City of Duluth in Minnesota suing Expedia, claiming company owes sales taxes on hotel rooms booked in the city, estimated to be worth US$36,000/year

DULUTH, Minnesota , May 23, 2011 () – The city of Duluth is suing Expedia Inc., claiming that the online travel company owes it a share of sales taxes on the hotel rooms it has booked in the city.

However, some hotel executives worry the lawsuit could backfire if Expedia and similar websites react by refusing to list local businesses.

City Attorney Gunnar Johnson said Duluth isn't sure how much money is at stake because it doesn't know how much Expedia has made doing business with local hotels and motels in recent years. The lawsuit seeks that information.

"It's important that everyone who owes taxes is required to pay their fair share," Johnson said.

According to one estimate, the city is missing out on about $36,000 per year.

Todd Torvinen, the chief financial officer and president of Duluth-based ZMC Hotels, said Expedia has a history of blacklisting cities that demand sales taxes. If it did so in Duluth the negative effect could outweigh the tax benefit.

"The bigger worry is that we'll be losing out on that larger amount," Torvinen said.

In a legal response to the lawsuit, Expedia said it has fulfilled its tax obligations because the reimbursements it pays to hotels do get taxed. A message left with Expedia on Friday was not immediately returned.

A Duluth News Tribute report (http://bit.ly/iTiRiS) says the city's chances of prevailing aren't good, at least based on past court decisions. Courts have heard 18 such cases in full, and decided in favor of travel companies in 15 of the cases.

Torvinen and other Duluth hoteliers estimated that 5 percent of rooms booked in Duluth hotels come through companies like Expedia.

Local hotels and motels collect about $56 million annually, Torvinen said, meaning about $2.8 million of that business is driven by online hotel bookers.

About 80 percent of that goes to hotels and is taxed. The other 20 percent, about $560,000, goes to the websites as part of their fees. That part, which isn't taxed, is at issue. If it were taxed at the city's 6.5 percent tax rate Duluth would make about $36,400 per year.

Some hotel managers are wary about the effect of the lawsuit.

"Everyone involved should go into this with their eyes wide open and aware of the potential consequences," said Lisa Augustine, the general manager of the Duluth Holiday Inn.

Johnson, the city attorney, said Duluth's approach will be carefully measured.

"We value our tourism industry, and we're trying to handle this in as careful of a manner as possible," he said. "But at the same time, we don't want to reward anyone for having been a bully in the past."

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