City of Duluth mulls $60,000 settlement with Expedia

Talk about it

The city of Duluth’s lawsuit against Expedia Inc. demanding unpaid lodging taxes from the online broker of local hotel rooms soon could be resolved.

On Monday, the Duluth City Council will discuss a proposed $60,000 settlement with Expedia and a couple of affiliated companies: Hotels.com and Hotwire.

If the city accepts the deal, it will drop all tax claims against Expedia and its subsidiaries, both related to the past and for the next two years.

Should the Expedia settlement be approved, Duluth will become the first city in Minnesota to take the online booking giant to court and prevail, at least financially. Expedia and its sister companies control about 75 percent of the total online hotel market, and Duluth City Attorney Gunnar Johnson would not rule out cases against additional smaller players.

The proposed settlement is small potatoes for Expedia, considering that in 2011, it pocketed profits of more $472 million on total revenue in excess of $3.4 billion.

Despite the pending financial settlement, Expedia Cos. makes no concession that it owes any taxes to Duluth.

Meanwhile, even if it agrees to the settlement, the city of Duluth would not drop its assertion that Expedia and other online brokers of local hotel rooms should pay taxes on the full retail price those rooms fetch in the marketplace, rather than on the reduced wholesale rate at which they often are offered to third-party vendors.

“John Q. Public pays his full tax burden. There’s no reason why Expedia, Orbitz or anyone else shouldn’t pay their fair share too,” said Todd Fedora, a former Duluth city councilor who was an early advocate of taking online booking agents to court.

The city retained Hermantown law firm Kanuit & Bray to pursue the case. The city paid the firm a $5,000 retainer and 20 percent of the settlement, for a total payment of $17,000.

Johnson declined comment on the case, pointing to one of the terms of the pending settlement, which says: “The parties and their attorneys agree that they will refrain from issuing any press releases and/or public statements regarding (the agreement) unless required by law to do so.”

Likewise, Expedia did not respond to the News Tribune’s requests for comment made by phone and e-mail Thursday.

On other fronts

The state of Minnesota also is pursuing additional tax revenue from online hotel brokers, such as Expedia.

Minnesota stands to collect an estimated $4 million in additional revenue if it can get online players to comply, said Susan Von Mosch, assistant commission for tax policy at the Minnesota Department of Revenue.

“We want to have them all register and pay their fair share,” Von Mosch said.

On June 11, the state Revenue Department issued a notice clarifying existing law and tightening tax collection requirements. It mandates that “any accommodations intermediary that facilitates the sale of lodging located in Minnesota is required to register as a retailer … and remit sales tax, regardless of the location of the intermediary or the customer who pays for the room.”

The new rules will apply for state lodging taxes and also lodging taxes the Minnesota Department of Revenue collects on behalf of the cities of Minneapolis, St. Paul, Rochester and Biwabik.

While Dan McElroy, president of Hospitality Minnesota, considers the state’s increased activity on the online front a positive development, he said the new rules do nothing to aid 95 other communities in their collection of local lodging taxes. He noted that few of these other communities have the wherewithal to take a company the likes of Expedia to court, as Duluth did.

McElroy suggested the best remedy would likely come in the form of new legislation codifying cities’ right to collect payments from online room brokers.

“We hope the action Duluth has taken will have some impact,” he said. “It makes it easier to make the case to the Legislature that something should be done.”

Some cities have been fearful to challenge Expedia. The city of Columbus, Ga., successfully sued Expedia only to have the company stop listing rooms in the market, effectively wiping the community off the online map.

Those tales of retribution were enough to give many people in the local hospitality industry pause, said Karen Pionk, general manager of the Duluth Sheraton Hotel and chairwoman of Visit Duluth’s board of directors.

But she gives the city high marks for how it handled its dispute with Expedia.

“We’d like to say thanks to the city for hearing our concerns and going about this case cautiously and wisely, so no one got hurt,” Pionk said.

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