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
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
The ruling could cost the city millions of dollars in tax
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
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
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
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
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
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
(Reporting by Joseph Ax)
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