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In a case more than 7 years old, Cook County Judge Robert Lopez Cepero ruled that such online travel companies can be defined as hotel operators, and they have been violating the Chicago Hotel Accommodations Tax Ordinance, which levies a 4.5 percent tax on room rates.
The controversy, in Chicago and across the country, centers on whether hotel occupancy tax is due on the retail amount that travel agencies collect from consumers or only the wholesale amount that agencies pay the hotels after subtracting their fees. Since online hotel booking began, Internet travel agents have remitted hotel taxes on the lesser amount.
At issue is surely millions of dollars the city could collect in back taxes, potentially relating to many years of Chicago hotel rentals booked through online travel agents. Many Chicago suburbs with hotel taxes have sued separately, alleging they have been short-changed too. A lawyer involved in one of those suits has said that if the state of Illinois joined, collected back taxes could amount to $150 million.
An travel-booking industry group called the ruling “shocking,” saying no other judge in the nation has made a similar finding. It predicted the ruling will hurt Chicago tourism.
“Get ready to pay more for a hotel room in Chicago,” said Robin Reck, spokeswoman for the Travel Technology Association.
Orbitz Worldwide said, “As a Chicago-based company that effectively promotes travel to the city to millions of online shoppers each month, we are disappointed that the city even pursued this case and that the decision clearly reflects a misunderstanding about our role in the marketing and distribution of hotel rooms. We will be exploring our options for appeal.”
In his ruling, the judge wrote that it the Chicago hotel-tax ordinance is clear and it would be “absurd” to find that online travel agencies do not rent rooms to the public, and therefore are “operators” of hotels. He ruled that the hotel tax applies to the transaction between the customer and the online travel agent, not to some lesser amount.
An official from the city did not immediately return a call requesting comment. Lawyers for the city called the ruling “a major win for taxpayers.”
“We are pleased with Judge Lopez Cepero’s decision to hold online travel companies accountable for unpaid taxes owed under the code,” plaintiff attorney Carol V. Gilden of Cohen Milstein Sellers & Toll said in a statement. “The decision makes clear that they must collect and remit taxes on the gross amount paid by customers for hotel rooms in Chicago going forward, as well.”
Online travel companies have argued the difference between the wholesale and retail prices is a fee for their services and not for lodging, and therefore is not subject to hotel-occupancy taxes.
The Travel Technology Association said Friday’s decision was “ripe for appeal.”
“Quite simply, we feel that today’s ruling by the Cook County Circuit Court is incorrect,” the group said in a statement. It disagreed with the judge’s finding that online travel companies are hotel operators. It said travel agencies don’t greet guests, change sheets and towels or maintain hotel buildings. “This is a basic misunderstanding of fact,” the group said. “That’s like calling a bailiff a judge because he happens to work at the courthouse.”
It said, “every other court decision nationwide that has addressed this issue has concluded differently. … This case serves as an outlier, as most courts nationwide have ruled decisively in favor of (online travel companies).”
The result, the travel association contends, will be to increase costs for tour operators, travel agents and online travel companies that send travelers to Chicago. “Because demand for travel to Chicago is sensitive to price changes, this change in tax treatment will harm consumers and significantly reduce demand for Chicago vacations, conventions and meetings,” the group said.
Named as defendants in the 2005 case were many of the largest online travel brands, including Hotels.com, Hotwire, Cheap Tickets, Expedia, Orbitz, Priceline and Travelocity.