A new debate over how to tax hotel rooms could have a strong negative effect on the popular online travel services many consumers use to locate affordable hotels. According to StatisticBrain.com, of the 148.3 million travel bookings made on the Internet each year, 19.5 percent are through online travel providers such as Orbitz, Travelocity, and Expedia.
In August the National Conference of State Legislatures passed a resolution calling for states to “consider rules that would require online travel companies to pay hotel occupancy taxes on the full rental price paid by customers, and not simply the wholesale rate they have negotiated with hotels,” according to Bloomberg.com.
Most online travel providers never actually purchase the rooms themselves; they merely facilitate the purchase of the room by online customers, placing them in rooms that would otherwise be unused. They make a profit by keeping the difference between the “wholesale” price and the final sale price.
This setup has worked well for more than a decade, but several state and local governments have begun to question how sales taxes are paid on these rooms. In most states, when customers pay for a room through an online provider, they pay the provider the market cost of the room plus a hotel occupancy tax on the wholesale price. The provider then sends the hotel the wholesale price of the room plus the sales tax. The hotel then submits to state and local governments the tax on the contract rate negotiated between the online provider and the hotel.
Several state and local governments have argued this system places local hotels at a disadvantage vis-à-vis those that work through online travel providers, hurting government revenue. In response some have drafted rules that would require online travel companies to pay hotel occupancy taxes on the full price paid by customers, not the contract rate negotiated with the hotel. New York and North Carolina already have passed legislation requiring payments based on the full room price.
The online providers have pushed back both in the legislatures and courts, arguing the profits they receive represent a service fee for facilitating the purchase and are not subject to the occupancy tax. The profits they receive are also subject to corporate income taxes. Joseph Henchman of the Tax Foundation argues no economic rationale exists for imposing such huge taxes on hotel stays, since the majority of benefits funded by the taxes are used by residents, not nonresidents.
Increasing taxes on hotels in this manner would unduly hurt online travel companies, whose profits are significantly eroded after providing a valuable service to hotels and consumers. Discriminatory and high travel and tourism taxes prop up poor state and local spending habits while placing an unnecessary tax burden on the backs of out-of-state individuals and businesses. Shifting this tax to online retailers disrupts a vibrant market and poses a real risk of hurting customers and hotels by increasing prices and keeping hotel rooms empty.
The following documents provide more information about online travel taxes.
Hotels, Online Sites Fight over Travel Tax Burden
http://www.washingtonpost.com/blogs/govbeat/wp/2013/10/05/hotels-online-sites-fight-over-travel-tax-burden/
Writing in the Washington Post, Reid Wilson reports on the clash between online travel providers and the hotel industry over which side will be responsible for forwarding taxes to state and local governments.
Expedia to Priceline Targeted as States Cry for Revenue: Taxes
http://www.bloomberg.com/news/2013-08-19/expedia-to-priceline-targeted-as-states-cry-for-revenue-taxes.html
Tom Gilroy of Bloomberg online reports on states’ proposals to require online travel companies to pay hotel occupancy taxes based on the full rental price paid by customers, and not simply the wholesale rate they have negotiated with hotels.
Research & Commentary: The Damaging Effects of Tourism Taxes
http://heartland.org/policy-documents/research-commentary-damaging-effects-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
http://heartland.org/policy-documents/cities-pursue-discriminatory-taxation-online-travel-services
Joseph Henchman, director of state projects for 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.
Are Cities Being Penny-Wise and Pound Foolish with Online Travel Taxes?
http://www.consumertraveler.com/today/are-cities-being-penny-wise-and-pound-foolish-with-online-travel-taxes/
Charles Leocha, director of the Consumer Travel Alliance, argues taxing online travel agent service fees might be “penny-wise and pound foolish.” He observes similar legislation in Washington, DC would hurt the district’s economy is four ways: (1) lose advertising dollars, (2) lose tourists encouraged to book elsewhere, (3) lose special package pricing, and (4) lose tax collections from persons who decide to take their travel elsewhere due to increased costs.
Research & Commentary: Florida’s Online Travel Agent Tax
http://heartland.org/policy-documents/research-commentary-floridas-online-travel-agent-tax
This Research & Commentary examines online travel agent taxes and argues Florida legislators, the attorney general, and the Florida Department of Revenue stand to gain much by working together to ensure tourists are not victimized by double-taxation.
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 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
http://heartland.org/policy-documents/ten-principles-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 Heartlander’s Budget and Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
