing them of failing to pay $30 million.

The stakes are especially high in Anaheim, which features tourist attractions and has 20,000 hotel rooms and a busy convention center. The tax on hotel rooms is the city's support system, bringing in about 30% of its annual budget -- $87.1 million last year.

In Anaheim, both the city and the travel sites contend that they have legal precedent on their side.

The travel companies say that four federal judges have ruled in their favor in recent years, including a favorable District Court ruling last year in Louisville, Ky. and an appellate court dismissal last month of a suit by Pitt County in North Carolina.

But the Anaheim hearing officer, in his ruling, cited cases in which cities won, such as in the dispute between San Antonio and In one suit against Expedia, the court ruled in favor of Columbus, Ga., citing the danger that a "gaping loophole" could be established if people did not have to pay tax based on the amount they paid for the room.


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