Judge: City can't collect unpaid hotel taxes from Expedia

The cash-strapped Nutter administration is out $1 million after a Common Pleas Court judge ruled Friday that it had no authority to collect unpaid hotel taxes from the online travel agency Expedia.

For now, the ruling means the city's hotel tax revenues - which promote tourism and help fund operations at the Convention Center - will be less than officials had hoped. The city collected $39.5 million in hotel-related taxes during the last fiscal year.

The additional revenue was viewed as critical because the center's operating expenses are about to balloon as it doubles in size. The expanded Convention Center will open in March.

The city filed suit five years ago against Expedia and 16 other online travel services, saying they should pay hotel taxes based on the room rates actually paid by guests and not the discounted room prices charged to the agencies. The difference between what the travel agency pays and what it charges the customer is kept as income by the agencies, which form agreements with hotels to buy blocks of rooms at discounted rates.

In 2006, Common Pleas Court Judge Howland W. Abramson dismissed the suit, saying the city had not tried to collect any tax from the companies before going to court. The city then issued Expedia a $1 million assessment in 2007. Expedia appealed to Philadelphia's Tax Review Board.

The action against Expedia was seen as a test case by the hotel industry. Expedia, the city contended, owed $1 million for failing to pay the hotel-occupancy tax based on the full cost of a room between 2001 and 2005. The tax is now 8.2 percent, but was 7 percent at the time.

Last July, the tax board ruled in favor of Expedia - a ruling Judge Idee Fox embraced Friday in ruling on the city's appeal. Her decision hinged on the question of whether Expedia was a hotel operator, which she determined it was not.

Part of the city's argument was that Expedia in effect rents rooms, since its customers have no interaction with any hotel until they check in. The city also argued that the customers' agreements are with Expedia, not hotels.

The judge said that while Expedia makes deals with hotels to offer rooms at discounted rates, no transactions are completed until a guest checks in.

"The hotel and not Expedia retains the right to refuse the room or evict the traveler if he/she refuses to abide by the hotel's rules and restrictions. The reservations are not made in Expedia's name; they are made in the customer's name," the judge wrote.

She ruled that Expedia was an "intermediary" and was permitted to remit to hotels a tax based on the discounted rate.

A spokesperson for Expedia could not be immediately reached.

Andrew Weinstein of the Interactive Travel Services Association, which represents the online travel industry, said, "This verdict adds another major stone to the large and growing foundation of legal decisions at every level that online travel companies are not hotels and thus should not be liable for hotel occupancy taxes."

Nationally, he said, 12 of 14 recent court decisions have been in favor of the online travel companies.

City Solicitor Shelley Smith declined to comment Friday, saying she was unaware of the judge's ruling and "so we've not had an opportunity to review the decision."

The city must decide whether it wants to appeal to Commonwealth Court.

Philadelphia hoteliers were quick to voice their displeasure.

"I think it's unfair that my members pay a tax on the full amount of a night stay [in a booked room] while an online booking agent, like Expedia, does not," said Ed Grose, head of the Greater Philadelphia Hotel Association, which represents 87 hotels, including 44 in Center City.

For example, Grose said, Expedia will buy a hotel room for $80 a night and sell it for $130, but the tax is paid on only the original $80.

"The hotel tax funds the expansion of the Convention Center and our two marketing agencies, the Philadelphia Convention and Visitors Bureau" and the Greater Philadelphia Tourism Marketing Corp., he said. "And with budget cuts, this hurts them as well."