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Research & Commentary: Expanding Hotel Occupancy Tax Online Would Hurt Ohio Tourism

June 12, 2018

In this Research & Commentary, Matthew Glans examines a proposal in Ohio that would increase the hotel occupancy tax paid by online travel agencies.

A new bill in the Ohio General Assembly could harm online travel agencies (OTA), which many Americans use to book affordable hotels. Since the 1990s, OTAs such as Expedia, Kayak, and Orbitz have gained traction and consumer confidence. OTAs currently control 39 percent of the digital booking market, according to Travel Trends. As OTAs gain popularity, their usage is expected to increase, with forecasts predicting their market share will reach 41 percent in 2020.

Most OTAs never purchase the rooms themselves—they merely facilitate the room purchase by online customers—filling hotels that would otherwise be empty. In most states, when customers buy a room using an OTA, they pay the online provider the room’s market price plus a hotel occupancy tax on the wholesale price. The OTA then sends the hotel the wholesale price of the room plus the sales tax. The hotel submits to state and local governments the tax on the contract rate negotiated between the online provider and the hotel. OTAs earn a profit by keeping the difference between the wholesale price and the “final room” price.

Several state and local governments argue this system places local hotels at a disadvantage vis-à-vis those that work with OTAs, thus reducing government revenue. In response, some state and local governments have drafted rules that would require OTAs to pay hotel occupancy taxes on the final price paid by customers, not the contract rate negotiated with the hotel.

New York and North Carolina have already passed legislation requiring payments based on the final room price. The bill offered in Ohio, proposed by state Rep. Dave Greenspan (R-Westlake), follows this model and would require OTAs pay taxes on the final room rate instead of the wholesale price.

OTAs are pushing back, arguing the profits they receive represent a service fee for facilitating the purchase and are not subject to the occupancy tax. The profits they earn are also subject to corporate income taxes. Joseph Bishop-Henchman, executive vice president of the Tax Foundation, contends no economic rationale exists for imposing such huge taxes on hotel stays, since the majority of benefits the taxes fund are used by residents, not travelers. Opponents of the Ohio bill argue the costs of the increased tax will inevitably be passed to customers. These critics call the bill the “Greenspan Tax.”

Increasing taxes on OTAs would unduly hurt online travel companies, whose profits are significantly eroded after providing a valuable service to hotels and consumers.

Travel and tourism are key industries for cities and states across the country. Tourism generates billions of dollars in economic activity and produces millions in tax revenue for state and local governments every year. 

Travel and tourism taxes, which are often charged at a rate higher than normal sales and excise taxes, can reduce tourism if they grow so substantial that they make travel and lodging unaffordable. These unnecessary taxes would allow state and local governments to prop up budget deficits by placing an excessive tax burden on OTAs and travelers. Imposing these taxes on OTAs would disrupt a vibrant market and pose a real threat to customers and hotels by increasing prices and potentially keeping hotel rooms vacant.

The following documents provide more information about online travel taxes.
 

Litigation Ongoing against Online Travel Companies for Hotel Occupancy Taxes
https://taxfoundation.org/litigation-ongoing-against-online-travel-companies-hotel-occupancy-taxes/
In this Special Report, Joseph Bishop-Henchman of the Tax Foundation examines the efforts by states and municipalizes to use the courts to expand online travel taxes to online travel agent companies.

Taxman Comes for Online Hotel Booking
https://www.heartland.org/news-opinion/news/taxman-comes-for-online-hotel-booking
Phil Britt writes in Budget & Tax News about attempts by municipalities to increase online travel taxes to boost revenues that are often used to cover budget shortfalls caused by overspending.

Research & Commentary: The Damaging Effects of Tourism Taxes
https://www.heartland.org/publications-resources/publications/research--commentary-the-damaging-effects-of-tourism-taxes
The Heartland Institute’s director of government relations, John Nothdurft, documents the negative effects of tourism taxes. He writes, “in order to promote tourism as part of a strong state or local economy and have a stable budget, it is vital to create a non-distorting tax code with low rates and a broad base, coupled with spending reforms.”

Cities Pursue Discriminatory Taxation of Online Travel Services
https://www.heartland.org/publications-resources/publications/cities-pursue-discriminatory-taxation-of-online-travel-services?source=policybot
Joseph Bishop-Henchman of the Tax Foundation, published this Special Report detailing the unintended consequences of discriminatory taxation of online travel agencies. Among other key conclusions, Henchman finds cities should not expect revenue in the short term, but instead litigation.

Taxation of Online Travel Services: Lawsuits Generally Not Succeeding in Effort to Expand Hotel Taxes
http://taxfoundation.org/article/taxation-online-travel-services-lawsuits-generally-not-succeeding-effort-expand-hotel-taxes
Joseph Bishop-Henchman of the Tax Foundation examines various efforts, which have met with limited success, to move the sales tax burden off hotels and onto online travel companies.

Ten Principles of State Fiscal Policy
https://www.heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at jnothdurft@heartland.org or 312/377-4000.

Article Tags
Taxes
Sub-topic
Taxes: Sales Tax
Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR