Extras On Excise: Are Online Travel Companies Winning the Fight Over Hotel Taxes?

The longtime battle between state and local governments and online travel companies (OTCs) over the proper tax base for hotel occupancy taxes rages on in 2015, with a recent Hawaii Supreme Court decision and pending decisions in two other popular tourist destinations, California and Florida. Also, legislators in Maryland are considering legislation that could end the debate over what OTC revenue is taxable there.

Governments want to tax the full amount paid by consumers to OTCs while OTCs contend that only the amount they pay to hotels is taxable. Disputes have also arisen over whether OTCs are liable for certain lodging taxes. Earlier this month, the issue was addressed when the Hawaii Supreme Court ruled in In the Matter of the Tax Appeal of Travelocity.com, L.P. v. Director of Taxation, State of Hawaii that online travel companies are not liable for the state’s transient accommodations tax because they are not hotel operators under state law.

The court further held that OTCs are liable for the state’s general excise tax (GET) but found that a statutory apportioning provision applied to the transactions at issue. While the Department of Taxation assessed the GET on the total amount received by online travel companies, the court ruled that OTCs owe the GET only on the portion of gross income that they withheld and not what was paid to hotels. Both sides claimed victory, according to an article in the Daily Tax Report, by Michael Bologna, however, the ruling saved online travel companies hundreds of millions of dollars in tax, interest and penalties.

The Hawaii Department of Taxation has asked the Hawaii Supreme Court to reconsider its ruling that the GET apportionment provision applies to online travel company transactions. The Department argues, in part, that the ruling is flawed because OTCs are “direct room sellers” and not mere intermediaries in transactions between consumers and hotels. The request for reconsideration is detailed in a March 30 article in the Daily Tax Report, by Michael Bologna.

In California, a major tourist hub, online travel companies have been victorious in numerous cases wherein jurisdictions sought to impose the state’s transient occupancy tax. As discussed in an article featured in the Daily Tax Report, by Tom Gilroy, the string of success continued in a case brought by the City of San Diego when an appellate court ruled that OTCs have no liability for transient occupancy tax. The California Supreme Court granted review of that decision, however, the case is still pending and may not be decided until 2016.

Similarly, Alachua County v. Expedia, Inc. remains pending before the Florida Supreme Court. After a 2013 appellate court ruling that favored OTCs, the state Supreme Court agreed to consider the question of whether Florida law imposes a tax on the total amount of consideration received by OTCs for hotel reservations made on their website or only on the amount paid to the actual property owner for the reservations.

This question goes to the heart of the dispute between governments and online travel companies across the country. OTCs believe the proper tax base is the wholesale rates they have negotiated with hotels whose rooms are reserved on their websites, while many governments believe that the hotel occupancy tax is due on the total amount paid by the customer, even though a portion of that is retained by OTCs as compensation for services provided.

Online travel companies have been overwhelmingly successful when this battle has been waged in the courtroom, and as a result, some states have pursued legislative remedies. Maryland can now be added to that list, as state legislators have proposed legislation that will eliminate the debate over the proper tax base in that state. Maryland S.B. 190 proposes to amend the Maryland Code to clarify that the full amount of consideration paid by a buyer to an online travel company for the sale or use of an accommodation is taxable. Legislators hope the proposed amendments will end the debate over the taxability of certain OTC revenue. The bill is currently being debated by the Maryland House Ways and Means Committee.

By: Jequetta Byrd

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is litigation or legislation the best way to address the hotel tax problem?

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