Hilton Head reaches settlement with websites over bed taxes

April 26, 2011 

The Town of Hilton Head Island last week netted more than $300,000 in a settlement resolving a dispute with a dozen discount travel websites over local taxes paid on hotel rooms.

The town announced the details Monday after Town Council voted April 19 to settle its suit against national online hotel booking sites, including Hotels.com, Expedia, Orbitz, Travelocity.com and Priceline.com.

The online resellers of hotel rooms agreed to pay $562,500, with the town retaining $348,143 after attorneys' fees and expenses.

In a series of lawsuits, Hilton Head and other South Carolina municipalities claimed companies were not paying the correct amount of accommodations taxes.

The town charges 3 percent in local accommodations taxes on short-term lodging and gets a share of the state's 2 percent bed tax. The tax money is used on tourism-related expenses, such as beach renourisment, festivals, events and marketing the island.

The settlement comes after the S.C. Supreme Court established in January that the total amount charged a person by booking sites for short-term lodging, including fees and charges, is the sum on which taxes are owed. Mayor Drew Laughlin said the court decision expedited the settlement with the town.

"We have recovered moneys due us for the economic health of our community," Laughlin said in a news release.

The online companies have contracts with hotels to accept rates discounted from those offered to the general public. The booking sites then add service fees and tax-recovery charges to the room's net rate. The fees are retained by the company as compensation for its role in the transaction. The tax-recovery charge, based on the net room rate, corresponds with the sales tax owed by the hotel, according to court records.

Hilton Head argued, and the S.C. Supreme Court agreed, that companies must remit taxes on gross proceeds and not the net rate.

The lawsuit also said the companies charged marked-up room rates but paid taxes only on the lower prices negotiated with hotels, which in turn pay the town.

The discount travel websites contend they are not required to pay taxes on fees because they are derived from services provided, not the room charge.

Attorneys and representatives for the online hotel booking companies could not be reached or had no comment Monday.

Hilton Head requested taxes as far back as 1999 in its lawsuit, amounting to $450,000 plus $150,000 in interest, which the companies denied, said Charleston attorney Ronnie Bonds. Bonds was hired by the town in 2009 as special council to recover the taxes and beach-preservation fees owed.

"The settlement is intended to (be a) compromise (for) disputed claims, ... (and) payments made ... are not for the purpose of paying past or future tax," according to the release. "The parties have agreed to enter into the settlement in order to put to rest the uncertainty and expense of continued litigation."

Town manager Steve Riley said Monday that Hilton Head officials believe the amount is fair based on analysis by attorneys and consultants.

Riley said the settlement resolves "all issues in the past," and the companies are required to abide by the town's tax-collection process, and it "will collect what it feels is owed" going forward.

About two-thirds of the settlement money will pay for beach preservation; the remainder will be used at Town Council's discretion to pay for one-time expenses, he said.

Bonds secured a $900,000 settlement last year from Internet brokers for Charleston, Mount Pleasant and North Myrtle Beach.

Dozens of lawsuits have been filed across the country against the websites over the past five years in regard to unpaid taxes.

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