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Court decision could mean millions for Hawaii

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Expedia Inc., the leader in U.S. online travel bookings, is fighting an outstanding hotel-room tab of more than $800 million.

That’s how much Expedia could owe Hawaii and scores of U.S. city and county governments in tax payments for online hotel bookings over more than a decade, according to a review of dozens of lawsuits and tax-revenue records. Expedia, which announces its 2014 earnings later Thursday, had less than 1/10 that amount set aside to address the potential liability as of Sept. 30, according to a filing with the Securities and Exchange Commission.

The Bellevue, Washington-based investor favorite, along with other travel websites, has shorted these governments by paying taxes on the wholesale price it pays hotels for rooms, according to the suits. It and other sites should instead be paying taxes on the full room price paid by online customers, these local governments say.

Expedia and other sites have told the courts that under local ordinances, taxes apply to entities that own or control hotels — not to the websites that help them book rooms. Tarran Vaillancourt, a spokeswoman for Expedia, declined to comment on the pending litigation or the tax payment issue.

The suits seek to claw back what amounts to a few dollars per room per night. But that adds up to as much as $400 million a year in suppressed state and local government receipts from online travel bookers, according to a 2011 estimate by Michael Mazerov, a senior fellow at the Washington-based Center for Budget and Policy Priorities, which advocates for low-income families. Since then, revenue for the biggest online travel sites has grown about 70 percent.

HAWAII DECISION

In coming weeks, Hawaii’s Supreme Court is expected to hand down a decision in the biggest tax case currently pending. The state has appealed one part of a lower-court decision finding in favor of Expedia and its rivals, including Orbitz and Priceline. The online travel sites, joined by Travelocity, have appealed another part of that decision, which found them liable for some taxes. The sites sued after the state billed them to recover what assessors claim is more than a decade’s worth of lost taxes.

An across-the-board loss in Hawaii could leave Expedia on the hook for as much as $626 million in taxes, penalties and interest through 2015, according to data and estimates compiled by Bloomberg News.

Losses in the cases across the U.S. could leave the Expedia companies with a total tax bill of as much as $847 million through 2015. That is based on the amounts that jurisdictions are attempting to collect in nine of the largest suits involving Expedia, plus conservative estimates of potential tax bills for the periods since the suits were filed. The tally doesn’t count tax bills that Expedia has already paid but is appealing. It may also exclude some legal fees, interest and penalties and assumes that Expedia, as part of its purchase of Travelocity, took on its potential liabilities.

WORST CASE

That worst-case estimate compares with Expedia’s net income of $410.7 million before extraordinary items in the 12 months through September on $5.6 billion in revenue. Expedia’s legal reserve to cover “probable and estimable” losses was $60 million on Sept. 30, according to a quarterly SEC filing.

“The online travel companies are grossly under-reserved,” says Steven Wolens, a principal at the law firm McKool Smith PC in Dallas, who has helped file cases for cities and other jurisdictions across the country.

ADEQUATE RESERVES

Expedia has told investors its reserves are adequate. “We believe that the ordinances at issue do not apply to the services we provide, namely the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed,” Expedia’s most recent quarterly securities filing states.

Expedia shares were up 37 percent over the 12 months ending Feb. 4, compared with 16 percent for the Standard & Poor’s 500 Index.

According to its SEC filing, Expedia has been the target of 88 lawsuits involving the room-tax issue. It’s won dismissal in 23 cases; 35 remain active. The remainder have been settled, put on hold, referred to administrative proceedings or otherwise resolved.

Orbitz has had “considerable success in defending” such cases, Tim Enstice, a company spokesman, said by e-mail. A Priceline spokesman declined to comment.

‘FAIRNESS ISSUE’

“It’s a fairness issue,” says Owen Clements, chief of special litigation for San Francisco, which was awarded $73.5 million by a city hearings examiner in a decision Expedia is appealing. “If we’re not getting tens of millions of dollars from the online travel companies, then other people will have to pay more” in taxes, he says.

Expedia isn’t the only online travel agent to use the pricing model, but it is the biggest. The units that comprise the company — which include Hotels.com and Hotwire, as well as Travelocity, which Expedia bought in January — accounted for 54 percent of hotel bookings made in the U.S. through online travel websites in 2014, according to preliminary data from Phocuswright, a travel industry research group. Priceline was next, with a 29 percent share.

2001 EMAIL

In 2001, an Expedia executive wrote in an email that paying taxes on wholesale rather than retail hotel rates “will add between $2-$3 million in our net profit (bottom line) next quarter,” according to a 2011 presentation by the Indiana Attorney General’s office, citing documents in a class-action lawsuit against Expedia in Washington State. The state was sued by several online travel sites, including Hotels.com and Hotwire, after it tried to assess back taxes.

The first room-tax suit on behalf of a city was filed in 2004 for Los Angeles, according to Wolens, who represented the city in its case. Wolens says he first heard from “people who for a living read 10-Ks” that Expedia was setting aside cash in case they were sued by local governments about its tax payment practices.

“It’s a neon light,” he says. “They’re saying, ‘We can be sued by jurisdictions, and we may have to pay.’ “

A handful of lawyers around the country have since joined city and county attorneys filing dozens of similar suits.

WATCHING SAN DIEGO

Wolens stands to earn a cut from victories against online travel sites by his government clients, which include several California cities, 173 Texas cities, two counties in Florida and the state of Hawaii.

New York, Oregon and Washington, D.C., have in the past six years amended hotel-tax regulations to clarify that travel websites owe taxes on retail room rates charged to customers. Lawyers are also watching an appeal brought by the city of San Diego against Expedia, which is now before California’s highest court; cases in Los Angeles and San Francisco have been stayed pending the outcome.

Clements, the lawyer for San Francisco, says a decision in San Diego’s favor could trigger a new round of suits in the state.

“A lot of people are probably holding fire until they see what happens in the Supreme Court,” he said.

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