NEW YORK, Nov 29 (Reuters) - An appeals court on Tuesday struck down a New York City law imposing a tax on hotel-booking websites such as Expedia and Priceline, the latest legal development in a battle playing out in cities across the country.

Reversing a trial court, the Appellate Division, First Department, ruled that the city had overstepped its bounds in extending a six-percent occupancy tax to "online travel intermediaries" and declared the law unconstitutional. Sites such as Expedia, Priceline, Orbitz and Hotels.com allow customers to book hotel rooms online, often at a discounted rate.

The ruling could cost the city millions of dollars in tax refunds.

The city law in question, Local Law 43, was intended to close what the city believes is a tax loophole. Travel sites profit by buying rooms from hotels -- paying tax on that rate -- before selling them to consumers at a higher price. Before Local Law 43, the city did not collect taxes on the difference.

By requiring taxes on the full amount paid by customers, including the sites' service fees, the law aimed to reclaim that revenue for the city.

The lawsuit applies only to the tax year from September 2009 to August 2010, according to the city, because the state legislature took steps to change its tax methodology in 2010, allowing the city to rely on state law to collect the tax rather than the disputed local law.

But the First Department's ruling means that the city may still owe a refund of the taxes collected on the sites' fees during that year. The exact amount was unavailable Tuesday, but city projections for the law prior to its approval by the City Council estimated $4 million in new annual revenues.

LAWSUIT ONE OF DOZENS

"We are very disappointed in the decision and are considering all of our legal options," said city attorney Joshua Wolf.

In court filings, the city had argued that the legislation establishing a hotel occupancy tax permitted it to collect taxes on the entire amount paid for a room, regardless of whether the customer paid the hotel directly or used a third-party booking company.

The First Department disagreed.

"Contrary to the motion court's finding, the plain language of the enabling legislation did not clearly and unambiguously provide the city with broad taxation powers with respect to imposing a hotel occupancy tax," the panel wrote. "Rather, it permitted the city to impose the tax on 'hotel occupants.'"

The lawsuit is just one of dozens pitting online travel sites against municipalities, which argue that they lose millions of dollars in tax money because of the online services.

Court rulings thus far have gone both ways. In July, for instance, a Texas federal judge affirmed a jury's finding that online travel companies owed millions in taxes to 173 municipalities. This fall, however, a California court ruled that San Diego's occupancy tax could not be applied to booking sites.

The Interactive Travel Services Association, an industry group, claims the sites had prevailed in 15 of 19 cases where courts have ordered judgment before Tuesday's ruling.

"The efforts of governments to try to balance their budgets on the backs of travel companies is not a wise decision, and is only going to hurt travel and tourism," said Joseph Rubin, a spokesman.

Robert Gaffey, who represented the sites in the New York case, said his clients were "pleased" with the decision.

The case is Expedia et al. v. The City of New York Department of Finance, New York Supreme Court, Appellate Division, First Department, No. 650761/09.

For Expedia et al.: Robert Gaffey of Jones Day

For the city: Joshua Wolf of the New York City Law Department

(Reporting by Joseph Ax)

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