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Orange Grove: Cities overreach on hotel fees

3 min readBy: Joseph Bishop-Henchman

This op-ed was published in the Orange County Register on November 10. 2009.

A recent legal victory for some Texas cities against online travel companies over hotel taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es may have given Anaheim officials hope for their own case, but they shouldn’t start celebrating just yet. Other cities have not fared as well in similar lawsuits.

Take Fairview Heights, Ill. (pop. 15,000). In 2005, a five-year legal nightmare began after a lawyer pitched the City Council on suing hotels to collect taxes. Sure, they said, but quickly discovered that the real plan was a class-action lawsuit against nearly every online travel broker in the country.

Officials in Fairview Heights went along with the lawyers, hoping for a big payoff that never came. Class-action lawyers have persuaded local officials in 22 states – including California – to pursue similar hotel-tax lawsuits. But far from a budget windfall, in the end city officials fended off transparency criticisms as the lawyers got 80 percent of a modest settlement. The city also had to agree to repeal its law.

Here’s what Fairview Heights, Anaheim and other cities wanted to change: In a typical transaction, a traveler picks a hotel and books a room, stays there, and pays the hotel a room charge plus a local occupancy tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on the room charge. The hotel keeps the room charge and forwards the tax money to the government.

Enter online travel companies like Expedia,, Orbitz, Priceline and Travelocity, which allow travelers to sort through hotels and book a room on a central Web site. These companies do not reserve or resell hotel rooms, but act as intermediaries to facilitate the transaction between hotel and traveler. The hotel receives an amount for the room, on which the city’s hotel tax is based.

Let’s say I search a Web site and book a $100 hotel room. The online company charges me $10 for their service. Anaheim argues that hotel occupancy tax should be paid not only on the $100 room charge, but also on the $10 service fee.

Judges have not found the cities’ arguments convincing. Aside from the Fairview Heights settlement, the Texas lawsuit awarding $20 million to more than 170 cities is the second city victory – and one that the online travel companies are sure to appeal. Lawsuits have been dismissed in nine states and remain pending in the others, including Anaheim’s Priceline case, where the Tax Foundation filed a friend-of-the-court brief opposing giving tax collection powers to private contingency-fee lawyers. The case is being appealed to the state Supreme Court.

Cities’ own laws often state that hotel taxes are paid by hotel occupants, based on the amount the hotel receives. Amounts paid by guests to others aren’t subject to the hotel tax. (Companies must, however, pay income taxes on this amount.) Earlier this year, the 4th U.S. Circuit Court of Appeals held that hotel taxes are owed only by retailers that operate retail facilities, and that online travel companies don’t count.

Unfortunately, some cities are moving to amend their laws to apply hotel taxes to everyone conceivably connected with hotel transactions. Travel agents, brokers, and advertisers might be in danger, depending on how broad the laws get.

A federal bill is pending to limit hotel taxes to amounts collected by a hotel for occupancy purposes, excluding service fees and markups by intermediaries. The Constitution permits Congress to pass such laws if there is a danger that state and city laws are interfering with interstate commerce.

Hotel taxes are attractive to local politicians because they are a way to shift the tax burden to “outsiders.” But because every U.S. city has a hotel tax, we’re all somebody else’s “outsider.” The net result is that everyone is taxing everyone else in an unaccountable way, and unless the cities and their lawyers are stopped, in an unpredictable way, too.