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6/30/2010

News

Room service
Orange Country takes online-travel companies on a trip to court

 

Although it wasn’t much of a vacation, late last year Richard Rabazinski eschewed the comforts of his Winter Park home for two nights in posh Orlando hotels. On Nov. 3, 2009, he called online-travel company Expedia and asked for a room at the Portofino Bay Hotel on Nov. 7. He and a salesperson named Nathaniel settled on a “garden view” room with two queen beds for $304 – or $342, “including taxes.”

“I asked Nathaniel if the total price included $38 in taxes, and he said ‘That is right,’” Rabazinski states in an affidavit filed Jan. 29 in Business Court of the Ninth Judicial Circuit.

“I asked Nathaniel if there were ‘service fees or anything in there’ and ‘Are there any service fees put on?’ He replied ‘Hotel resort fees?’ and then quickly said ‘No,’” Rabazinski states. “I asked Nathaniel ‘So $38 is just for taxes?’ Nathaniel replied ‘Correct. Taxes and service fees, that includes taxes and service fees.’ I asked Nathaniel for the ‘breakdown’ between taxes and service fees in regards to the $38. He replied that he did not have that and said that ‘we cannot disclose that information.’

“I asked Nathaniel why he couldn’t disclose the information. Nathaniel replied ‘the only thing we can disclose to you is the room price of $304 and the tax and service fees are $38 that will give you a total price of $342.’”

Two days later, Rabazinski went through a similar routine on Expedia’s website, booking a deluxe nonsmoking room at the Grand Bohemian Hotel for $145.33 – plus “taxes and service fees” of $18.26, with no breakdown between taxes and fees.

Rabazinski duly put up at both hotels and noted that his debit card showed Expedia billed him for the rooms. The only money he paid directly to the hotels was for parking.

Pleasant though his brief vacation might have been, Rabazinski’s was no pleasure trip. He was sent by attorneys working for Orange County to test Expedia’s booking and billing policies; the county has filed suit against Expedia and its fellow travel vendor Orbitz, claiming that the companies have failed to pay their fair share of taxes.

According to the suit, companies like Expedia and Orbitz buy up hotel rooms for wholesale prices, then resell them at higher rates to travelers. The companies pay taxes on the prices they pay for the rooms but not on the markup they charge to consumers.  The county’s lawsuit seeks a ruling that the companies should pay the local tourist-development tax -– currently set at 6 percent in Orange County – on the full price they charge customers for the hotel rooms. If the court grants the county that decision, the precedent would extend to the other big players in the field, such as Priceline and Travelocity, says County Attorney Tom Drage. 

Orange County isn’t the only locale to be fighting this battle with online-travel firms. Neighboring tourist mecca Osceola County is going through an administrative hearing on the matter, which may eventually lead to a suit, according to County Attorney Jo Thacker. In November the state of Florida sued Expedia and Orbitz, looking for tourism taxes, and a growing number of counties in the state are filing similar suits of their own.

The municipalities say they need the money to promote a lagging tourism industry during difficult economic times. The online-travel vendors, meanwhile, say they provide travel incentives in the form of bargain prices on hotel rooms, thus funneling tourists into Florida. They need that money, they say, to continue doing so. 

Some Florida hotels book up to 40 percent of their rooms with online-travel firms, according to Florida Restaurant and Lodging Association spokesperson Christina Johnson. That’s a big chunk of Florida’s signature industry – and given the number of hotels clustered near the major theme parks, it’s an even bigger deal for Orange County.

To aid in filling those hotels, the state lets counties charge a tax of up to 6 percent on hotel rooms and use the proceeds to promote tourism.

Florida counties are going after the funding because lots of big-ticket projects – including a handful of high-profile ones right here in Orlando – are relying on it. Tourist-development tax dollars are a vital part of a city-county plan to make Orlando an even bigger arts and entertainment draw. The new Amway Center, home to the Orlando Magic and scheduled to open in October, cost $480 million. Whether the city is going to be able to meet its first $10.6 million debt service on the arena in November remains up in the air, largely because of declining tourist-development tax money. The city’s plans to build the Dr. Phillips Performing Arts Center and to renovate the Citrus Bowl also were supposed to count on revenues from the tourist tax, but there’s no money left in the pot. The Citrus Bowl project has been virtually scrapped, and so far, the $383 million budget for the arts center has been reduced to $250 million (see “Keeping up appearances,” March 24). According to a May 10 presentation on plans for the performing arts center by Orlando chief financial officer Rebecca Sutton, there is no further tourist-development revenue available. According to the arrangement between the city and county, in order to spend tourist-development dollars on the project, there has to be a certain amount of funding maintained in the county’s coffers. That minimum amount rises by 2 percent every year, but tourism revenues – and therefore tourist-development tax dollars – are decreasing, so the goal post keeps drifting farther down the field. The city has been pressuring the county for cash to keep its dream alive, which may go some way in explaining why the county is applying legal pressure to get hold of any additional cash it can.

