The law is trying to catch up to technology by pitting state and local governments against third-party websites. The issue is taxes collected on online guestroom sales. Cities spanning Rome, GA (population 35,000) and Los Angeles (some 10 million strong) are suing online travel agencies like Expedia and Travelocity in an effort to collect what might be millions of dollars in bed taxes that they claim are owed but unpaid.

Dot.com spokespeople say they do not act as hotel operators or hotel agents so they don't collect taxes on the retail rate when they offer rooms secured on a net rate.

The issue is complicated because there are so many different tax collection mechanisms. In addition, conventional bed tax law doesn't cover travel-industry dot.coms.

According to Tom Hazinski, managing director of HVS Convention, Sports and Entertainment Facilities Consulting, bed tax laws are based on gross room revenues. “When you come to a hotel and you're charged $89, you're taxed on that as an individual. Say I go through Expedia; it's the gross that gets charged to the hotel that gets taxed. The customer pays it, but the hotel is responsible for collecting it.

“One way to look at it is that the hotelier is playing collections agent for the government. Let's say the third party charges the hotel $100 but the customer pays $80; the hotel gets charged commissions and fees.” Hazinski says statutes he's reviewed vary “quite a bit,” but all show that “the tax is on gross room sales. Most of these laws were written before these third-party things existed.”

In Orange County, FL, home to the tourist Mecca of Orlando, officials say the online travel agents have been shortchanging the county by about $5 million a year. A lawsuit attempting to clarify a tax law that would help them collect the money is in the works.

“We have taken a position that we want to do this with baby steps, and the baby steps are to establish whether or not we have the right to audit” the dot.coms, says Orange County Attorney Tom Drage. “We feel it's clear that what they're doing constitutes a taxable transaction.” The county's five-percent bed tax yields about $120 million a year, “and the estimate is we may be losing as much as $5 million a year as a result of the dot.coms not paying the tourist development tax,” Drage says.

What's murky is what Scott Joslove, president and CEO of the Texas Hotel & Lodging Association, calls the “upcharges.”

“Typically, when a hotel dot.com charges $100 a room, it's under a contract with hotels saying they'll pay $70, and that includes taxes for the hotel based on the $70 charge. So the hotel will be remitted $70 plus taxes on $70.” Those taxes, or “upcharge,” are a form of reservations fee.

“If you book a room through a travel agency, it may be paid an upcharge or commission it adds on to your base charge; one could argue whether or not the taxes due should be based on the full amount that the customer pays for the room or on the amount that actually went to the entity that was paid.

“It's an issue for the courts to decide,” the attorney says, “and it will be litigated pretty fiercely.”

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