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Court upholds New York City tax on hotel-booking companies

By Daniel Wiessner

ALBANY, New York (Reuters) - A New York City occupancy tax on hotel-booking companies, such as Expedia Inc, was ruled constitutional by New York state's highest court on Thursday, the latest development in a legal battle playing out nationwide.

In a 5-2 decision, the New York Court of Appeals upheld the law which imposes a 6 percent occupancy tax on "online travel intermediaries."

Sites such as Expedia Inc, Priceline.com Inc, Orbitz Worldwide Inc and Hotels.com allow customers to book hotel rooms online, often at a discounted rate.

The court rejected the companies' claim that the city did not have the right to tax them because they merely facilitated reservations and did not occupy the rooms.

"Online travel companies ... have successfully reshaped the way people book travel," Judge Jenny Rivera wrote for the court. "However, this innovation has not changed the main purpose of a hotel reservation process: selecting and paying for a room for future occupancy."

Steve Shur, the president of the Travel Technology Association, a trade group that represents online booking companies, said on Thursday that the companies were disappointed but would continue to comply with the law.

"The key point is that online travel companies do not buy, sell or operate hotel rooms, and dozens of courts have recognized this," he said.

Todd Geremia of Jones Day, who represented the companies, declined to comment on the decision. An Expedia spokeswoman also declined comment.

The City Law Department did not immediately have comment.

The decision reversed a 2011 ruling from a lower state appeals court, which had declared the law unconstitutional.

It was not immediately clear how much money the companies have paid as a result of the occupancy tax, but the city has said the figure runs into the millions.

The city law in question, Local Law 43, was intended to close what the city believes is a tax loophole. Travel sites profit by buying rooms from hotels - paying tax on that rate - before selling them to consumers at a higher price. Before Local Law 43, the city did not collect taxes on the difference.

The lawsuit is one of many pitting reservation sites against municipalities, which argue that they lose millions of dollars in tax money because of the online services.

Courts have been divided on the issue. In 2011, a Texas federal judge affirmed a jury's finding that online travel companies owed millions in taxes to 173 municipalities. Months later, a California court ruled that San Diego's occupancy tax could not be applied to booking sites.

The case is Expedia v. New York City Department of Finance, New York State Court of Appeals No. 180.

(Reporting by Daniel Wiessner; Editing by Noeleen Walder and Kenneth Barry)

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