June 03, 2006
Still pursuing a hotel tax lawsuit

I mentioned before that the city of San Antonio is suing discount online hotel brokers over lost tax revenues. The city of Houston has looked into filing a similar suit, and has now taken further action on this front.

After a setback in late April - the firm chosen by the city to move ahead with the lawsuit backed out - City Attorney Arturo Michel said he hopes to ask the City Council to approve a contract with a different law firm sometime this month.

"We still plan on proceeding with it," Michel said. "We'll keep an open mind, but we've had a lot of good lawyers looking at it, and I'd be surprised if something happened that would change our minds."


Houston has been considering legal action for months, but plans to sue fell through in late April when a Houston law firm the city had chosen bowed out of the project.

The firm did not return calls for comment, but Michel said the move was sparked by a memo that City Controller Annise Parker issued to City Council members, expressing doubt that a lawsuit would be worth the city's time and money.

"It is my belief that there is no clear, irrefutable basis for pursuing this issue further at this time," Parker wrote on April 11.

Indeed, several cities across the country that considered legal action have decided against it.

But Mayor Bill White said Houston will continue to push for a lawsuit. The city plans to negotiate a contingency fee, so it will be financially responsible to a law firm only if unpaid taxes are recovered.

I'm not sure what the merits are of such a suit (me not being a lawyer and all), but I don't suppose I have a problem with one being undertaken on a contingency basis. At least that mitigates the risk.

As for the merits, here's the point/counterpoint for you in a nutshell:

"Part of the problem here is that like a lot of our tax laws, the hotel tax law was created before there was an Internet," said Texas Deputy Comptroller Billy Hamilton. "So the law simply didn't contemplate it."

Not so, said former state Rep. Steve Wolens, a lawyer who is representing several cities in lawsuits against online travel companies.

He said both Texas and Houston law are very clear: Any person controlling a hotel room is required to collect and remit the tax.

He said that whether the Web site operators actually own the hotel rooms is irrelevant. "They control the rooms and therefore they have to collect the tax," he said.


Art Sackler, director of the Interactive Travel Services Association, which represents travel Web sites, argues they do not have to pay the tax because the price markup represents a service fee. Companies charge customers for the convenience of finding them an affordable, available hotel room, he said.

"Those service fees are not - on the law or on the facts - subject to the tax," Sackler said.

His industry is frustrated with the lawsuits, he said, because some were filed without any attempt to talk out the issue with travel companies.

"We're extremely confident that once we would have a chance to chat with anyone who is in a position to be looking at this, we'll be able to easily demonstrate that there are no taxes due on our service fees, no taxes being collected and withheld," Sackler said. "The city of Houston so far has been very responsible in this manner, approaching it in just the right way: having discussions with us."

Like I said, I'm not sure how solid the cities' cases are. I suspect that a legislative solution is going to be needed here, though I'm not sure how likely one is to pass. It would be a shorter path for the cities to get what they want if they can get a bill through the Lege, that's for sure. We'll see what happens.

Posted by Charles Kuffner on June 03, 2006 to Legal matters | TrackBack