A tax battle between the nation's capital and seven online travel companies has ended with the websites being ordered to pay almost $61 million in sales taxes.
The taxes, which apply to Washington, D.C., hotel rooms booked from 1998 to 2010, could be the largest tax settlement ever paid to the District of Columbia government.
It also ends a tax fight between the national capital's tax collector and the online room reservation agents at Expedia, Hotels.com, Hotwire, Orbitz, Priceline, Travelocity and Travelscape that began in 2011.
Retail taxes due: At issue was the tax difference between applying Washington's 14.5 percent hotel tax to the wholesale prices of the rooms sold by the websites versus the rooms' full retail prices.
Some estimates of the unpaid taxes over the 14-year booking period in question put the national capital's tax losses at around $200 million.
Both sides agreed to the nearly $61 million plus interest settlement in 2014. The deal, however, still gave the travel companies the right to appeal the original D.C. Superior Court decision that found they owed the back sales taxes.
It was a chance worth taking, so they did. But it didn't pay off.
Appellate court sides with D.C.: The travel companies argued that the only taxable transaction was between the customer and the hotel.
The D.C. Court of Appeals three-judge panel said no, ruling that the D.C. government can tax the difference between the actual cost of the room, which the hotel receives, and the higher rate the travel companies charge the customer in order to make a profit.
"[T]he meaning of the statute is clear: by imposing tax on the 'sale or charge … for any room … furnished to transients by any hotel,' the sales tax statute is taxing the sales transaction by which a customer purchases a hotel room in the District of Columbia," Judge Corinne Beckwith wrote for the court. "The [online travel companies'] retail margins are a part of that sale."
"This is a huge victory for the District's taxpayers, and it ensures that online travel companies have to follow the same rules as everyone else," D.C. Attorney General Karl Racine said in a statement.
The travel companies have put the money in escrow so it could be transferred to the District shortly.
Just one of many travel tax fights: The D.C. tax situation is not unique. Online travel sites have been fighting with state tax collectors and even with hotels for years over who's responsible for paying what taxes.
Hawaii recently won in its state's highest court in an effort to collect back taxes against nine online travel companies. D.C.'s neighbor Maryland also has been looking to close a loophole that lets online hotel bookers pay less in sales tax than the hotels themselves when the same room is booked directly with them.
The bottom line is that as states look to maximize their revenue streams, travelers nationwide looking to save a few dollars by making online accommodations might soon fine those hotel rooms are a little less of a bargain.
You also might find these items of interest: