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Book your hotel online? If you paid less, tax collectors want more.


Online travel companies (like Expedia, Orbitz, and Travelocity) are intermediaries between hotels and consumers. They offer big discounts on hotel rooms, and they charge service fees for making the booking. Millions of consumers are now using these services, especially for leisure travel.


Now, local governments where these hotels are located want to impose new taxes on these service fees. We’re not talking just about the local sales tax here; these guys are demanding the hotel & occupancy tax PLUS the regular sales tax, which amounts to 15-22% in taxes on your hotel bills.


Thing is, these online travel companies aren’t running hotels – they’re offering a service like any other travel agent. If a state or local government wants to tax service fees, they have to enact a sales tax on services. No way should online travel companies or travel agents have to deal with the multiple rates, rules, and filing systems across several thousand hotel tax jurisdictions.


That’s the message we delivered this week in Philadelphia, at the annual meeting of the National Conference of State Legislators (NCSL).


Online travel companies (OTCs) operate what is known as the “merchant hotel model.” This model has been around for decades in the offline world. Travel sites don’t buy or sell rooms–instead they negotiate for deep discounts on room rates, usually much lower than the walk-in rate. These travel sites work to attract travelers to their web sites, and offer the discount rooms, often bundled into a travel package that includes airfare and auto rentals.


This model is a win-win for both the hotels and consumers. Hotels have a new distribution channel to help fill rooms that would otherwise go empty. Consumers get the advantage of much cheaper room rates. It’s what we’ve come to expect from the Internet–new business models and distribution efficiencies that create added value for both buyers and sellers. Isn’t everyone happy about that?


Well, the tax collectors aren’t so happy. One group that represents government tax collectors–the Fair Hotel Tax Collection Coalition–wants consumers to pay more taxes when they book rooms through sites like Expedia and Orbitz. At the NCSL meeting, Martin Morris of the coalition said that state and local governments are losing $8 billion in taxes that should be collected by online travel companies.


He endorsed the Multistate Tax Commission (MTC) proposal to tax these service fees at the 15-20% rates levied on your hotel bill. In his testimony, Morris refused to acknowledge the difference between the actual cost of the hotel room and the service fee charged by travel agents and online travel sites.


Hotel operators–such as Marriott, Hilton, and Holiday Inn–already collect state and local occupancy taxes on every room they rent. And online travel companies already collect these taxes as part of their charge to consumers, and pass it along to the hotels. Travelocity describes it this way on its web site:


What is a “tax recovery charge?”


Well, it is our travel suppliers, and not us, that have the obligation to collect any applicable taxes, governmental fees and other charges and remit them to the government. Therefore, what we’re collecting from you is a “tax recovery charge” that is equal to the amount we expect our travel suppliers to bill us so they can pay those taxes, governmental fees and other charges to the government.


Seems simple enough, but some state and local tax authorities say that occupancy taxes should apply to the total price that online travel sites charge (including service fees), not the negotiated rate that hotels actually get for the room. But cities and states can’t tax service fees like they tax hotel rooms, and they shouldn’t impose new collection burdens on travel websites.


First, online intermediaries shouldn’t be confused with the parties they intermediate. Expedia and Orbitz are not hotel operators, and therefore shouldn’t be forced to collect and file occupancy taxes that apply to hotels. Allowing this doublespeak sets a bad precedent for other websites that act as intermediaries or platforms for connecting buyers and sellers.


States should recognize that anything above what the hotel actually receives is a fee for service. If a state want to tax service fees, they know exactly how to do it: by expanding their sales tax base to include service fees. States also know who should get the tax revenue: the jurisdiction where the purchaser received the service, most likely at their home or office where they went online to make the reservation. (see this detailed analysis from the nation’s top tax professor, Walter Hellerstein).


This method follows the Streamlined Sales Tax Project, which is the basis for “fair” taxation of e-commerce. Yet for some reason it’s not acceptable to the “Fair” Hotel Tax Collection Coalition. Go figure.


Over 100 million people visit online travel sites every month! States and cities that are struggling through a recession should be looking to grow their travel and tourism business, not taxing them with extreme prejudice.