Dana Herra Jul. 5, 2016, 11:11am

The village of Lombard is the only one of more than a dozen municipalities suing 13 online travel sites to come out a winner, after a federal judge ruled that the sites do not need to pay additional taxes to the other villages and cities.

In the case, docketed in Chicago federal court as Case No. 13-CV-5633, 14 municipalities in northern Illinois – Bedford Park, Warrenville, Oakbrook Terrace, Oak Lawn, Orland Hills, Rockford, Willowbrook, Arlington Heights, Burr Ridge, Des Plaines, Lombard, Orland Park, Tinley Park and Schaumburg – filed suit claiming the travel sites do not pay enough in hotel taxes. Oakbrook Terrace later voluntarily dismissed charges.

Each of the municipalities has a hotel tax ordinance requiring hotels to pay a specified percentage of the price of a hotel room rental in tax. Hotels collect this tax by passing it on to the customer; a customer staying in a $100 hotel room in a city with a 10 percent tax pays $110, and the hotel passes $10 along to the city.

Online travel companies operating under the “merchant model” agree to pay hotels a discounted wholesale rate for the rooms they rent. At the same hotel, a customer may pay $80 to book the room through a travel company, but the room may have only cost the company $60. The travel company then pays $66 – the wholesale rate to the hotel and the tax on that amount to the city.

In their lawsuit, the municipalities claimed 13 online travel companies using the merchant model – Expedia Inc., Hotels.com LP, Hotwire Inc., Egencia LLC, Trip Network Inc., Orbitz LLC, Internetwork Publishing Corp., Priceline.com Inc., Priceline.com LLC, Travelweb LLC, Travelocity.com LP, Site59.com LLC, and Does 1 Through 1000 – should pay the tax on the retail price of the room, not on the wholesale rate.

Both sides had moved for summary judgment, which U.S. District Judge Matthew Kennelly granted in favor of the defendants in every case except that of Lombard.

The key, Kennelly wrote, was in the wording of the hotel tax ordinances. In most of the ordinances, the municipalities specified that the tax is to be paid by a hotel owner, operator or manager. The municipalities argued that the companies qualify as managers or operators because they are in the business of renting hotel rooms. The defendants, however, argued that they cannot be classified that way because they are not involved in the day-to-day operations of the hotels.

“Plaintiffs argue that what makes an online travel company the owner or operator of a hotel is the fact that it sells rooms,” Kennelly wrote. “The Court is not persuaded. …Online travel companies do not choose what amenities hotels provide; they do not employ staff to clean or service hotel rooms; and they do not provide any services to transient guests when they are staying in hotels. They cannot be said to ‘operate’ hotels.”

Four of the municipalities apply their tax to all persons engaged in the business of hotel rooms, which Kennelly said includes the defendants. But because the ordinances require the defendants only to collect taxes on the rooms’ net rate, not retail rate, Kennelly ruled that the companies are already paying the appropriate amount of tax.

Unlike the other ordinances, Lombard’s law does not apply the tax only to the amount paid for room rental; it requires a tax of 5 percent of “the charge on individual billings” and applies to anyone involved in the business of renting hotel rooms.

“Unlike all the other ordinances under which plaintiffs seek money from defendants, Lombard’s ordinance both applies to defendants and requires them to pay taxes on transactions associated with their business of renting hotel rooms,” Kennelly wrote. “This includes all of the money consumers pay under retail rates.”

Lombard and the defendants have until July 15 to submit proposals for a way to determine the extent of the companies’ liability to the village. The case is set for a status hearing on Aug. 9.

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