Newport warned not to join suit

A representative for many of the online travel companies targeted in a class-action lawsuit said Newport Beach would do well to stay out of the case, calling it a self-defeating lawsuit that would hinder cities’ ability to fill hotel rooms.

The suit, filed in December 2004 by the city of Los Angeles, claims that Expedia, Travelocity and other online providers shortchange cities on the transient occupancy tax they pay for booking rooms.

The Newport Beach City Council is scheduled to consider the matter in closed session at its Tuesday meeting, and assistant city attorney Aaron Harp said the city’s options included filing litigation against the travel companies.

According to Art Sackler, executive director of the Interactive Travel Services Assn. in Washington, D.C., that would be a bad idea.

“They’re wrong on the facts, and they’re wrong on the law,” Sackler said about the class-action suit. “The city [of Los Angeles] is following an unfortunate path in suing first and asking questions later.”

The controversy in the suit boils down to how much tax money online providers owe cities for booking rooms. If a company such as Hotels.com obtains a hotel room for $70, for example, it may rent the room to a consumer for $100. However, the company only pays transient occupancy tax to the city for the $70, not the remaining $30.

The suit argues that the online companies pocket the difference and fail to pay the extra tax due to the city. Sackler, however, said that the extra dollars charged to the consumer are a service fee for providing easy online booking, and that they should be considered apart from the room rental.

“The service fees that are charged are for a return on the millions and millions of dollars of investments in creating those wonderful online travel sites that are state-of-the-art and have multiple functionality and are so easy to use, and they are not for the hotel room,” Sackler said. “And since they are not for the hotel room, they are not taxable.”

Glen Everroad, Newport Beach’s revenue manager, said he had heard arguments similar to Sackler’s but said he found it flawed.

Virtually every part of a hotel bill, he said, could be deducted to cover electricity, cleaning and other services.

“Once you start exempting things, it becomes a slippery slope and could open up to all kinds of exemptions,” Everroad said.

MICHAEL MILLER may be reached at (714) 966-4617 or at michael.miller@latimes.com.