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Online Travel Companies Score Victory In Tax Fight With Georgia Cities And Counties

On December 13, 2013, the Eleventh Circuit awarded a significant victory to online travel companies (OTC’s) in their long-running dispute with Georgia cities and counties over “excess” occupancy taxes the OTC’s allegedly charged their customers.   In City of Rome v., L.P.,the Eleventh Circuit agreed with a lower court ruling which held that the localities failed to present sufficient evidence that the OTC’s actually collected the “excess” occupancy taxes the localities sought to recover, affirming summary judgment for the OTC’s—and avoiding a multi-million dollar exposure.


The City of Rome brought the class action against the OTC’s on behalf of 250 Georgia cities and counties. At issue were occupancy taxes that the cities and counties were entitled to collect from Georgia hoteliers under the Enabling Act, O.C.G.A. § 48-13-51. The Enabling Act provides that “every . . . entity subject to a tax levied as provided in this Code Section shall . . . be liable for the tax at the applicable rate on the lodging charges actually collected.” The localities alleged that the manner in which OTC’s calculated, collected and paid occupancy taxes violated the Enabling Act and also gave rise to state law claims for conversion, money had and received, and constructive trust.

The OTC’s generally operated this way: They would contract with Georgia hoteliers to sell the hotelier’s un-booked rooms through their travel websites. The hoteliers would agree to charge the OTC’s a discounted “wholesale” rate for any rooms they sold. The OTC’s would profit by chargingconsumers a higher “retail” rate for those rooms. The OTC’s also charged consumers an additional, un-itemized amount for “taxes and fees.” That charge consisted of anticipated occupancy taxes plus a service fee. When an OTC sold a room in this manner and collected payment from its customer, the hoteliers would then invoice the OTC for the cost of the room, at the agreed-upon wholesale rate, plus occupancy taxescalculated based on that wholesale rate. The hotelier would then pay the wholesale-rate occupancy taxes to the appropriate local taxing authority.

In the lawsuit, the cities and counties essentially accused the OTC’s of playing “occupancy tax arbitrage.” They allegedthat the OTC’s assessed consumers occupancy taxesbased on the higher “retail” rate the OTC’s charged, but paid hoteliersfor occupancy taxes based on the lower “wholesale” rate the hoteliers charged them. Thus, according to the localities, the OTC’s improperly pocketed “excess” occupancy taxes—i.e., the difference between the higher retail-rate occupancy tax and the lower wholesale-rate occupancy tax. The localities alleged the OTC’s should have paid occupancy taxes based on the higher retail rate and sued to recover those alleged unpaid taxes.


The problem for the localities: they couldn’t prove their allegations. Or so concluded the district court and the Eleventh Circuit. As Judge J. Randall Hall stated in the Eleventh Circuit’s opinion: “While the Localities offer facts that they hope raise the Court’s eyebrows, they, after years of discovery, have failed to present sufficient evidence that raises a genuine question that the OTC’s, in fact, collected any taxes above the wholesale rate.” Stated differently, the localities failed to present sufficient evidence to create even a triable issue of fact as to whether the OTC’s actually collected retail-rate occupancy taxes from consumers.

If there is a broader lesson to be drawn from this case, it relates to the interplay between circumstantial evidence and the summary judgment standard—particularly when it comes to a plaintiff’s burden of proving and quantifying damages. As the Eleventh Circuit noted, FRCP 26 requires plaintiffs in their initial disclosures to include “a computation of each category of damages claimed by the disclosing party.” The district court and the Eleventh Circuit rejected as insufficient circumstantial evidence that the OTC’s appeared to be charging consumers occupancy taxes at the higher retail rate—despite the fact that the OTC’s likely contributed to this proof problem by lumping taxes and service charges together on their un-itemized consumer invoices.

As the Eleventh Circuit held, “the evidence presented . . . does not permit a jury to decide—beyond guesswork and conjecture—what amount of the ‘taxes and fees’ line item charge was taxes, and what amount was fees. Even more critical, the evidence does not permit a jury to reasonably conclude that the entire ‘taxes and fees’ charge, just the fees portion charge, or any of the line item charge at all was collected as a tax on the retail rate.” So, plaintiffs beware: circumstantial evidence of damages, even “eyebrow raising” circumstantial evidence, might not be enough to get you past summary judgment and to a jury.

Scott L. Bonder is a trial lawyer who handles business litigation cases, including the defense and prosecution of RICO claims, in federal and state courts nationwide.

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