Nassau seeks class action suit to reclaim tax revenue

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A federal district court is weighing whether New York counties can band together and file a class action suit against online hotel retailers to recoup what they consider to be lost tax revenue.

At issue is more than $5 million that county governments throughout the state claim Web sites such as Hotels.com, Hotwire.com, Cheaptickets.com, Expedia.com, Orbitz.com and Travelocity.com owe in back taxes.

The case stems from a suit Nassau County filed against the online retailers in 2006.

Popular travel Web sites charge tax on the wholesales prices they pay for rooms in the county, not the retail rate that the sites charge to travelers.

Peter Clines, chief of the Bureau of Affirmative Litigation in the Nassau County attorney’s office, said the difference between the two rates has led to millions in losses for the 41 counties and cities in New York with a hotel occupancy tax.

On the other hand, Interactive Travel Services Association, a lobbying group for online travel retailers, said an increase would hurt hotel occupants because the Web sites would pass the fees on to customers. The group, which has fought similar lawsuits in other markets, also said a change in the way taxes are levied would lead to a decline in tourism.

Nassau’s original lawsuit was dismissed by the U.S. District Court in 2007 because the county did not follow all of its procedures for collecting unpaid taxes before filing a lawsuit. Last month, the 2nd Circuit Court of Appeals vacated that decision, sending the case back to the district court to determine if a class action could be certified.

If a class action suit is certified, it could have wide-reaching effects not only in the state, but also in Connecticut and Vermont, which are included in the 2nd Circuit.

The ruling comes on the heels of a February decision by a federal court in California that awarded the city of Anaheim $21 million in back taxes from 2000 to 2008. The Nassau suit is seeking money dating back to 1995.

Moke McGowan, president of the Long Island Convention & Visitors Bureau, said Nassau and Suffolk counties could receive a windfall to help make up for budget deficits, sales tax revenue decreases and a decline in tourism.

“Certainly the counties are in need of the funds,” he said.

While the average price of hotel room on Long Island in 2008 was $125.28, up from $122.51 in 2007, the number of room nights booked declined from more than 6,700 in 2007 to more than 4,900 in 2008, according to the LICVB.
Nassau, through a 3 percent hotel tax, has collected between $4.2 and $4.5 million annually from 2005 to 2009. But it saw a decrease in the money it received from 2007 to 2008, and another decrease is expected this year as well.

As of July of this year, the county received $1.4 million in occupancy tax revenue, compared to $4.2 million for all of 2007 and $4.5 million for all of 2008.

Suffolk County is also projecting lower sales tax revenue.

Suffolk’s tax is 0.75 percent, but County Treasurer Angie Carpenter is proposing raising its tax to mimic Nassau’s 3 percent.

Carpenter said the money the county collected from the tax increased each year from 2005 to 2008, but is slated to decline this year. Through June, the county has collected more than $323,000 in hotel tax money, compared to $383,000 collected in the same time frame last year.

“We don’t believe anyone will be running away to Nassau County from Suffolk because of the tax increase,” Carpenter said, noting that the county has yet to decide whether it would join Nassau’s suit.

“We have had some discussions about that, but we do not know if they will ultimately have any success using that avenue,” she said.

Even if the class action suit is not certified, Rodger Citron, an assistant law professor at Touro Law School in Central Islip, said the county may be able to file another suit under a different federal law by dropping the other municipalities from their complaint.

“By no means is the lawsuit over for Nassau County,” Citron said.