Expedia could owe more than $800 million to Hawaii and scores of U.S. city and county governments in tax payments for online hotel bookings over more than a decade, according to a review of dozens of lawsuits and tax-revenue records.
Expedia, the leader in U.S. online-travel bookings, is fighting an outstanding hotel-room tab of more than $800 million.
That’s how much Expedia could owe Hawaii and scores of U.S. city and county governments in tax payments for online hotel bookings over more than a decade, according to a review of dozens of lawsuits and tax-revenue records.
Expedia had less than one-tenth that amount set aside to address the potential liability as of Sept. 30, according to a filing with the Securities and Exchange Commission (SEC).
The Bellevue investor favorite, along with other travel websites, has shorted these governments by paying taxes on the wholesale price it pays hotels for rooms, according to the suits.
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It and other sites should instead be paying taxes on the full-room price paid by online customers, these local governments say.
Expedia and other sites have told the courts that under local ordinances, taxes apply to entities that own or control hotels — not to the websites that help them book rooms. Expedia spokeswoman Tarran Vaillancourt declined to comment on the pending litigation or the tax-payment issue.
The suits seek to claw back what amounts to a few dollars per room per night. But that adds up to as much as $400 million a year in suppressed state and local government receipts from online-travel bookers, according to a 2011 estimate by Michael Mazerov, a senior fellow at the Washington, D.C.-based Center for Budget and Policy Priorities, which advocates for low-income families.
Since then, revenue for the biggest online-travel sites has grown about 70 percent.
“It’s a fairness issue,” says Owen Clements, chief of special litigation for San Francisco, which was awarded $73.5 million by a city hearings examiner in a decision Expedia is appealing. “If we’re not getting tens of millions of dollars from the online-travel companies, then other people will have to pay more” in taxes, he says.
Expedia isn’t the only online-travel agent to use the pricing model, but it is the biggest. The units that make up Expedia — which include Hotels.com and Hotwire, as well as Travelocity, which it bought in January — accounted for 54 percent of hotel bookings made in the U.S. through online-travel websites in 2014, according to preliminary data from Phocuswright, a travel-industry research group. Priceline was next, with a 29 percent share.
In coming weeks, Hawaii’s Supreme Court is expected to hand down a decision in the biggest tax case pending.
The state has appealed one part of a lower-court decision in favor of Expedia and its rivals, including Orbitz and Priceline.
The online-travel sites, joined by Travelocity, have appealed another part of that decision, which found them liable for some taxes. The sites sued after the state billed them to recover what assessors claim is more than a decade’s worth of lost taxes.
An across-the-board loss in Hawaii could leave Expedia on the hook for as much as $626 million in taxes, penalties and interest through 2015, according to data and estimates compiled by Bloomberg News.
Losses in the cases across the U.S. could leave the Expedia companies with a total tax bill as high as $847 million through 2015. That is based on the amounts jurisdictions are attempting to collect in nine of the largest suits involving Expedia, plus conservative estimates of potential tax bills for the periods since the suits were filed.
The tally doesn’t count tax bills that Expedia has already paid but is appealing. It may also exclude some legal fees, interest and penalties and assumes that Expedia, as part of its purchase of Travelocity, took on its potential liabilities.
That worst-case estimate compares with Expedia’s operating income of $518 million in the 12 months through December on $5.7 billion in revenue. Expedia’s legal reserve to cover “probable and estimable” losses was $60 million on Sept. 30, according to a quarterly SEC filing.
“The online-travel companies are grossly under-reserved,” says Steven Wolens, a principal at the law firm McKool Smith in Dallas, who has helped file cases for cities and other jurisdictions across the country.
Expedia has told investors its reserves are adequate.
“We believe that the ordinances at issue do not apply to the services we provide, namely the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed,” Expedia’s most recent quarterly securities filing states.
According to its SEC filing, Expedia has been the target of 88 lawsuits involving the room-tax issue. It’s won dismissal in 23 cases; 35 remain active. The remainder have been settled, put on hold, referred to administrative proceedings or otherwise resolved.
Orbitz has had “considerable success in defending” such cases, Tim Enstice, a company spokesman, said by email.
Expedia’s 4Q results disappoint
Expedia shares slid in after-hours trading Thursday after it posted disappointing quarterly results.
The company reported fourth-quarter profit of $66 million, or 50 cents a share, compared with $94.7 million, or 70 cents a share, a year earlier. Earnings, adjusted for one-time gains and costs, were 86 cents a share.
The results missed Wall Street expectations. The average estimate of analysts surveyed by Zacks Investment Research was for $1 a share.
Expedia posted revenue of $1.36 billion in the period. Analysts expected $1.37 billion, according to Zacks.
The company said hotel revenue increased 15 percent, reflecting a 28 percent increase in room nights stayed, partially offset by a 10 percent decrease in revenue per room night.
Revenue per room night fell mainly due to Expedia’s efforts to expand its global hotel offerings, promotional activities such as growing loyalty programs and the impact of the strong U.S. dollar.
Expedia warned that it expects revenue per room night to continue to fall in 2015.
For the year, the company reported profit of $398.1 million, or $2.99 a share. Revenue rose 21 percent to $5.76 billion.
Expedia shares fell $7, or 8 percent, to $81 in extended trading after the release of the earnings report.