Columnist Jon Ralston: On why we might not reap a windfall

Sunday, Jan. 15, 2006 | 7:50 a.m.

Jon Ralston hosts the news discussion program Face to Face with Jon Ralston on Las Vegas ONE and also publishes the daily e-mail newsletter RalstonFlash.com. His column for the Las Vegas Sun appears Sunday, Wednesday and Friday. Ralston can be reached at 870-7997 or through e-mail at ralston@vegas.com.

How does a local government turn down a risk-free chance to collect more than half a billion dollars in taxes? We are about to find out if there is any good reason -- legal or political.

A letter I have obtained that was sent to Clark County commissioners last week asks the panel to approve filing a lawsuit to recover as much as $723 million in tax money that Internet travel sites allegedly owe local jurisdictions.

The cash could be used to help build roads, fund school programs and erect capital projects. The possibilities are endless.

"It could make the Millennium Scholarship look like chump change," said one insider with knowledge of the potential suit.

But District Attorney David Roger says he doubts the commissioners "will even put it on the agenda" after some analysis was done and following meetings with members of the gaming industry.

Seems there is some concern, Roger said, that the profit margins of some Web site operators are so small that it is not worth risking the chance to get what, for the county, would amount to a relatively small percentage of the lost room tax funds. The convention authority, Roger said, also has not been enthusiastic.

This is not a novel concept. Other local governments across the country, including Los Angeles, Chicago and Philadelphia, have been pursing similar court actions over the last year. None has been resolved yet.

The argument is simple: Web sites such as hotels.com, Priceline, Expedia and Travelocity buy blocks of rooms from hotels for a set fee -- for the sake of illustration, say $70 a room.

But then the site turns around and sells rooms to consumers for a higher price -- say $100. The room tax amount charged to consumers is based on the lower amount, not the higher one. Thus, the lost revenue.

In Clark County the total number of hotel and motel rooms rented via the Web sites since 2000 was about 680,000, according to the letters sent to commissioners by a couple of law firms -- Kummer Kaempfer et al., the ubiquitous local government lobbying outfit, and Feinberg Grant et al., local civil litigation experts.

"From the year 2000 through 2005, the lost tax revenue to Clark County could range between $677,353,486 and $722,892,275 because (the Web sites) have failed to collect and pay (room taxes)," argues the letter to commissioners from the lawyers, who would get a cut of that money.

So how do commissioners possibly turn down a chance to pull the lever on this Megabucks?

The politics are provocative.

The board members and county legal counselors have been lobbied by the eager lawyers who stand to make quite a bit of money. The commissioners have been pilloried for taxpayer sinkholes such as the Regional Justice Center and for financial scandals surrounding airport land. Here's a chance to make taxpayers applaud rather than sneer -- how could they say no?

The gamers' don't-rock-the-boat mentality is not that surprising considering these travel Web sites and resorts work hand-in-hand. And the question eventually might arise about who is responsible for the lost tax money -- the Web site or the hotel company?

It will be interesting to see whether enough political pressure can be applied to induce commissioners not to take what amounts to a free roll. I can't imagine this is an issue on which the gamers want to be seen as parade leaders.

There are serious legal questions to be resolved here. One seminal question that arises is whether the Web sites fall within the legal definition of hotel operators under the Clark County code -- thus making them susceptible to room taxes.

But the fact that these Web sites do not pay taxes on their markups is not in dispute. And some even understand that the practice could be challenged.

The suit by the city of Philadelphia cites a Nov. 9, 2004, filing with the Securities and Exchange Commission by Priceline that acknowledges it "recovers the taxes on the underlying costs of the hotel room night from customers and (returns) the taxes to the hotel operators for payment to the appropriate tax authorities. Several jurisdictions have indicated that they may take the position that sales or hotel occupancy tax is applicable to the differential between the price paid by a customer for the Company's service and the cost to the company of the underlying room."

The filing goes on to cite the possibility of "substantial liabilities for past sales and could have a material adverse effect on the Company's business and results of operations."

If the cities put these folks out of business, now (BEGIN ITAL) that (END ITAL) could be a political problem of a different magnitude. I am sure that Priceline's William Shatner would recoil at the idea, although "Boston Legal's" Shatner would think it positively delicious.

Roger may be right that the board won't move forward. But the commissioners, barring some insurmountable legal impediment or political pressure, will have a lot of explaining to do if they don't.