REPORT FROM THE U.S.—Whether municipalities should collect taxes on the retail rate or the wholesale rate when an online travel agent sells a hotel room is a continuing debate with different cities across the United States falling on different sides of the fence.
It is estimated there are 50 lawsuits pending between a city and at least one OTA attempting to decide the issue. Recent rulings have come down in favor of both sides; in Texas in July a judge ordered several OTAs and a collection of cities to determine what back-taxes were owed and begin collecting on the retail rate, but in San Diego last week a judge overturned a similar ruling and OTAs will continue to pay taxes on the wholesale rate negotiated with hotels.
The crux of the issue is between local municipalities and online travel agents (also known as OTCs) and, until recently, hoteliers didn’t have a dog in the fight. But experts continue to stress that as cities see dwindling tax revenues—much of which is used to fund local convention and visitors bureaus—they will look to hotels to make up the difference.
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Is that a realistic fear? Shawn McBurney, a representative from the American Hotel & Lodging Association who has been leading the charge on the issue, said yes.
“It’s already happening in San Francisco,” he said. “San Francisco is holding hotels liable for the money that the OTCs aren’t remitting in tax. The hotels don’t even know how much the OTCs sold the room for.
“We think that’s going to start to happen. Hotels are going to start feeling it.”
Recent cases
OTAs in early July lost a class-action lawsuit by 173 cities in Texas as defendants in the case of The City of San Antonio v. Hotels.com, which was initially filed in May 2006 and is one of the longest-running cases against OTAs. The ruling on 1 July declared OTAs must collect and remit taxes on the full retail rate they charge consumers as opposed to the wholesale rate they get from hotels, including margins and service fees.
“Because the (OTAs) are not occupants, they never have the right to occupancy, and the wholesale rate they pay for the right to sell a hotel room is not consideration paid for the right to occupancy, there is absolutely no reason for hotel occupancy taxes to be imposed on wholesale rates paid by the (OTA) to the hotel,” the judge’s ruling states.
Messages left with the Interactive Travel Services Association, a trade group for OTAs, and Expedia, were not returned by deadline.
The judge also instructed both parties on how to calculate back-taxes and asked them to meet, confer and come to an agreement on the financials. Steve Wolens, lead attorney for the plaintiff in the case, said that process was completed this past Friday. He anticipates the judge will look over the findings and issue a final judgment in the next several months, and then he anticipates an appeal will ensue.
In California last week, a state court overturned a decision by a San Diego administrative hearing officer assessing more than US$21 million in taxes and penalties against OTAs, rejecting the City of San Diego’s attempts to collect. In San Diego, the governing laws are written in such a manner that owners and operators of hotels are required to pay an occupancy tax, and thus the Los Angeles Superior Court ruled OTAs are neither owners nor operators of hotels.
“As far as the way these cases are shaking out—one jurisdiction is finding in favor of the OTCs and another against them,” McBurney of the AH&LA said. “Why are they so different? It boils down to how the state law is written. In Texas, the court found that the way the law is written the OTCs are liable. In San Diego, the judge said the municipality wrote their code in a way that doesn’t capture the OTCs.”
Columbus, Georgia
A similar case involving the city of Columbus, Georgia, was unique in that once a court ruled the OTAs had to collect and remit taxes on the full retail rate, Expedia, Hotwire and Travelocity, among others, subsequently decided not to list and sell hotel rooms in that city.
Instead, a search for hotels in Columbus—home to Aflac Insurance headquarters and the Army's Fort Benning—turns up available rooms across the river in Phenix City, Alabama, which some say cuts into business for the Columbus hotels.
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According to data from STR, parent company of HotelNewsNow.com, occupancy in Columbus hotels hasn’t been nearly as affected as the loss in pricing power after the 2009 removal of hotels from third-party sites.
Occupancy for the Columbus market dipped slightly from 57.6% to 56.2% in 2009, but recovered to 62.2% in 2010 and sits at 67.3% through July 2011. Meanwhile, occupancy in Phenix City, Alabama, remained nearly flat from 2008 to 2009 (60.5% to 60.9%) but hasn’t seen nearly the uptick (63.2% through July 2011).
Average daily rate, however, tumbled in the Columbus, Georgia, market nearly US$4 from 2008 to 2009 (US$79.19 to US$75.79) and continues to fall, sitting currently at US$72.45 through July 2011. Meanwhile, ADR in Phenix City received a generous bump from US$53.56 in 2008 to US$60.18 in 2009 and has ridden that wave, sitting currently at US$61.02 through July 2011.
McBurney said the retaliation from the OTAs against the hotels in Columbus was unfair because it was the city that ultimately went after the OTAs for more tax revenue.
“The OTCs retaliated against the hotels and then started sending guests to another state. There is that concern,” he said. “There was another incident in New York City—after New York City began considering a change in their code that would require OTCs to pay taxes on the retail rate, the OTCs sent an email to local GMs asking them to help repeal this. They said they were keeping records of who signed and who didn’t. The implications were clear.”
Sen. Josh McKoon, on the platform that OTAs not selling hotel rooms in Columbus is hurting business, recently sponsored Senate Bill 244, a state bill that would exempt online travel companies from paying local occupancy taxes on their markup. The bill is subject to a committee vote when the general assembly reconvenes in January. A similar bill in Florida, Senate Bill 376, was the first of its kind and drew plenty of attention earlier this year from hoteliers and lobbyists. Senate Bill 376 ultimately did not pass the Florida senate.
Federal involvement
With each city having a different interpretation of the laws, naturally the idea of federal regulation over the issue has credence. The concern, however, lies in which side the federal government would fall.
In 2010, the major online travel agencies and their national trade association circulated a letter proposing federal legislation called the “Internet Travel Tax Fairness Act,” in which language stated the OTAs would only be responsible for remitting taxes on the wholesale rate.
“When that thing was in circulation, it wasn’t introduced yet but we heard about it, we went to The Hill and made our opposition known,” McBurney said.
Although the battle continues to be fought on the city and state level, official federal legislation has not been introduced. McBurney said the Internet Travel Tax Fairness Act is “dormant” but the AH&LA continues to monitor the issue.