Travel deals offered by online travel companies (OTCs) such as Expedia Inc., Hotwire Inc., Travelocity.com and others, have been much sought after as customers look for the best deal when booking hotels and making other travel arrangements. But many OTCs have been caught up in the seemingly unending litigation with state tax authorities seeking to apply hotel occupancy taxes on the full amount OTCs charge to their customers, instead of the negotiated wholesale rate actually paid to hotels. The ongoing dispute between OTCs and state and local jurisdictions has led to dueling decisions in Chicago and Denver. Whether OTCs are considered vendors of hotel rooms and whether OTCs have an obligation to collect and remit lodging taxes is based on the rate parity markup—the higher retail rate paid by the consumers for rooms, rather than the negotiated wholesale rate.
In Illinois, the Appellate Court of the First Judicial District reversed a ruling by the Circuit Court of Cook County that ordered OTCs to collect and remit over $29 million in taxes to Chicago for facilitation and service fees charged by OTCs to customers for booking through their websites. The city imposes a Chicago Hotel Accommodation Tax (CHAT) on the gross rental or leasing price charged by “every owner, manager or operator of hotel accommodations.” Chicago asserted that the CHAT applies to the total price charged to hotel guests booking rooms through OTCs, rather than the rate collected by the hotels. OTCs argued that the facilitation and services fees are nontaxable services charged on travelers to search for, compare and book hotel rooms. The court concluded that facilitation and services fees are not part of the “gross rental and leasing charge” because these fees do not provide customers with “the right to occupy hotel rooms.”
In contrast, the Colorado Supreme Court decided that OTCs are operating as vendors of hotel rooms and are required to collect and remit Denver lodger’s tax on the full amount charged to customers, including the companies’ service fees and markups. The court reasoned that such fees should be included in the price subject to tax because the sale cannot be complete unless the customer pays the service and markup fees when purchasing lodging accommodations through OTCs’ websites.
Online travel companies aren’t the only ones being scrutinized in this new sharing economy. Short-term rental websites such as Airbnb Inc. are also facing lawsuits from states and localities attempting to collect hotel occupancy taxes. Litigators are debating whether the rental websites are responsible for collecting and remitting taxes or if the owners listing their property for rent must collect and remit taxes themselves. Airbnb has reached several tax agreements with state and local authorities, agreeing to collect and remit hotel occupancy taxes on behalf of its hosts.
The 2017 Survey of State Tax Departments has a new section of questions dedicated to addressing the tax collection obligations of third-parties operating in the expanding sharing economy. Currently, taxing authorities in 15 states impose collection obligations on third-parties that facilitate short-term rental accommodations.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should hotel occupancy taxes be based on the full amount charged to customers, including the markup charged by OTCs?
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.
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