Expedia Pays San Francisco $35 Million in Disputed Hotel Taxes

July 16, 2009

On July 13 online travel giant Expedia Inc. and its subsidiary, Hotwire Inc., paid the city of San Francisco $35 million in taxes the companies claim they don’t owe. The city levies a 14% hotel tax on the purchase price of hotel rooms. The dispute is over whether online sellers have to collect and remit the tax.

For background, here is how these businesses operate. In order to avoid having empty rooms, hotels often offer blocks of rooms to online sellers at a discount, say $100 each. The online seller is charged the 14% hotel room tax on the sale price. The online seller then turns around and sells the room to a consumer for $150. The disagreement is over whether Expedia then owes the hotel tax on the $50 difference between what they paid for the room and what they sold it for. The city says the pair of online sellers owe $35 million on the difference between the purchase price and selling price of hotel rooms between 2000 and 2008.

Expedia has held since 2000 that it does not have to charge or remit the tax because it is an intermediary, not a hotel operator or owner, and the tax only applies to owners and operators. But a trial court disagrees and in order to have their case heard in appeals court the companies paid up the $35 million in hopes of getting it back later. According to Tax Analysts, many similar attempts to get online sellers to pay similar taxes in other cities have failed in state and federal courts.

The hotel tax in San Francisco is projected to bring in $173 million in fiscal year 2010, out of general revenue of $2.9 billion.

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