With a favorable ruling in court, Orange County Comptroller Martha Haynie could audit the travel companies’ books to figure out how much each one should pay in back and future taxes.

Rough estimates from 2008 put that figure at $60 million to $100 million in “interest, (back) taxes and penalties” – plus perhaps $8 million in each subsequent year, according to Drage.

Per state law that allows counties to collect tourist-development taxes in the first place, the first two thirds of the 6-cent tax can only be used for “the acquisition and operation of convention centers, sports stadiums and arenas, auditoriums and museums, promotion and/or advertisement of tourism and funding of tourist and convention bureaus and tourist information centers.”

The next penny on every dollar has to go for debt payments on a sports arena or convention center or to advertise tourism; and the sixth cent can only go toward payments on a sports center or to advertise tourism.

The biggest part of the county’s hotel-tax revenue – usually about two-thirds of the total receipts – goes to pay off long-term debt at the Orange County Convention Center. The center, which was supposed to be self-sustaining, has also required subsidies of up to $10 million a year for most of its nearly three-decade operation. After that, the next biggest allocation goes to the Orlando-Orange County Convention & Visitors Bureau for advertising. After putting some in reserve and funding smaller needs, such as the Orange County Regional History Center, there usually hasn’t been much left.

In June 2006 the county increased its tourist tax rate from 5 cents to the maximum 6 cents permitted by law, hoping the additional money would help pay for the new Dr. Phillips Center for the Performing Arts, Amway Center and renovations to the Citrus Bowl. Those projects, expected to use the hotel tax as their primary source of funding over the next 30 years, carry a total price tag of more than $1 billion.

In 2007, hotel-tax receipts brought in $163 million. Of that, $91 million went to the convention center and about $48 million to the Orlando-Orange County Convention & Visitors Bureau, according to a county financial summary. The next year – the last for which figures are complete – tax receipts increased to $168 million. However, that’s also the first year the city-county interlocal agreement was in force, requiring the allocation of $9.6 million to the city’s “community venues” – the arts center and sports-arena projects.

But the recession took millions out of a pool that had actually been expected to grow ever larger. It didn’t. 

Convention center debt payments are covered for now, and preliminary tax receipts have been edging up for a couple of months – but that doesn’t guarantee a turnaround, says Jan Addison, business manager for the Orange County Convention Center.

“Obviously for people lower on the totem pole, that could get worrisome if it started declining again,” she says. 

If the hotel tax revenues continue to sputter, it will fall to county commissioners to make the tough choices of what to cut or where to move money, according to Addison.

The tourist-development tax brings in a tiny fraction of Orange County’s annual revenue, but with a budget of $3.4 billion dollars, even that sliver is a wad of cash by most standards.

In 2008, the tax brought in $168.2 million, according to Randy Singh, manager of the county Office of Management and Budget. In 2009 it had fallen by $26 million, he says. For the current fiscal year the county predicts another drop of $4.3 million – a total decline of 18 percent over three years, Singh says.

At the current 6 percent tax rate, for every $100 hotel room purchased by companies like Orbitz, Expedia, Travelocity and others, the county reaps $6. The hotels charge the fee to the companies then remit it to the county monthly. Online-travel companies charge a higher price for that room when they sell to a customer – say $130 for a room purchased for $100 – but they don’t pay tax on the inflated price. The county’s lawsuit wants to change that. 

The Expedias of the world argue that they are just booking aids for travelers and their service fees should not be taxable; the county, however, argues that these companies are “dealers” in hotel rooms and should be paying tax on the full price they charge for rooms. If the current suit against Expedia and Orbitz is successful, its results will be applied to all companies doing online-travel bookings in the county. 

In the past three or four years a number of Florida counties have filed lawsuits against online travel firms in pursuit of hotel taxes. Monroe County launched a class-action lawsuit against numerous travel companies, to which all counties in Florida can join as plaintiffs; some, like Indian River County, have signed on, but most have not. It’s scheduled for trial July 11. 

The class-action suit bases its claim for reimbursement on figures released by the travel companies themselves. Orange County prefers its own method of calculation, so in early May when county commissioners mulled joining Monroe’s suit, they opted to stick with their own.

Some Florida counties, like Osceola, are first holding administrative hearings to tell online firms how much tax they might owe, and only going to court if those bills are rejected, Drage says. Orange County decided to go straight to court. A trial is scheduled for August, but both parties are asking for summary judgment, a simple judicial declaration that one side or the other is clearly right.

