In a legal battle between 13 Illinois cities and 13 travel websites over hotel taxes, federal judges in Chicago have now ruled against all 13 municipalities, after a federal appeals court overturned a federal district judge’s decision to allow suburban Lombard alone to continue exacting taxes from Expedia and other online travel agencies.

In an opinion issued Nov. 22, a three-judge panel of the U.S. Seventh Circuit Court of Appeals said online travel agencies such as Expedia are not improperly holding sales tax dollars, largely affirming an earlier ruling from federal District Judge Matthew F. Kennelly.

The panel, however, found fault with Kennelly’s reasoning in granting the village of Lombard a reprieve from his overall findings pertaining to the dozen other communities included as plaintiffs in the action. 

Judges William J. Bauer, David F. Hamilton and Sara Darrow delivered the decision in favor of the online travel sites.

In July 2016, Kennelly largely granted summary judgment in favor of the OTAs — 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 a collection of 1,000 unidentified “Doe” defendants — saying they were not obligated to remit taxes on the retail price of hotel rooms they bought wholesale.

Under the “merchant model,” OTAs pay hotels a discounted wholesale rate for rooms, then sell those rooms to customers at a more expensive rate. But an OTA pays the city the lodging tax based on its wholesale price. The municipalities, including the suburbs of Bedford Park, Warrenville, Oak Lawn, Orland Hills, Willowbrook, Arlington Heights, Burr Ridge, Des Plaines, Lombard, Orland Park, Tinley Park and Schaumburg and the city of Rockford, argued they should be entitled to collect tax based on the rate the customer pays to rent the room.

The Seventh Circuit, like Kennelly, based its analysis on the language the municipalities used in the ordinances establishing their pillow taxes. Darrow wrote the opinion, and said the panel denied a motion to request the Illinois State Supreme Court certify legal questions concerning whether OTAs are “operators” of hotels, if they “own” or “manage” hotels or rooms and if “‘gross rental receipts’ refers to the room rate negotiated between the OTA and the hotel or the full amount the customer pays to the OTA.”

The appellate judges, Darrow wrote, can handle “routine questions of statutory interpretation,” and said the Supreme Court can correct its opinion if needed during future cases regarding the same subject matter.

Darrow further wrote the ordinances do not explicitly define the concept of owning, operating or managing hotels and rooms beyond common understanding, and said Kennelly was right to determine the wholesale contracts for rooms do not in any way position the agencies as owners or operators of the hotel businesses.

“The OTAs do not perform the function of running a hotel,” she wrote. “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. We would not say that when a hotel contracts with a cleaning service that orders supplies and hires, schedules, and pays workers, the cleaning service becomes an operator of the hotel.”

Kennelly had granted summary judgment in favor of Lombard because its ordinance doesn’t apply the tax only to the amount paid for room rental. Rather, that village’s rules require a tax of 5 percent of “the charge on individual billings” and applies to anyone involved in the business of renting hotel rooms.

But the appellate panel said Lombard’s law is similar enough to those in Rockford and Willowbrook, which Kennelly said should not apply to OTAs. Further, the panel reiterated the OTAs “are not engaged in the business of renting rooms” and therefore are not subject to ordinances governing hotel operators. They reversed judgment in favor of Lombard and granted it to the OTAs.

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U.S. Court of Appeals for the Seventh Circuit U.S. District Court for the Northern District of Illinois

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