The U.S. Court of Appeals for the Fifth Circuit has vacated an $84 million class action award won by 173 Texas cities who sued numerous online travel companies including Hotels.com, Expedia and Orbitz, for failure to pay hotel occupancy taxes.

The City of San Antonio originally filed the class action suit San Antonio v. Hotels.com in the Western District of Texas federal court in 2006 against numerous online travel companies (OTCs) for violations of the Texas tax code, municipal ordinances and for conversion. Two years later, the federal court certified a class of 175 Texas cities whose ordinances require any person controlling a hotel to remit hotel occupancies.

After the class certification, two cities, one of them Houston, opted out of the class, according to the opinion. Houston decided to pursue its case in a Texas state court to recover unpaid occupancy taxes.

The remaining 173 cities sought damages for unpaid or underpaid hotel occupancy taxes and a declaration that an OTC is required to collect and remit hotel occupancy taxes based on the amount it collects for discounted room rates and service fees.

In 2009, a federal jury heard testimony from 38 witnesses and 150 exhibits to determine whether the OTCs controlled the hotels and were therefore subject to the hotel occupancy tax ordinances. The jury determined that the OTCs did control the hotels, according to the opinion.

After the jury's decision, the federal trial court judge had to address a pure question of law: whether the retail rate paid by the traveler, or the lesser discounted rate the OTC pays the hotel, is included in the tax base. Two years after the jury's verdict, the trial court ruled that tax applied the retail rate paid by the traveler, rather than the discounted rate paid by the OTC. And in 2014 the trial court issued an $84 million judgment against the defendant OTCs.

The OTCs appealed that decision to the Fifth Circuit, arguing that they do not “control” hotels within the meaning of the tax ordinances and that the tax applied to the discounted room rate the OTC pays the hotel, rather than the retail rate paid by the traveler.

Meanwhile, a Texas state court judge rejected Houston's claim to collect unpaid hotel occupancy taxes in a summary judgment ruling. Houston's 14th Court of Appeals later affirmed that ruling, holding that the tax only applied to the “discounted-room-rate amounts paid to the hotels.”

In its decision, The Fifth Circuit agreed that the occupation tax only applied to the discounted rate paid by the OTC.

“Cities concede OTCs have been collecting taxes on the discounted room rate paid to the hotel, and the hotels have been remitting them,” wrote Senior Judge Rhesa Barksdale in the decision vacating the $84 million award and rendering judgment for the OTCs. “Because the only monetary amounts at issue in this class action are those not included in the scope of the hotel occupancy tax base, as limited by our above holding, OTCs are not liable.”

The U.S. Court of Appeals for the Fifth Circuit has vacated an $84 million class action award won by 173 Texas cities who sued numerous online travel companies including Hotels.com, Expedia and Orbitz, for failure to pay hotel occupancy taxes.

The City of San Antonio originally filed the class action suit San Antonio v. Hotels.com in the Western District of Texas federal court in 2006 against numerous online travel companies (OTCs) for violations of the Texas tax code, municipal ordinances and for conversion. Two years later, the federal court certified a class of 175 Texas cities whose ordinances require any person controlling a hotel to remit hotel occupancies.

After the class certification, two cities, one of them Houston, opted out of the class, according to the opinion. Houston decided to pursue its case in a Texas state court to recover unpaid occupancy taxes.

The remaining 173 cities sought damages for unpaid or underpaid hotel occupancy taxes and a declaration that an OTC is required to collect and remit hotel occupancy taxes based on the amount it collects for discounted room rates and service fees.

In 2009, a federal jury heard testimony from 38 witnesses and 150 exhibits to determine whether the OTCs controlled the hotels and were therefore subject to the hotel occupancy tax ordinances. The jury determined that the OTCs did control the hotels, according to the opinion.

After the jury's decision, the federal trial court judge had to address a pure question of law: whether the retail rate paid by the traveler, or the lesser discounted rate the OTC pays the hotel, is included in the tax base. Two years after the jury's verdict, the trial court ruled that tax applied the retail rate paid by the traveler, rather than the discounted rate paid by the OTC. And in 2014 the trial court issued an $84 million judgment against the defendant OTCs.

The OTCs appealed that decision to the Fifth Circuit, arguing that they do not “control” hotels within the meaning of the tax ordinances and that the tax applied to the discounted room rate the OTC pays the hotel, rather than the retail rate paid by the traveler.

Meanwhile, a Texas state court judge rejected Houston's claim to collect unpaid hotel occupancy taxes in a summary judgment ruling. Houston's 14th Court of Appeals later affirmed that ruling, holding that the tax only applied to the “discounted-room-rate amounts paid to the hotels.”

In its decision, The Fifth Circuit agreed that the occupation tax only applied to the discounted rate paid by the OTC.

“Cities concede OTCs have been collecting taxes on the discounted room rate paid to the hotel, and the hotels have been remitting them,” wrote Senior Judge Rhesa Barksdale in the decision vacating the $84 million award and rendering judgment for the OTCs. “Because the only monetary amounts at issue in this class action are those not included in the scope of the hotel occupancy tax base, as limited by our above holding, OTCs are not liable.”