City suit against hotel sites draws interest from across state, region.

After filing suit against a dozen online hotel booking services, the city of Los Angeles has been flooded with calls from other municipalities that want to take part in the potential class-action case and collect back taxes to fill their cash-strapped coffers.

The lawsuit could eventually encompass as many as 100 municipalities in California, including San Francisco, Santa Barbara and Beverly Hills, according to the lawsuit filed in Los Angeles Superior Court last week.

L.A. city officials claim Las Vegas is looking into its own lawsuit, and Matt Dorsey, a spokesman for the San Francisco City Attorney Dennis Herrera, said that city, as well as New York and Orange County, Fla. (which includes Orlando), have expressed interest in separate lawsuits.

"The issue is complex and it depends a lot on local ordinances and how tough it is to collect the taxes," Dorsey said. "We certainly agree with L.A. that these are revenues that belong to local governments."

Last week, Los Angeles City Attorney Rocky Delgadillo sued online service firms, including Hotels.com, Expedia.com and Priceline.com. The suit alleges that the services are passing through only a portion of the city's 14 percent hotel occupancy tax that they collect.

The city has estimated that Hotels.com and Expedia.com alone, which are both owned by Barry Diller's IAC/InterActiveCorp., owe a combined $10 million a year in occupancy taxes, said Steven Wolens, a Dallas attorney who is representing Los Angeles in the suit. The city is seeking back taxes from all online hotel operators dating to 1999.

"These companies essentially have stolen money from the city that could pay for 100 police officers," said Delgadillo. "It's an important issue for any city when anyone defrauds residents of important tax dollars that pay for critical services like policemen and firefighters."

Art Sackler, executive director of Interactive Travel Services Association, an industry trade group, said the city attorney's lawsuit is "wrong," adding: "The claim that ITSA members do not remit collected taxes is false."

At issue is the 14 percent hotel occupancy tax charge on all Los Angeles hotels rooms.

The city alleges that the online hotel sites purchase rooms at a discount and sell them at a marked-up price to consumers, collecting the taxes on the full price paid. Local hotels end up paying the occupancy tax based on the discounted rate but the Web sites keep the taxes they collect on the mark-up.

"It's very clear when you look on their Web sites that if you buy a hotel room for $100, the tax they are collecting is 14 percent but they are not paying that to the city," said Katie Buckland. a spokeswoman for the city attorney, who added that the sites often obscure the amount of taxes they collect by calling them service fees.

"It's very, simple math for them to calculate the taxes they owe," Delgadillo said. "It is a complicated and fraudulent scheme because these entities are buying rooms at one rate, selling them at a higher rate and not paying taxes on the higher rate."

City's annual take

The hotel occupancy tax is among the 10 largest tax sources collected by Los Angeles, and for the 2004-2005 fiscal year it's expected to generate $118.7 million, according to the city's budget summary.

The legal issues in the case are expected to hinge on the interpretation of city ordinances and their specific wording. Recognizing that issue, Los Angeles city officials modified the Uniform Transient Occupancy Tax Ordinance in July 2004 to specifically identify Internet booking companies as being subject to the tax.

The industry is expected to fight the lawsuit on two grounds: that the tax does not apply to online hotel booking companies, and that the city is trying to impose a new tax on Internet companies, even though new taxes must be approved by voter referendum.

Despite industry denials, IAC/InterActiveCorp., operator of Hotels.com and Expedia, said in a November filing with the Securities and Exchange Commission that it "does not pay occupancy tax on hotel customer payments that it retains for the intermediary services it provides in connection with its merchant hotel business."

The filing also said that "discussions and developments relating to this practice are ongoing in various tax jurisdictions." The company claims that the issue will not have a material adverse effect on its past or future financial results.

In a statement, IAC/InterActiveCorp. said the lawsuit was "entirely without merit." Company officials referred calls to the ITSA's Sackler.

Brian Ek, a spokesman for Priceline.com, said Priceline is reviewing the lawsuit. "Until we've had an opportunity to thoroughly review it, we're not going to say anything," he said.

Calls to Cendant Corp.'s Orbitz Inc. and Cheap Tickets Inc. and Sabre Holdings Corp.'s Travelocity.com weren't returned.