Irony - San Diego CVB: Expedia "Partner of the Year" While City Sues Expedia Over Occ Taxes

Expedia Media Solutions (the media arm of Expedia Inc.) yesterday announced that the San Diego Convention and Visitors Bureau had named Expedia.com "Partner of the Year." According to the press release, the San Diego CVB was recognized as "a top advertising partner and major sales channel for San Diego hotels."

The press release continues:

"'As a promotion partner, Expedia not only grew San Diego's room nights year-over-year by 26 percent, but in these tough economic times they were able to grow revenue by 11 percent – exceeding ROI estimates and generating a significant return on investment of 125 to 1,' said Joe Terzi, President and CEO of the San Diego CVB. 'Serving many different consumer segments—from families booking a summer vacation to individuals arranging a quick weekend getaway—Expedia gives us a highly effective way to share San Diego's message to a broad audience of travel shoppers and potential visitors.' "

Hmmm. Interesting that the CVB is so enthusiastic given that the City of San Diego is one of the many municipalities currently suing Expedia and the other major online travel agents. An administrative hearing has been held on the case but before any decision was rendered, the Judge in the similar Anaheim case rendered her opinion in favor of the the OTAs.

And just how does the San Diego CVB receive most of its funding? You guessed it, occupancy taxes. According to the CVB's own website, "the majority of funding is derived from San Diego Tourism District Assessment Funds." Again from the CVB's own website, the current transient occupancy tax is 10.5% in the City of San Diego. There is also an additional 2% occupancy tax levied for the San Diego Tourism Marketing District. If you enjoy reading tax code, here is the actual language from the City of San Diego's municipal code.

Anyone who has been following the ongoing saga of the tax lawsuits against the OTAs knows that the issue is if the taxes above are levied on the net or wholesale rate actually charged by the hotel to the OTA or the marked-up, retail rate sold by the OTA.

So now we have an interesting situation: The very agency (the CVB) charged with promoting San Diego (whose funding comes from the occupancy taxes in question) is holding out an OTA (Expedia) as a great partner. At at the same time the city of San Diego is suing Expedia et al for non-payment of occupancy taxes that largely fund the CVB!

So, San Diego (and other cities) which is it?

OTAs Prevail Against Anaheim: Court Calls Prior Rulings "Logical Fallacy"

The major Online Travel Agencies today notched a huge win in Anaheim, California where a judge threw out a $21,326,881.30 ruling against Expedia, Travelocity, Priceline, Orbitz and their related subsidiaries with a strongly worded rebuke to the Anaheim City Hearing Officer's earlier findings.

This case was originally heard by the City's Hearing Officer who made the determination that the OTAs did, in fact, operate hotels under Anaheim's definition. The Hearing Officer originally found that each OTA is both "the proprietor" and the "managing agent" of every hotel in the City of Anaheim. Wow. As such, the Hearing Officer found that the OTAs owed the princely sum of ~$21M covering back taxes, fines, interest and, no doubt, extra donuts for the office.

We'll get the whole decision up shortly for reading on your next flight but here are the highlights:
The big take away is that the judge who decided this case will also be presiding over several other similar cases currently in various stages of litigation in California. These include cases in Los Angeles, San Diego and a particularly nasty one in San Francisco where the OTAs have already paid significant damages in order to even have the right of appeal under the City's "Pay to Play" rules. (Note: Anaheim had this rule as well but the OTAs were able to get it overturned.) While no one can predict how a judge will rule and each case is obviously different, this judge clearly understands the issues at hand.


The ruling states "OTCs do not control and run hotels. The Hearing Office's factual findings list several functions performed by OTCs with the respect to resale of hotel rooms" including marketing functions, determining mark-ups etc. The Court correctly determined that "none of these facts comprise incidents of control of a hotel or give the OTCs the right to run the business of a hotel. The hotel control the production of the product sold, the quality of production, the channels of distribution of the product and the pricing of the product." This discussion of Marketing 101 and the " Four Ps" reminds me of my first marketing class in college - sounds as if the Judge may have taken a similar class along the way.

In one of the stronger worded sections, the judge concludes that the Hearing Office that it is "a logical fallacy to conclude, as the Hearing Officer apparently did, that because a hotel operator is responsible for collecting rent and taxes from [guests], any entity that collects rent and taxes from a [guest] must be an operator [and be liable for the occupancy tax] " The footnote explains it more clearly still: "Principles of formal logic demonstrate that when the statement 'if A then B' is a true statement, it is incorrect to conclude that the converse 'if B then A' must be true. Yet the Hearing Officer accepted this reasoning." Ouch. Basic logic, right?

However, the judge clearly leaves the door open for the City to base an occupancy tax on the total amount paid by the guest for the hotel room if the law was drafted (as New York City has attempted to do) and constructed to facilitate such a tax. "There seems to be no reason why such a tax scheme could not be drafted and considered." But before Anaheim goes off to re-do the tax wording, consider the Courts further discussion in regards to the City's position that times had changed (with the advent of the merchant model) and that the taxation laws should simply morph to fit the times: "where a taxing agency has not anticipated a new revenue opportunity, the court may not act to fill what might be perceived as a 'gap' in tax coverage. Creation of a larger tax rate or larger tax base requires voter approval pursuant to Proposition 218. California Proposition 218 states that "A taxing methodology must be frozen in time until the electorate approves higher taxes"

This ruling came down to carefully interpreting the current tax laws on the books. Clearly, opportunities exist for taxing authorities to adjust those laws (at least outside of California) to change with the times - but a go-forward tax is a far cry from a huge retroactive tax from the OTA's perspective.