The village of Lombard will reap a $459,000 payday from the operators of six of the biggest online travel websites – the only Illinois municipality allowed to do so - after a federal judge signed off on a deal to end a years-long court fight over claims the travel sites had stiffed Lombard and other suburban Chicago communities of hotel taxes.
On Oct. 19, U.S. District Judge Matthew F. Kennelly entered final judgment in the litigation, ordering the operators of Hotwire, Hotels.com, Expedia, Orbitz, Priceline and Travelocity to pay the village $459,239 to settle the west suburban village’s claims against the travel sites.
In June, Kennelly had declared Lombard to be the only one of more than a dozen communities with a valid claim against some of the 13 online travel sites targeted as defendants in a large legal action over the allegedly unpaid hotel taxes.
In the case, filed in 2013, Lombard and 13 other municipalities in northern Illinois, including Bedford Park, Warrenville, Oakbrook Terrace, Oak Lawn, Orland Hills, Rockford, Willowbrook, Arlington Heights, Burr Ridge, Des Plaines, Orland Park, Tinley Park and Schaumburg, asserted the travel sites do not pay enough in hotel taxes.
Each of the communities had a hotel tax ordinance in place, requiring hotels to pay a specified percentage of the price of each rented room in tax. Hotels typically collect this tax by charging it to the consumer renting the room, and then passing the collected taxes on to the village or city to which the tax is payable. Under this model, for instance, if a city charges a 10 percent hotel tax, a consumer may pay $110 for a room listed at $100 per night. The hotel then passes $10 to the city.
However, the municipalities alleged the travel sites operated under a different model. Known as the “merchant model,” this way of selling hotel rooms allows the online booking sites to pay hotels a discounted wholesale rate for the rooms. This, a customer may pay $100 for a room through one of the travel sites, but the room may have cost the travel site only $80. The travel company would then pay $88 – the wholesale rate to the hotel and the tax on that amount to the city.
The municipalities claimed the travel sites should be required to pay the tax on the retail price of the room, not the discounted wholesale charge.
Oakbrook Terrace voluntarily dismissed its charges. But in June, Kennelly found largely in favor of the travel sites, saying most of the municipalities’ ordinances don’t actually require anyone other than the hotel owners, operators or managers to pay the municipalities’ hotel tax. The judge said this excluded the online travel sites who “cannot be said to ‘operate’ hotels.”
Also, Kennelly said four of the municipalities also apply their tax only to the rooms’ net rate, not the retail rate.
Lombard’s ordinance, however, applied the tax only to the amount of the rental, requiring a 5 percent tax on “the charge on individual billings” and applies to everyone involved in the business of renting hotel rooms.
This, Kennelly said, meant Lombard alone had a valid and enforceable claim on taxes owed from the travel sites on the retail rates of the room.
After several more months of talks, Lombard and the travel sites agreed to the $459,000 sum to settle the claims owed through March 31, 2016, and end the litigation.
Under the deal, Hotwire Inc. agreed to pay $148,993; Hotels.com agreed to pay $110,003; Expedia, to pay $87,330; Priceline, $73,234; TVL LP, which was formerly known as Travelocity, to pay $20,463; and Orbitz, $18,215.
The judgment did not indicate how much of the approved payments would go to the village’s attorneys in the case.
Lombard was represented in the action by the Bird Law Group, of Atlanta, Ga.; the Crongeyer Law Firm, of Atlanta; Peterson, Johnson & Murray, of Chicago; the Clifford Law Offices, of Chicago; and the Finnell Firm, of Rome, Ga.
The travel sites were represented by the firms of Jones Day, of Chicago; Skadden Arps Slate Meagher & Flom, of Chicago; Morgan Lewis & Bockius, of Chicago; Kelly Hart & Hallman, of Fort Worth, Texas; DeGrand & Wolfe, of Chicago; and Freeborn & Peters, of Chicago.