Hotel Taxes and Online Travel Companies

Local governments, facing revenue shortfalls and budget cuts, are looking for any and all sources of revenue to help fill their coffers. One prospective revenue source is now in the crosshairs – hotel occupancy taxes from online travel companies, such as Orbitz, Expedia, Priceline and Hotels.com. While this is not a completely new issue (Pitt County, North Carolina first filed suit in 2005) more and more local governments are looking at this as a possible revenue source. One estimate, from the tax collectors, is that $8 billion is at stake nationwide.

So why do local governments claim that the tax revenues are lost? More and more travelers are using online services to book their own flights, rental cars and secure hotel rooms. Online travel companies purchase hotel rooms at wholesale prices, then turn around and resell the room for a higher price. Taxes are paid to the local government for the wholesale rate, not for the retail rate. Many local governments are claiming the right to collect the taxes on the difference between the wholesale and retail rate.

Several counties in North Carolina and six counties in Florida have filed class-action lawsuits. And in November 2009, a federal district court jury awarded a group of 170 Texas cities $20 million for the online travel companies’ failure to pay hotel occupancy taxes. The decision is under appeal. Another lawsuit, filed by Kentucky local governments was dismissed in December, under the reasoning that because the online travel companies lack ownership and physical control over the rooms rented, they do not constitute “like or similar accommodations businesses.”

However, not all local governments are pursuing these revenues. Clark County (Las Vegas), Nevada decided not to file suit, after County Commissioners cited concerns that going after the online travel companies would hurt their tourism-based economy. Instead, the County Commission asked county staff to look into the issue and to come back with proposed legislation to clarify the tax issues.

This issue is now gathering attention from policymakers outside the local government arena. The National Conference of State Legislatures (NCSL) held a panel discussion the issue at its Annual Legislative Summit last summer, and will be discussing the issue again at its Executive Committee meeting at the end of January. The Federation of Tax Administrators (FTA), comprised of state tax administrators, has also taken an interest the payment of hotel taxes from online travel companies. (Both NCSL and FTA are looking at this issue to help determine how online businesses should be treated under the Streamlined Sales and Use Tax Agreement.) Another group, the Fair Hotel Tax Collection Coalition, is advocating in favor of the Multistate Tax Commission’s proposal for online travel companies pay the difference between the wholesale and retail rate.

Between local governments, state legislators, state tax collectors and the coalition, it is safe to say this is an issue that will not be resolved any time soon.

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