A federal judge in Nashville ruled Feb. 21, 2011, county and city governments may not impose taxes on online travel companies for services offered to customers under existing hotel occupancy laws. (File photo)
A federal judge in Nashville ruled Tuesday that county and city governments may not impose taxes on online travel companies for services offered to customers under existing hotel occupancy laws.
U.S. District Judge Aleta A. Trauger ruled that companies like Expedia Inc. do not operate as hotels and are independent entities that negotiate in arms-length transactions. As such, online travel companies serve only as a conduit for consumers wishing to make reservations at a discounted rate.
The decision ended a nearly four-year legal battle that pitted more than 70 Tennessee counties and 56 municipalities, including the city of Murfreesboro, in a class-action lawsuit against some of the best-known online travel companies in the country.
Trauger said the Tennessee General Assembly had “failed to keep up with the times,” referring to the lack of tax laws designed for online commerce.
As part of her decision, Trauger also said local governments had overreached, noting the Enabling Act, which gives cities and counties the authority to enact parallel taxes as the state, was not applicable.
“It is ultimately the role of the state legislature,” she said, “to enact revenue statues that clearly state the scope and application of the tax laws and, upon identifying any potential revenue shortfalls in their application, to address those perceived shortfalls by appropriate legislation.”
If the General Assembly intends to permit county and city governments to “tax the retail rate paid by consumers to the online travel companies for hotel bookings, the legislature may do so through appropriate statutory language,” she said.
In June 2010, the Murfreesboro City Council joined the class-action lawsuit, which was led by the city of Goodlettesville.
“This was done because it was the City Council’s contention that regardless of whether a visitor makes a reservation for local accommodations from a computer or directly in person, it should not make any difference to whether the hotel tax is levied,” said Chris Shofner, public information officer for the city of Murfreesboro.
Shofner said city officials had not yet reviewed the decision, adding he would not speculate as to how “this ruling will affect future taxation.”
However, he said the current budget includes more than $850,000 in occupancy tax revenue, which was collected from hotels located in Murfreesboro.
The decision comes on the heels of two other setbacks for local governments. The Kentucky Supreme Court and the Pennsylvania Commonwealth Court also dismissed similar lawsuits using the same logic.
“We are pleased that these three courts have properly interpreted the law, and correctly concluded that online travel companies do not operate hotels or underpay taxes,” said Joseph Rubin, president of the Interactive Travel Services Association.
Rubin said the ruling proves that filing class-action lawsuits against online travel companies in other states should cease.
“We hope other municipalities will recognize this clear trend and will read these thorough, well-reason opinions,” Rubin said. “As demonstrated by these strong opinions, there is little basis for this litigation that some states and localities have pursued, (which) end up simply wasting taxpayer resources.”