Consideration and Adoption of Resolution No. 2022-25: Approving a partial settlement of the case, City of Phoenix et al. v. Orbiz Worldwide et al., relating to collection of local transaction privilege taxes from online travel companies; providing for delegation of authority, and establishing an effective date 

City staff is requesting City Council authorize a partial settlement of the lawsuit, City of Phoenix et al. v. Orbitz Worldwide Inc. et al.,, which currently is being litigated on remand in trial court.  This case was jointly filed by over a dozen Arizona cities and towns in order to collect local transaction privilege taxes, penalties and interest from online travel companies ("OTCs") on the gross revenue earned from hotel and lodging bookings.

This will be the third and last of the settlements with the OTCs.  The case will continue to be litigated on remand in the trial court only with the City of Tucson, whose tax code and legal issues differ from the other cities.

With regard to City of Phoenix et al. v. Orbitz Worldwide Inc., financial impact is confidential. State law prohibits disclosure of taxpayer information without consent of the taxpayer. 

Tax collection efforts help ensure that all businesses pay their fair share of taxes and that there is funding to pay for governmental services for the community.

City Council has received legal advice in executive sessions regarding this tax collection matter over the years since the tax litigation commenced in 2014.  

On October 5, 2021 the City Council approved a partial settlement of this lawsuit in a public meeting.  On December 7, 2021 City Council approved a second partial settlement in a public meeting.  The City Council received legal advice related to this third proposed partial settlement in executive session on March 8, 2022.  If approved, this will be the third and final partial settlement. 

1. Approve settlement (recommended); or
2. Do not approve settlement and continue litigation with online travel companies.

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.  

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 legally 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.

On December 28, 2021 the trial court ruled that OTCs are liable for payment of taxes on gross income retroactive to August 1, 2007.  Although the retroactivity date could continue to be litigated on appeal, this would involve further time, expense and risk to all parties.   All of the above information is a matter of public record.