Consideration and Approval of Legal Services Contract:  Contract for Legal Services with the law firm of Holmes Wright Hyde & Hays PLC, for the purpose of collecting unpaid transaction privilege taxes (sales taxes) from specific on-line travel companies.

Motion to approve a Contract for Legal Services with Holm Wright Hyde & Hays PLC for collection of unpaid sales taxes on a contingency fee basis, including authority for litigation on behalf of the City.

To coordinate sales tax collection efforts and share litigation costs with other Arizona cities in recovery of sales taxes assessed against online travel companies. Assessments are based on gross income received by online travel companies acting as brokers for selling hotel rooms and lodging.

No upfront City expenditures are required.   The City is not required to pay for legal services unless the cities recover unpaid taxes. The law firm has offered to provide services on a contingency basis.  If the cities prevail, the law firm will be reimbursed its litigation costs, then will be paid a 27% attorneys fee from the remaining recovered amount before remitting the balance to the cities.  The City of Flagstaff will receive a proportionate share of the overall recovery. Minimal staff time in administering the contract is involved.

  1. Retain, expand, and diversify economic base
  2. Effective governance.

No. Executive Sessions were held on July 17, 2012 and again on March 26, 2013 to consult with City Attorneys concerning possible litigation.

1. Approve the legal services contract. If the City approves the legal services contract, the City will not expend any upfront funds and will benefit from a joint litigation effort. 
2. Do not approve the legal services contract. If the City chooses not to approve the legal services contract, the City will need to consider alternative legal services arrangements.  Options include alternative outside legal representation or using City legal representation. 

The City of Tempe (“Tempe”) conducted a multi-jurisdictional audit on behalf of 13 cities, including the City of Flagstaff, for collection of unpaid transaction privilege taxes from on-line travel companies. On-line travel companies serve as brokers on behalf of hotels and lodging establishments.  The on-line travel companies had not been paying taxes on gross income received from booking hotel rooms and lodging, retained as broker fees.  Tempe determined approximately $6 million is owed to the 13 cities for the audit period of 2004-2009.   In 2012, Tempe issued a Request for Proposals for legal services for the collection of unpaid taxes.  The law firm of Holm Wright Hyde & Hays PLC was selected as the successful proposer (“the Firm.”)  Tempe awarded a contract to the Firm.  All other cities that were a part of the original audit, not including Flagstaff and Nogales, have awarded contracts to the Firm. The Firm will pay for all litigation costs and attorneys fees upfront. The Firm will be paid from any amount collected from taxpayers as follows: (a) first, all litigation costs will be reimbursed, such as reporter costs for depositions, copy charges, and expert fees; (b) then the Firm will be paid a contingency fee of 27% of the balance as its attorney's fee; (c) then the remaining amount will be distributed to the participating cities. The proposed City of Flagstaff contract incorporates the terms and conditions of the Tempe Contract, with some modifications. In the event the City of Flagstaff terminates the legal services contract early, then the Firm has stated that the contingency fee would not apply. Instead the City would pay reasonable charges, which would include reasonable attorneys fees and other litigation costs to date.
 
All cities issued the assessments from the multi-jurisdictional audit in March 2013.  The issuance of the assessments triggers a 45 day administrative appeal period.  The on-line travel companies each have the opportunity to dispute that taxes are owed, and may request an administrative hearing before the Municipal Tax Hearing Officer.  Following such hearings, the hearing officer’s decision may be appealed to trial court, at which point litigation may commence.  Litigation may not be necessary if a settlement is reached with the online travel copmanies as to tax liabillity.
 
Due to state taxpayer confidentiality laws, this staff report does not include details as to the City assessments.

If the City chooses not to enter into  the proposed legal services contract, the City will need to have legal representation, whether internal or external, to represent the City at administrative tax hearings, and any subsequent appeals to tax court.   

Inform

04/02/2013 - EAB - Council approved unanimously.