St. Paul moves to collect lodging taxes

The St. Paul City Council on Wednesday approved the hiring of a law firm to go after online travel-booking companies that the city says have been skimping on lodging taxes.

Industry representatives have said such legal action is futile and based on misconceptions.

Lockridge Grindal Nauen will pursue the case on a contingency basis, although the amount the firm would get hasn't been negotiated.

The city is considering a lawsuit because it says the online companies only pay a portion of taxes collected on discounted hotel rooms that are then sold at a higher price. Minneapolis is considering similar action.

Both cities have ordinances that clearly show the companies need to pay tax on the full sale price, says attorney Charlie Nauen.

Online travel companies say governments don't understand the business model -- that the companies merely provide a reservation service and do not purchase or provide rooms. The companies also say they rely on hotels to tell them how much tax needs to be paid and that that amount is added to a negotiated price and service fees to create a customer's final bill.

The city named the following companies as targets: CheapTickets, Expedia, Hotels.com, Hotwire, Orbitz, Priceline and Travelocity, "and/or other online companies."

City Attorney John Choi has not specified an amount but said the city could recoup hundreds of thousands of dollars.

Cities, counties and states across the country have made numerous legal claims seeking millions of dollars in allegedly underpaid taxes from online travel companies, but the results have been mixed. An administrative hearing officer ordered several companies to pay the city of Anaheim, Calif., about $21 million. But in another jurisdiction the companies got a suit brought by Pitt County, N.C., dismissed in a federal appeals court.

The council voted 7 to 0 to hire the law firm.

Also Wednesday, Mayor Chris Coleman submitted a budget amendment that calls for laying off seven people in the Department of Safety and Inspections and cutting hours from 40 to 32 per week for 36 trades inspectors.

In a letter to City Council members, Coleman said revenue in Fund 320, which covers business licenses and building permits, will likely decline by 7 percent by the end of the year. The fund, which makes up 66 percent of the department's budget, was expected to bring in $11 million. The layoffs and other cost-cutting measures are intended to meet the new lower projection of $10.5 million.