NYC Can't Tax Online Hotel Bookers - Court

November 30, 2011

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An appeals court on Tuesday struck down a 2009 New York City law imposing a tax on hotel-booking websites, the latest legal development in a battle playing out in cities across the US.

Reversing a trial court, the Appellate Division, First Department, ruled that the city had overstepped its bounds in extending a 6 percent occupancy tax to "online travel intermediaries," and declared the law unconstitutional.

Sites such as Expedia, Priceline and Orbitz allow customers to book hotel rooms online, often at a discounted rate.

The ruling could cost the city millions of dollars in tax refunds.

The city law in question, Local Law 43, was intended to close what the city believes is a tax loophole. Travel sites profit by buying rooms from hotels -- paying tax on that rate -- before selling them to consumers at a higher price. Before Local Law 43, the city did not collect taxes on the difference.

By requiring taxes on the full amount paid by customers, including the sites' service fees, the law aimed to reclaim that revenue for the city.

The lawsuit applies only to the tax year from September 2009 to August 2010, according to the city, because the state legislature took steps to change its tax methodology in 2010, allowing the city to rely on state law to collect the tax rather than the disputed local law.

But the ruling means that the city may still owe a refund of the taxes collected on the sites' fees during that year. The exact amount was unavailable, but city projections for the law prior to its approval by the City Council estimated USD$4 million in new annual revenues.

"We are very disappointed in the decision and are considering all of our legal options," said city attorney Joshua Wolf.


The lawsuit is one of dozens pitting online travel sites against municipalities, which argue that they lose millions of dollars in tax money because of the online services.

Court rulings have gone both ways. In July, for instance, a Texas federal judge affirmed a jury's finding that online travel companies owed millions of dollars in taxes to 173 municipalities. More recently, however, a California court ruled that San Diego's occupancy tax could not be applied to booking sites.

The Interactive Travel Services Association, an industry group, says the sites have prevailed in the majority of cases.

"The efforts of governments to try to balance their budgets on the backs of travel companies is not a wise decision, and is only going to hurt travel and tourism," said Joseph Rubin, a spokesman.

Robert Gaffey, who represented the sites in the New York case, said his clients were pleased with the decision.