by Peter Cohn

A furious lobbying campaign by mayors, hotel chains, and state and local employees appears to have scotched an effort to help the online travel industry in an occupancy tax dispute as part of a small-business aid package in the Senate.

Draft legislation has been circulating for months, which backers have been trying to attach to the first available "jobs" bill. Aides and lobbyists said the online firms, backed by travel agents, hotel unions and some smaller hotels, have friends in high places, including Senate Majority Leader Reid and Finance Chairman Max Baucus. Aides said the measure would not be part of an initial small-business bill, however, although interested senators, including Ron Wyden, D-Ore., and John Ensign, R-Nev., could push it on the floor, sources said.

The crux of the issue is the discounted rates hotel chains offer online travel sites like Travelocity, Expedia and Priceline to market and sell rooms. The Web sites then mark up the price as sort of a finders' fee, but generally remit occupancy taxes based on the original discounted price. Local governments don't want to forgo the higher tax revenue on the price the room is actually booked, while online firms argue they should only collect tax based on the rate contracted for with the hotel. The dispute is the subject of about 40 lawsuits nationwide, according to the U.S. Conference of Mayors.

The competitive disadvantage is clear, hotel chains argue. If a guest books a room through a Best Western website, for example, they might be charged $100 a night, plus 10 percent occupancy tax. The hotel would keep the $100 and pass on the $10 tax to the local taxing authority. On the other hand, the same room may have contracted to an online firm to sell at $80 a night, but the online site would charge $100 -- pocketing the $20 -- while remitting $80 to the hotel and $8 to the local government.

In that example, outlined in a letter to senators Thursday from the American Hotel & Lodging Association, U.S. Conference of Mayors and other groups, hotels are put at a disadvantage, while local budgets have lost revenues. "The current economic downturn has impacted the U.S. hospitality industry particularly hard," the letter states. "No industry should be allowed to manipulate the tax code to secure a competitive advantage over hoteliers while simultaneously shortchanging cities."

A spokesman for the Interactive Travel Services Association said the proposal would not cost any local government revenues. He said it just would prevent them from levying higher taxes and create a uniform standard, rather than having to comply with some 7,000 different municipality tax structures.

The group has employed a savvy lobbying strategy, including a letter of support earlier this year from small hotels like the Big Sky Resort and C'Mon Inn, both in Baucus' home state of Montana, and 300 other hotels across the country. "As our partners, online travel companies (OTCs) like Expedia, Orbitz, Priceline and Travelocity help us put heads in our hotel beds and often make the difference between profit and loss," the hotels wrote, calling the proposed measure "a common-sense approach that will help nurture and grow the U.S. tourism market."

Klobuchar said on balance the measure would be bad for small businesses, defeating the purpose of the larger package. "I'm very concerned about [it]. It's something of an Internet tax issue. And we think it should have gone through Commerce, first of all, and been fully vetted, so different interests could weigh in, including local governments that care about this ... and obviously small hotels that get most of their business by people calling as opposed to going through online travel services," she said.

"I have no problem with going through online travel services. I just think it should be an even playing field. ... I have talked to a number of other senators and told them that I think it's wrong, that it should have come through Commerce and that we need to have a full discussion about it."