The best way to explain the industry’s whole argument is the simplest, says Andrew Weinstein, spokesperson for the Interactive Travel Services Association, a trade organization for the online-travel industry. 

“If you’re not a hotel, you really shouldn’t have to pay hotel taxes,” he says.

Many laws authorizing tourist-development taxes passed decades ago, long before online travel booking was dreamed of, he says, but there were businesses then that operated in a similar manner – traditional travel agents, convention planners and tour operators – and the tax has never been applied to them. The “service fees” those entities charged have never been taxable in Florida. Only the hotel’s actual room price fell under the tourist-development tax, he says.

“From the very beginning of these models being arranged, through today, the hotels have always set the prices for their rooms,” Weinstein says. “Taxes have always been assessed on what the hotel charged for rooms. No one tried to interpret them differently until this round of litigation. Obviously there was some creative lawyering that went on over the past few years.”

As local governments around the country face shrinking budgets, they’ve tried to squeeze out more by reinterpreting old taxes, Weinstein says. But courts have generally barred that, dismissing 14 suits and issuing decisions in 10 more.

“Of those 10 cases, including both of the cases at the federal appellate level, nine of those cases have been decided in favor of the industry,” he says. The sole exception was in San Antonio, Texas, and the industry has high hopes for appealing that one. Additionally, state tax authorities in nine states have decided on their own that tourist-development taxes don’t apply to online travel firms, according to an industry fact sheet provided by Weinstein.

Rabazinski’s experience isn’t Orange County’s sole evidence in its suit against the online-travel companies. Attorneys also sent David Dougherty to www.orbitz.com in early February to book a room at Embassy Suites in Orlando. His affidavit, filed April 20, tells the same story, though he booked online instead of by phone. On Feb. 5 Dougherty paid $162.99 for the room plus $21.18 in unspecified “taxes and fees,” without the hotel’s involvement at all, the affidavit says.

Whether it’s the travel firm or the hotel that took the reservation is only half the question. Drage says the online-travel firms charge a markup of 20 to 30 percent for rooms over what they pay hotels, so they’re making enough to pay the tax. 

“Generally what we find is that the taxes and fees they collect will exceed the amount that a hotel would collect if they were charging the same,” Drage says. 

But since the breakdown of those taxes and fees is so vague, it’s hard to tell. When he booked the Grand Bohemian room, Rabazinski went to part of Expedia’s website that purports to explain its taxes-and-fees charge. That page, according to the affidavit, says “Expedia does not collect taxes for remittance to applicable taxing authorities. The tax recovery charges on prepaid hotel transactions are a recovery of the estimated transaction taxes (e.g. sales and use, occupancy, room tax, excise tax, value added tax, etc.) that Expedia pays to the hotel supplier in connection with your hotel reservations. The hotel suppliers invoice Expedia for tax amounts. The hotel suppliers remit applicable taxes to the applicable taxing jurisdictions.”

In other words, the hotels are responsible for collecting and submitting the appropriate amount of taxes. Lobbyists for local governments and travel companies have fought it out in the Florida Legislature, with one group seeking to require payment of the tax as the other urges an explicit exemption for the companies from the tax. Sentiment has seesawed for several years, with counties having an edge in 2009, Drage says. This year, though, travel companies actually got an exemption bill through the House – but it died in the Senate.

“Legislatively, this has been a very interesting issue,” he says. Part of the county lawsuit’s purpose is to let the Legislature know that the current law is clear enough; a solid court ruling could end the debate, Drage says.

Since 2007 the travel companies have been lobbying the U.S. Congress for retroactive immunity from tourist-development taxes nationwide. The most recent proposal would allow already-filed suits to go forward but would block any future filings. That prospect is what’s prompted the current flurry of litigation.

Orange County Commissioner Bill Segal, now running for county mayor, says he got interested in urging legal action on the hotel tax because it looked like legislators might “slam the door on us,” exempting online firms from the tax payment. But hearing that online firms might be collecting all the required tax and only paying part of it really got his attention.

“I think it’s pretty cut-and-dried. Everybody else has to pay it, so I think the online-travel companies ought to pay it,” Segal says. “First of all, if you’re not collecting it, you should be. And if you are collecting it, you should be remitting it.”

According to Weinstein, though, vagueness on how taxes and fees break down has not translated into court findings of any wrongdoing. In the San Antonio case, jurors found that though companies should have been paying the tax, their failure to do so was not deliberately malicious or negligent and so did not incur any punitive damages. And deliberately collecting local taxes but not turning them over?

“There’s never been a court in the country that’s upheld that,” Weinstein says.

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