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City of Chicago v. Expedia, Inc.

Court of Appeals of Illinois, First District, Third Division

April 26, 2017

THE CITY OF CHICAGO, ILLINOIS, Plaintiff-Appellee,
v.
EXPEDIA, INC.; HOTELS.COM, L.P.; and HOTWIRE, INC.; Defendants-Appellants.

         Appeal from the Circuit Court of Cook County. No. 05 L 51003 The Honorable Robert Lopez Cepero and Edmund Ponce De Leon, Judges, presiding.

          JUSTICE LAVIN delivered the judgment of the court, with opinion. Presiding Justice Fitzgerald Smith and Justice Cobbs concurred in the judgment and opinion.

          OPINION

          LAVIN, JUSTICE

         ¶ 1 This appeal arises from the Cook County circuit court's order granting summary judgment in favor of the city of Chicago (the City) and against certain online travel companies (OTCs), namely Expedia, Inc., and its subsidiaries, Hotels.com, L.P., and Hotwire, Inc. (defendants).[1] Specifically, the court granted the City judgment on its claim that defendants had failed to collect, and remit to the City, the correct amount of the Chicago Hotel Accommodations Tax (CHAT) (Chicago Municipal Code § 3-24-010 et seq. (1990)). Defendants now appeal.

         ¶ 2 I. BACKGROUND

         ¶ 3 The City enacted the CHAT ordinance in 1973. That ordinance has at all times required that "every owner, manager or operator of hotel accommodations" secure from the hotel's lessee or tenant, and remit to the City's Department of Revenue (Chicago Municipal Code § 3-24-040 (amended Nov. 16, 2011)), a tax on "the gross rental or leasing charge" (Chicago Municipal Code § 3-24-030 (amended Nov. 16, 2011)). Well after the CHAT ordinance was enacted, the Internet was invented and, eventually, profitable OTCs began operating. The City has joined numerous taxing authorities who have attempted to apply established tax provisions to OTCs' online business model.[2]

         ¶ 4 The result in other cases has often depended upon the precise statutory language at issue and, thus, such decisions are of limited assistance in considering the CHAT ordinance. See Independent Trust Corp. v. Kansas City Bankers Surety Co., 2011 IL App (1st) 093294, ¶ 24 (observing that while other jurisdictions may provide guidance, their decisions are not binding, and we must decide a case consistently with Illinois law); see also Orbitz, LLC v. Indiana Department of State Revenue, 66 N.E.3d 1012 (Ind. 2016) (declining to consider decisions from other states because the decisions relied on specific statutory language from those jurisdictions); City of Birmingham v. Orbitz, LLC, 93 So.3d 932, 936 (Ala. 2012) (similar). Consequently, we place minimal reliance on decisions from other jurisdictions. We also restrict our decision to the specific OTCs and record before us. City of Houston v. Hotels.com, L.P., 357 S.W.3d 706, 707 (Tex. App. 2011) (observing that the outcome of similar lawsuits against OTCs in other jurisdictions depended on the evidence introduced in those cases). Furthermore, the record on appeal is extensive. We therefore recite only those facts necessary to provide the factual and legal basis of this appeal.

         ¶ 5 Defendants operate websites that provide travel information to consumers while allowing them to book hotel rooms as well as other travel services. To that end, defendants enter into contracts with hotels, although language varies among such contracts. A contracting hotel generally makes rooms available to a defendant's customers but can, at any time, change the quantity of rooms available or the discounted amount that the hotel will charge that defendant for a room (net rate). According to defendants, they merely facilitate reservations, through servers that communicate with hotels' reservation systems. Although defendants do not own or reserve any blocks of hotel rooms, defendants appear as the merchant of record on credit card transactions for reservations made through them. Additionally, defendants forward such reservations to the relevant hotels, which in turn attempt to honor the reservations. In exceptional circumstances, however, a hotel may be unable to honor a particular reservation.

         ¶ 6 Defendants' websites, albeit with slightly varying language, charge customers a total price consisting of four components: (1) the aforementioned net rate set by the hotel, (2) the defendant OTC's facilitation fee, (3) the tax recovery charge, which reflects tax percentages supplied by the hotel to the defendant OTC, and (4) the defendant OTC's service fees. The first two components are combined into a single room rate. Additionally, defendants inform their customers that the room rate consists of the first two components but do not otherwise provide the specific sums associated with those components.[3] Similarly, the last two components are combined into a single line item, without further breakdown.[4] Defendants and hotels contractually agree to keep these figures confidential for the benefit of both the hotels and defendants.

         ¶ 7 Ultimately, defendants pay a hotel its net rate and the tax recovery charge based on the net rate, which includes taxes such as the CHAT. In turn, Chicago hotels remit the CHAT to the City. Defendants do not, however, apply the CHAT ordinance to their own facilitation or service fees or collect the corresponding amount of tax.

         ¶ 8 In November 2005, the City commenced this action against defendants for violating the CHAT ordinance (count I). The City also asserted a claim of conversion (count II) and sought the imposition of a constructive trust (count III) as well as an accounting (count IV). Specifically, the City alleged that defendants contracted with hotels for "negotiated discounted room rates" and sold hotel rooms to customers at marked up prices. Notwithstanding these sales, defendants failed to collect and remit the CHAT based on the marked up rate. In their answers, defendants denied that they sold hotel rooms or that they had failed to collect and remit the CHAT. Defendants also asserted that the City's reading of the CHAT ordinance would be unconstitutional and contravene the Internet Tax Freedom Act (ITFA) (47 U.S.C. § 151 note (2000)).

         ¶ 9 After years of discovery, the parties filed cross-motions for summary judgment. The City's position was that defendants were liable for the unremitted CHAT because their conduct made them owners, managers, or operators of hotels under the ordinance[5] and their share of revenue constituted gross rent. In contrast, defendants maintained that they were merely travel intermediaries who enabled Internet bookings, not hotel owners, managers, or operators subject to the duties imposed by the ordinance. Similarly, the amounts charged for defendants' services did not constitute rent, let alone gross rent.

         ¶ 10 In June 2013, the circuit court entered partial summary judgment in favor of the City, finding that defendants failed to collect and remit taxes as required by the CHAT ordinance (count I) and, consequently, the City was entitled to an accounting (count IV). Specifically, the court found defendants were operators under the ordinance and their fees were part of the gross rental charge. In light of the pending accounting, the court denied the City summary judgment on its conversion claim (count II), as well as its request for a constructive trust (count III). The court denied defendants' motion in its entirety and later denied their motion for reconsideration. Furthermore, the court also filed an amended order finding that defendants constituted hotel managers.

         ¶ 11 Following additional cross-motions for summary judgment, the circuit court found defendants were required to pay the City penalties under count I because there was no reasonable cause to believe the CHAT ordinance applied only to the net rate charged by hotels. Additionally, the court found that the damages to be imposed under count I would not compensate the City for breakage situations where a defendant OTC failed to transfer to ...


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