Authorization for Partial Settlement of Tax Litigation: City of Phoenix v. Orbitz Worldwide Inc., 247 Ariz. 234 (2019). 

City staff is requesting that the City Manager be authorized to approve partial settlement of the lawsuit, City of Phoenix v. Orbitz Worldwide Inc., 247 Ariz. 234 (2019), which continues to be litigated on remand in the trial court.  This tax litigation was filed in order to collect local transaction privilege taxes, penalties and interest from online travel companies ("OTCs").

Financial impact is confidential. State law prohibits disclosure of taxpayer information without consent of the taxpayer.

Priority Based Budget Key Community Priorities/Objectives
High performing governance:  Enhance the organization's fiscal stability and increase efficiency and effectiveness ^{(SP)3.1/ (RP)CD.}

In 1987, the City Council adopted the Model City Tax Code, which includes authority to pursue collection of local transaction privilege taxes. 

In 2013 the CIty Council approved an agreement with outside legal counsel for collection of local taxes from the online travel companies. The Cities are being represented by an Arizona firm, Wright Welker & Pauole PLC, and a law firm based in Atlanta, Georgia.  As consideration for legal services, outside legal counsel is entitled to payment of a 27% contingency fee from any amount recovered plus its costs.  

City Council has received legal advice and litigation updates regarding this lawsuit on several occasions. 

In September 2021 the City Council received legal advice and provided direction to City staff regarding this lawsuit.

1. Motion to authorize City Manager to approve partial settlement of lawsuit. This will result in partial settlement of the lawsuit. 

2. No action.  In this case, the litigation with all parties will continue.

This lawsuit arose because the Cities conducted a multi-jurisdictional audit of the OTCs for the audit period of 2000-2009. As a result of the audit, in 2013 an assessment was issued against the OTCs.  However, the OTCs asserted they are not legallly obligated to pay taxes, and appealed through all levels of the courts.

In November 2019 the Arizona Supreme Court ruled that OTCs are liable for payment of tax on gross income under Section -444 Hotels of the Model City Tax Code, but not under Section -447 Transient Lodging.  City of Phoenix v. Orbitz Worldwide Inc., 247 Ariz. 234 (2019) Taxes are due from and after the court's decision.  However, the case was remanded to the trial court to determine whether or not the taxpayers are liable for payment of taxes prior to the court's decision.  The parties have continued to litigate the case to reach such a determination.

All of the above information is a matter of public record.

The proposed partial settlement of this lawsuit is fair and appropriate, in the opinion of staff from the City of Flagstaff and other cities who have been monitoring the litigation.

The purpose of this staff report is to inform.  Per state law, taxpayer information is confidential except to the extent it is a public record (such as court filings) or voluntarily released to the public.