Armed with a growing list of favorable court rulings, a coalition of online travel sites and other resellers are — to the dismay of a wary hotel industry — lobbying Congress to exempt them from hotel occupancy taxes.

In response, hoteliers are cranking up their own political machinery, arguing that the proposal would unfairly shift a huge tax burden to them.

The dispute threatens to erupt into a major lobbying battle on Capitol Hill and further splinter the already tenuous relationship between hoteliers and online travel agencies like Expedia, Orbitz and Hotels.com over the fees hotels pay the sites to sell their rooms.

It is those fees, not coincidentally, that are at issue in the local taxing debate, where hoteliers have stayed largely on the sidelines in scores of lawsuits filed by local taxing authorities claiming the OTAs owe municipalities and counties back room taxes.

"The hotels have been very careful not to offend [the online giants] because of the delicate balance in the relationship between hotels and third-party intermediaries," said Marlene Colucci, executive vice president for public policy at the American Hotel & Lodging Association. "But I think when it comes to an issue that would shift the burden and make them tax exempt at our expense, that’s where we split forces."

Andrew Weinstein, spokesman for the Interactive Travel Services Association, which represents the OTAs, said resellers are simply trying to get clarity on an issue that has dragged them into lawsuits around the country, most of which they have won.

The heart of the dispute is the question of whether online travel agencies owe taxes on markups, or the difference between what they pay a hotel company for a room and the actual amount of money they collect when they sell the room.

Currently, if an online site sells a room for $100 and the local tax is 5%, the OTA collects $105. But it only actually pays tax on what it pays the hotel company for the room, say $80. In that case, it pays $4 in tax instead of $5.

The OTAs insist that they owe taxes only on the amount they actually paid for the room, not on the money above and beyond that, which they say is their fee for making the sale. In the brick-and-mortar world, they argue, travel agents and other third-party intermediaries don’t pay taxes on the discounts they get from hotel companies.

Still, a number of cities and local government taxing entities have been suing the OTAs for back taxes on those markups.

Most recently, a Los Angeles Superior Court judge last week dismissed Anaheim, Calif.’s claim that OTAs owe the city $21 million.

"The issue at the heart of this case is simple: Because online travel companies do not own, manage or operate hotels, they are not liable for hotel occupancy taxes," said Darrel Hieber, a partner with the law firm of Skadden Arps, who represented the OTAs.

According to Hieber, the Los Angeles court is the eighth in the nation to dismiss attempts to claim back taxes on those markups, including two federal appellate courts. In a ninth case, a court in San Antonio recently ruled that the online companies do, in effect, control hotels. The companies plan to appeal that decision.

Opposing letters

No actual legislation has yet been introduced, but ITSA has been floating proposals on Capitol Hill in an effort to get some kind of exemption tacked onto other legislation so it doesn’t have to continue fighting local governments all over the country.

Hoteliers protest that any such exemption would come at their expense. A report last fall from the Center on Budget and Policy Priorities calculated that a proposal like that currently being floated in Washington could cost state and local governments some $680 million a year — money that hoteliers fear governments will come after them for.

"Cities and localities are starved for cash," Colucci said. "And we’ve met with enough state and local officials to know they are going to go after hotels. If an OTA is tax exempt, the burden now falls on hotels. Which is a big game-changer."

Besides exposing hotels to liabilities for taxes that the AHLA said the OTAs would have already collected, the AHLA said the proposal would give OTAs one more advantage over the hotel companies’ own booking sites, which would still have to pay tax on the full booking fee.

Weinstein declined last week to release any specific language saying it was "still being floated." But he insisted that much of the travel industry, including tour operators, travel agents, even some hotel owners, was backing the ITSA effort to pass what the association has dubbed the Internet Travel Tax Fairness Act.

Among the group’s grassroots efforts is a letter from "The Hotel Booking Alliance" to Sens. Max Baucus (D-Mont.) and Chuck Grassley (R-Idaho), the chairman and ranking member, respectively, of the Senate Finance Committee.

"The undersigned hotel and lodging companies are writing to urge passage of the Internet Travel Tax Fairness Act. By establishing a fair and simple national standard for travel booking services, ITTFA will expand the tourism pie, creating jobs and critical economic growth," stated the letter, which was signed by some 300 hotel owners and operators.

"The online travel industry is a major source of tourism promotion in the United States," the letter continued. "As our partners, online travel companies like Expedia, Orbitz, Priceline and Travelocity help us put heads in our hotel beds and often make the difference between profit and loss."

A similar letter was sent by the hotel workers’ union, UniteHere.

But the AHLA said that ITSA, as part of a multimillion-dollar lobbying and grassroots effort, was spreading misinformation and "picking off hotels" to try to make it appear that hoteliers are split on the issue.

"They really have hired an army on this," Colucci said.

"When we went to see Sen. Baucus of Montana, he said, ‘I thought the hotels were with them.’ … [ITSA] basically reached out to small hotels and said, ‘We do all this advertising for you. We’re a powerful player. You need to be on board on this.’ But when we explain the implications, all of sudden [the hotel owners’] eyes light up and they say, ‘Oh, I don’t think we got the whole story.’ It’s given the Hill the initial impression that we are split, when we are not."

The AHLA has sent its own letter to the Senate, arguing that the Internet Travel Tax Fairness Act "would specifically target the lodging industry to place it at a competitive disadvantage and … potentially would subject lodging properties throughout the United States to massive tax increases."

Weinstein said that ITSA was not trying to start a war with the hotel industry.

"Hotels are our partners in this effort," he said. "Our goal is to increase bookings for them. We want to increase business to hotels. We think the reason for much of this confusion is misinformation that is being spread by plaintiffs’ attorneys who have a very strong self-interest to convince municipalities to come down on the wrong side of this."

He said the lawyers behind the lawsuits "are attempting to drive a wedge between natural allies for their own interests."

Regardless of who is to blame, David Kong, president and CEO of Best Western and chairman of the AHLA, said that if the law were to pass, hotels would have to shell out "a lot of money out of their pockets. … I don’t know if we are even in the position to negotiate margins with Expedia and Orbitz right now, because they dictate to us."

"So it’s going to be an ugly situation moving forward," he said.