Observe the noble Hawaii general excise tax (GET) in its natural habitat, waiting for travel industry businesses. Just now, bounding up across the field and jubilant from escaping the clutches of the transient accommodations tax, is the online travel company (OTC). Noticing the OTC’s juicy flanks, the GET prepares for action. And with a spring of its feet and snap of it jaws, the GET pounces on the OTC, satisfied to find another source of nourishment. Order has been restored to the tax kingdom.

Hawaii’s struggles with OTCs like Expedia and Travelocity over tax collection enforcement, which have spanned a number of years, are worthy of a David Attenborough documentary. On Aug. 5, the First Circuit Court of Hawaii added to this saga with a ruling that OTCs are on the hook for more remittance.

Judge Gary Chang ruled that online travel companies must collect GETs on gross receipts for car rentals.  The opinion determined that gross receipts from rentals sold through package deals are taxable. State law provides that “tourism related services” include “transportation included in a tour package” and that these services are subject to the GET. 

Additionally, Chang upheld Hawaii assessments on gross receipts of car rentals that were not made as parts of travel packages. Regardless of whether the rentals are bundled, OTCs are liable for remitting the tax on their portion of the gross income they share with the car rental companies.

The general excise tax, which is in lieu of a sales tax, is imposed on businesses for the privilege of doing business in the state. The rate varies based on the type of company liable; for online travel companies, it is 4 percent of gross income. There is also a local 0.50 percent surcharge for businesses operating on Oahu.

This recent decision is another part of the transition in how OTCs fit into Hawaii’s taxing scheme and follows an earlier court ruling that subjected OTCs to the GET. In 2015, the state supreme court ruled in Travelocity.com, L.P. v. Dir. Of Taxation that online travel companies were subject to the state general excise tax on the portion of gross income they withheld, instead of being subject to the transient accommodations tax (TAT).

The Hawaii transient accommodations tax is imposed on hotel operators; the court held OTCs were not operators and thus not taxable under the TAT.

Travelocity.com, L.P. also illustrates the internal debate the state has had about which taxes are applicable to OTCs. The opinion notes that the case’s record included discussions within the Department of Taxation over the last decade about whether the TAT or the GET was more appropriate to apply to OTCs.

However, the Hawaii GET and TAT may already have their eye on other creatures that may fit into the food chain –the emerging room-sharing economy.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think that OTCs should be responsible for collecting taxes on ancillary travel services like car rentals?

With a free trial to Premier State Tax Library, practitioners have a single trusted resource that provides all of the tools and information they need to develop and implement the right tax strategies.