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Expedia Ordered to Reimburse Extra Tax Charged to Consumers

Award is largest in Washington state history

By Jon Hood
ConsumerAffairs.Com

June 5, 2009

• Air travel • Hotels • Vacation packages --- News • Expedia Ordered to Reimburse Extra Tax Charged to Consumers

A Washington state court ordered travel reservations site Expedia to pay $184 million to consumers, the largest consumer class action award in Washington state history.

The suit alleged that while Expedia paid taxes calculated using the wholesale price of hotel rooms, consumers' taxes were based on the rooms' retail price. According to the suit, the corporation kept the difference for themselves.

The suit, filed in 2005 by class action firm Hagens Berman Sobol Shapiro, claimed that Expedia breached its contractual obligations to consumers by breaking its promise to charge only enough to compensate for its own expenses. According to partner Steve Berman, who filed the suit, the company masked the price difference by labeling it as a "service fee," and included it in the same billing line as taxes, making the higher prices difficult for consumers to notice.

Expedia's Terms of Use agreement explicitly promise that the corporation only collects service fees as necessary to "cover the costs" of providing tickets and reservations for hotels, air travel, car rentals, and other travel necessities. In reality, the extra tax was simply pocketed by the company in an effort to increase its profit margin.

Berman explained that "Expedia used the service fees to sweeten the deal for the company at the direct expense of the consumer. They apparently thought no one would notice if they padded each transaction by a few dollars, money that went straight to profit."

Indeed, in her ruling, Judge Monica Benton pointed to a smoking-gun internal e-mail from December 2001, which boasted that the additional charge "will add between $2-3 million in our net profit (the bottom line) next quarter."

The court noted that "[i]n none of the myriad of declarations filed here, does Expedia show that profit, identified as markup, was considered a cost of providing travel reservation services," and that the "[p]laintiffs correctly conclude [that] 'profits, not costs are the subject matter of these service fees.'"

Under the ruling, the company must return $184,470,452 that it collected in service fees from consumers who bought tickets between Feb. 18, 2003 and Dec. 11, 2006.

Berman said that he and his firm are extremely pleased with the ruling. "Consumers deserve to know what they are paying for, and companies like Expedia have an obligation to be upfront," Berman said.

Expedia, based in Bellevue, Washington, is the largest online booking website, ahead of competitors such as Orbitz and Hotels.com. The ruling comes at an especially bad time for the company, which announced late last month that it is getting rid of fees for flighs booked on its site, in an effort to reinvigorate the dismal travel market. It is also eliminating fees charged for cancellations or change of reservations. Before the worldwide economic crisis, the site charged $25 for cancelled or changed hotel and car reservations.

Expedia has announced that it plans to appeal the court's decision.

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