It hasn't received much publicity but a New York state court handed online travel agencies, traditional travel agencies and tour operators a stinging rebuke on the hotel tax and service fee issue -- one that might have far-reaching repercussions in New York City and beyond.
The Supreme Court, New York County, threw out part of a lawsuit brought by Expedia, Priceline, Travelocity, the American Society of Travel Agents and United States Tour Operators Association against the City of New York challenging the constitutionality of New York City Local Law 43.
In essence, the law creates a category, room remarketers, which would includes OTAs, traditional travel agencies and tour operators offering hotel rooms using the merchant model, and states they are responsible for the hotel occupancy tax on the full retail rate charged to consumers, including service fees, instead of merely on the net rate they negotiate with hotels.
The law also requires room remarketers to provide a detailed breakdown of "taxes and fees," a step intermediaries are loathe to do for competitive reasons.
In many lawsuits across the country, the OTAs have often successfully argued that they are not hotel operators and thus should only be liable to remit tax on the net rate they get from hotels.
The New York state court, in its Oct. 21, 2010, ruling nixed arguments from the OTAs, ASTA and USTOA that the new city tax law required action by the state legislature and that service fees should be excluded from the tax liability.
“We are pleased that the Court confirmed the constitutionality of Local Law 43, and accordingly, the City’s right to impose the hotel room occupancy tax on the full amount charged for a hotel room," says Joshua Wolf, assistant corporation counsel, Tax & Bankruptcy Division, NYC Law Dept.
While the court dismissed the plaintiffs' constitutional claim, it has yet to rule on a second cause of action, alleging that even if the New York City law is constitutional, it doesn't apply to the OTAs, travel agencies and tour operators.
Laws vary from state to state, but the decision could embolden other jurisdictions to write legislation that would specifically hold remarketers accountable for remitting occupancy tax.
The New York City law is more far-reaching than most because it is directed not only at OTAs, but also at offline travel agencies and tour operators.
The Interactive Travel Services Association, which speaks for major OTAs and ASTA on the hotel tax issue, says it is studying the ruling "and considering what next steps to take, in any."
In another jurisdiction, Columbus, Ga., where a tax case went against the OTAs, they ceased selling hotel rooms on a merchant basis in that city, which is tiny compared with New York City.
With the ruling, the OTAs may face the challenge of complying with the law -- which would upend their practice of the merchant model and compel them to detail their fees in a transparent manner -- or withdrawing from the market.
Pulling out of New York City, with its vast hotel market and large visitor numbers, isn't very likely, but it's also improbable that OTAs, travel agencies and tour operators will idly sit back.
They could possibly negotiate some kind of compromise with New York City.
The ruling will undoubtedly put new energy into the OTAs' efforts to get federal legislation to remove themselves from this cross-country litigation and tax nightmare.