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McKool Smith Helps City of Anaheim Win Landmark $21.3 Million Award

Hotel Tax Lawsuit Against Online Travel Companies

February 18, 2009

ANAHEIM, Calif. – Attorneys from the national law firm of McKool Smith represented the City of Anaheim in a recent administrative proceeding that resulted in a $21.3 million award against a group of online travel companies for back taxes, interest and penalties related to the payment of hotel occupancy taxes.

The landmark decision is believed to be the first authoritative ruling that supports the stance of more than 40 other municipalities and governmental entities from across the nation that have filed claims seeking a larger share of hotel occupancy taxes collected by online travel companies such as Hotels.com, Expedia, Orbitz, Priceline, and Travelocity.

Attorneys from McKool Smith argued that the city was owed the additional revenue because the online travel companies pay taxes only on the wholesale price of a hotel room booking, but collect and retain taxes on the higher, retail price. The defendant companies are required to pay the city based on rooms booked through their sites between the years 2000 and 2008 in Anaheim. The city was represented by attorneys Steve Wolens and Gary Cruciani of McKool Smith’s Dallas office, along with co-counsel from Los Angeles’ Kiesel, Boucher & Larson and Dallas’ Baron & Budd.

The Anaheim ordinance, as is the case with many of the hotel tax ordinances in cases brought by other municipalities against the online travel companies, required the city to first exhaust its administrative remedies before going to court.  After a two-week evidentiary hearing, the Hearing Officer found that the online travel companies were  both “operators” and “managing agents” as defined by the city’s ordinance, which is key in establishing their responsibility and liability.  “This is an exhaustive, well-reasoned opinion that we believe will be persuasive authority in other hotel tax litigation, particularly for those cities with similar language in their ordinances,” says Mr. Cruciani.  “The ruling affirmed our position that these companies must collect and remit hotel taxes based on what they actually charge their customers. 

McKool Smith is lead counsel for more than 170 Texas cities in a federal lawsuit that was granted class action status in May 2008 by the U.S. District Court for the Western District of Texas.  The class representative is the City of San Antonio, and includes cities large and small throughout the state.  McKool Smith also represents Broward County, Florida, and the City of San Diego, among other governmental entities, in similar proceedings over unpaid hotel occupancy taxes.

“We’ve seen cities, counties, and states losing out on millions of dollars in tax revenues in every corner of the country where these online travel companies do business,” says Mr. Wolens. “We think the law is clear that our clients are owed these taxes, and our goal is to make sure they receive every nickel they are due.”

The Anaheim ruling was issued on February 6 and, according to Mr. Cruciani, the online travel company defendants, which have filed an appeal, must pay the cash award as a condition to their right to appeal the ruling.

McKool Smith has more than 100 attorneys in Dallas, Austin, Marshall, New York, and Washington DC, handling commercial and intellectual property litigation for national and international clients. The firm is recognized as one of the premier litigation law firms in the United States, having earned significant courtroom victories for clients such as American Airlines, BearingPoint, Ericsson, Electronic Data Systems, Medtronic Inc., and Sony Ericsson.