Taxman Comes for Online Hotel Booking

Published May 31, 2016

Municipalities seeking to boost revenues to cover budget shortfalls caused by overspending are setting their sights on online booking companies such as Orbitz and Expedia.

Booking hotels online has helped lower the cost of travel for consumers, offering discounted rates for budget, mid-range, and upscale hotels. However, state and local occupancy taxes collected by the hotels also reflect the discount.

When a consumer successfully books a discounted rate, the occupancy tax, usually based on some percentage of the cost of the room, is lower as well. Additionally, the rates online bookers pay the hotels tend to be still lower, resulting in a further drop in the occupancy tax.

That doesn’t sit well with many municipalities seeking ways to boost revenues. They’re moving to recover occupancy taxes for the difference between what the consumer pays the online booking company and the amount the booking company then pays the hotel. For example, South Carolina cities Mt. Pleasant, Charleston, and Myrtle Beach filed a consolidated case against online booking companies this year. The case was resolved, but terms of the deal remain undisclosed.
Lawsuits Filed
More than 40 lawsuits have been filed nationwide on both sides of the issue, which has had some attention for several months.

A 2006 class-action suit filed in Texas on behalf of more than 170 cities seeking tax revenues was resolved in the cities’ favor in 2009. The trial resulted in a $20 million jury verdict against defendants, Inc., Travelocity Inc., and others. This past October, the New York Supreme Court dismissed a case filed by more than 11 online booking companies seeking exemption from the state’s Local Law 43, enacted in September 2009. The law levies a tax on the fees collected by online agencies for hotel booking transactions. It also requires the agencies present clients an itemization of hotel taxes on their bill. As a result of the dismissal, booking agencies must now pay the hotel occupancy tax according to what the company collects from the customer instead of the rate the company actually pays the hotel.

‘Unimaginable Compliance Requirements’
In an open letter to the hotel industry earlier this year, the Interactive Travel Services Association in Washington, DC expressed many concerns about cities attempting to rewrite these laws to impose higher taxes.

“If even a fraction of [an estimated 7,000] municipalities succeed, it could result in an impassable web of overlapping, confusing and contradictory local tax schemes,” the letter reads. “Travel intermediaries of every size—from mom-and-pop travel agencies to the largest tour operators—could face unimaginable compliance requirements from hundreds or even thousands of new local regulations, each with different definitions, tax rates, audit procedures, and paperwork obligations.”

Beyond those problems, there is the question of a governing body attempting to impose a tax on an entity such as Orbitz or Expedia that lies outside of its jurisdiction, said Joe Henchman, tax counsel at the Tax Foundation in Washington, DC. “From my perspective, the tax should just be on occupancy; you shouldn’t try to extend it to a statewide services tax.”

‘Exporting the Tax Burden’
The occupancy taxes are typically at double-digit rates and, even if only charged on the discounted rate the booking company pays, still bring in significant income to the local jurisdictions from people who usually live outside that jurisdiction, Henchman added.

“It’s an effort to export the tax burden. Such taxes can be justified if they are neutral and do not discriminate between residents and nonresidents.”

Phil Britt ([email protected]) writes from South Holland, Illinois.