Online travel companies (like Expedia, Orbitz, and Travelocity) are intermediaries between hotels and consumers. They offer big discounts on hotel rooms, and they charge service fees for making the booking. Millions of consumers are now using these services, especially for leisure travel.
Now, local governments where these hotels are
located want to impose new taxes on these service fees. We’re not talking just about the local
sales tax here; these guys are demanding the hotel & occupancy tax PLUS the
regular sales tax, which amounts to 15-22% in taxes on your hotel bills.
Thing is, these online travel companies aren't
running hotels – they’re offering a service like any other travel agent. If a state or local government
wants to tax service fees, they have to enact a sales tax on services. No way should online travel companies
or travel agents have to deal with the multiple rates, rules, and filing
systems across several thousand hotel tax jurisdictions.
That’s the message we delivered this week in
Philadelphia, at the annual meeting of the National Conference of State
Legislators (NCSL).
Online travel companies (OTCs) operate what
is known as the "merchant hotel model." This model has been around
for decades in the offline world. Travel sites don't buy or sell rooms--instead
they negotiate for deep discounts on room rates, usually much lower than the
walk-in rate. These travel sites work to attract travelers to their web sites,
and offer the discount rooms, often bundled into a travel package that includes
airfare and auto rentals.
This model is a win-win for both the hotels
and consumers. Hotels have a new distribution channel to help fill rooms that would
otherwise go empty. Consumers get the advantage of much cheaper room rates.
It's what we've come to expect from the Internet--new business models
and distribution efficiencies that create added value for both buyers and
sellers. Isn’t everyone happy about that?
Well, the tax collectors aren’t so happy. One
group that represents government tax collectors--the Fair Hotel Tax
Collection Coalition--wants consumers to pay more taxes when
they book rooms through sites like Expedia and Orbitz. At the NCSL meeting,
Martin Morris of the coalition said that state and local governments are losing
$8 billion in taxes that should be collected by online travel companies.
He endorsed the Multistate Tax Commission (MTC) proposal to tax these service
fees at the 15-20% rates levied on your hotel bill. In his testimony, Morris refused to acknowledge
the difference between the actual cost of the hotel room and the service fee
charged by travel agents and online travel sites.
Hotel operators--such as Marriott, Hilton,
and Holiday Inn--already collect state and local occupancy taxes on every room
they rent. And online travel companies already collect these taxes as part
of their charge to consumers, and pass it along to the hotels. Travelocity
describes it this way on its web site:
What is a "tax recovery charge?" Well, it is our travel suppliers, and not us, that have the obligation to collect any applicable taxes, governmental fees and other charges and remit them to the government. Therefore, what we're collecting from you is a "tax recovery charge" that is equal to the amount we expect our travel suppliers to bill us so they can pay those taxes, governmental fees and other charges to the government.
Seems simple enough, but some state and local
tax authorities say that occupancy taxes should apply to the total price that
online travel sites charge (including service fees), not the negotiated rate
that hotels actually get for the room. But cities and states can't tax
service fees like they tax hotel rooms, and they shouldn’t impose new
collection burdens on travel websites.
First, online intermediaries shouldn't be confused with the parties they intermediate. Expedia and Orbitz are not hotel operators, and therefore shouldn't be forced to collect and file occupancy taxes that apply to hotels. Allowing this doublespeak sets a bad precedent for other websites that act as intermediaries or platforms for connecting buyers and sellers.
States should recognize that anything above what the hotel actually receives is a fee for service. If a state want to tax service fees, they know exactly how to do it: by expanding their sales tax base to include service fees. States also know who should get the tax revenue: the jurisdiction where the purchaser received the service, most likely at their home or office where they went online to make the reservation. (see this detailed analysis from the nation’s top tax professor, Walter Hellerstein).
This method follows the Streamlined Sales Tax Project, which is the basis for "fair" taxation of e-commerce. Yet for some reason it's not acceptable to the "Fair" Hotel Tax Collection Coalition. Go figure.
Over 100 million people visit online travel
sites every month! States and
cities that are struggling through a recession should be looking to
grow their travel and tourism business, not taxing them with extreme prejudice.
