BERLIN – A federal judge this week again rejected a motion to dismiss a civil suit filed in January by the County Commissioners against a host of Internet-based travel booking companies seeking what could be millions of dollars in unpaid hotel room taxes, allowing the case to continue to move forward.
In January, attorneys for the county commissioners filed suit in U.S. District Court naming 14 individual defendants, all under the umbrella of four major Internet travel booking companies including Expedia, Orbitz, Priceline and Travelocity. The complaint alleges the companies have not been paying the entire amount of room taxes owed on rental transactions booked in the county, largely from Ocean City.
According to the complaint, the defendants purchase hotel rooms in the county in bulk at deeply discounted wholesale prices and pay the required room tax to Worcester only on the discounted rate. The Internet travel companies then turn around and sell the rooms to consumers at normal retail rates and collect the required room tax during the transactions, but do not remit the taxes they collect to the county, instead keeping the money as part of their profit.
In March, the defendants filed a motion to dismiss the case, claiming the county’s complaint was not valid because the travel booking companies do remit to the county the required amount of room tax based on the price they paid for the rooms. However, Worcester countered the defendants should be paying room tax on the amount the travel-booking companies sell the rooms to the consumers, not the deep discounted rates they pay the establishments. This week, U.S. District Court Judge Marvin Garbis ruled against the defendants’ motion to dismiss the case, effectively stating the county’s case has at least enough validity to continue through the process.
“Worcester County’s claim is on the plausible side of the line between conceivable and plausible,” the opinion reads. “Whether Worcester County’s claim against any defendant will survive a motion for summary judgment remains to be seen. However, the Worcester County claim is plausible enough to survive the motion to dismiss.”
In his formal opinion, Garbis said the county’s complaint passed the test for reconsideration because nothing in the law had changed remarkably between when it was filed in January and when the defendants motioned to dismiss the case in March.
“A motion for reconsideration should only be granted in the relatively rare instances where there has been an intervening change in the controlling law, or the court has made a clear error in its initial ruling, or new facts have surfaced,” the opinion reads. “Little additional discussion is necessary in view of the low threshold for survival of the plaintiff’s claim. The court finds that a hearing is unnecessary.”
Worcester alleges the defendants fit in the county’s definition of hotels because they are establishments that offer sleeping accommodations for compensation. Essentially, the county is alleging the Internet travel booking companies named as defendants are technically hotels in that they buy and resell rooms to the public for compensation, which fits them into Worcester’s definition of a hotel, motel or lodging place.
While not entirely dismissing that concept, Garbis opined there would be opportunities further down the road to test the county’s rather nebulous definition of a lodging establishment. In short, the judge denied to motion to dismiss the case at this time despite the county’s apparent loose interpretation of its room tax statute.
“Of course, there is an issue whether the reach of the Worcester County tax must be limited to an amount paid to a hotel,” the opinion reads. “However, even if so narrowed, there would be a plausible claim against any defendant whose method of operation could be found to bring it within the definition of a hotel.”
With more and more travelers booking their vacations online through Internet companies, the potential room tax allegedly lost in the transactions could total millions of dollars. Although the difference in most cases is a couple of dollars per room, per night, the amount of room tax revenue lost in Worcester, should the county prevail in its suit, could be staggering when considering thousands of hotel rooms in the resort area and hundreds of nights.
For example, if a vacationer paid Expedia $100 for a hotel room in Ocean City, the company would calculate the room tax it owes to the county based on that amount. However, Expedia might have purchased the room at a bulk wholesale rate of $60, and would pay the county the room tax based on the $60 amount it paid for the room.
In the above example, with Worcester County’s current room tax rate at 4.5 percent, the room tax owed on the $100 room rental would be $4.50. If Expedia, for example, paid the county the room tax it was owed for the $60 bulk purchase of the room, it would pay only $2.70 in room tax to Worcester, or 40 percent less than it should have, according to the civil suit filed this week. In essence, the online travel booking company would have pocketed the difference, or about $1.80 in the above example.