U.S.-based online travel agencies lost a hotel sales tax case in a high-profile jurisdiction — the nation’s capital.

Major online travel agencies, including Expedia, Priceline and Orbitz, will have to pay the District of Columbia more than $60 million in unpaid sales tax dating back to 1998, according to a July 23 ruling by the District of Columbia Court of Appeals.

The court upheld a Superior Court ruling that the online travel agencies are “vendors” that are subject to sales tax on the retail rates they charge consumers, including the online travel agencies’ service fees, and not just for the sales tax on the net rate that they collect from consumers and hand over to hotels.

The American Hotel & Lodging Association and the Hotel Association of Washington, D.C. hailed the ruling (embedded below).

“We are thrilled that online travel companies will be required to pay their fair share of taxes in the District of Columbia,” said Solomon Keene, president of Hotel Association of Washington, D.C. “This decision not only reinforces our position that these taxes are owed to District taxpayers but hopefully also sends a message to OTCs that the days of misleading consumers are over.”

It wasn’t an all-encompassing win for the District of Columbia, however. The District, which sued the online travel agencies in 2011, had argued that the online travel agencies should also be held liable for sales tax on the net rate that they collect from guests and transmit to hotels, which pay the tax to the District. The District alleged that the online travel agencies should essentially be responsible for sales tax on the sales tax that they were already collecting for hotels because the online travel agencies didn’t specifically detail these charges to customers but lumps them together as “taxes and fees.”

“… the District points out that the online travel companies’ failure to make a separate statement worked ‘to the detriment’ of their customers and so there must be some consequence for that,” the appeals court ruled. “Not only is this sort of punitive taxation not provided for in the text of the sales tax law, however, but it is also not clear how the OTCs’ payment of more money to the District is going to somehow make those customers whole.”

Chalk up a victory for one big city and the hotel industry, which likes to see the online travel agencies’ get squeezed. The case dealt with sales taxes on hotel sales and not the more-common occupancy taxes. It was harder for online travel agencies to argue they aren’t “vendors” than it is for them to convince courts that they are not “hotel operators.”

Download (PDF, 380KB)

Photo Credit: President Obama's armored Cadillac limousine parked outside an entrance to the St. Regis Hotel, Washington, D.C. on March 13, 2013. Stephen Melkisethian / Flickr.com