Sales Tax Slice: Should Online Travel Companies Collect Tax on Full Price of Rooms?

While the recent cold snap and snowy conditions that spread across the country may have inspired you to explore online travel company websites for getaway deals, a federal judge in Texas has had both eyes fixed on online travel companies (OTCs) and their bid to overturn a 2009 decision in favor of 173 cities in Texas.

Over the last couple of years numerous disputes have arisen over the amount that is subject to hotel occupancy taxes when hotel rooms are booked using OTCs.  The point of contention is whether tax applies to the amount the OTCs agree to pay hotel owners to list available rooms on their websites, or the marked-up rate that the OTCs charge to customers to reserve the rooms. 

Characterizing the difference between the amounts as a fee for facilitating the transaction, OTCs have maintained that this amount is not subject to tax.  Many state and local jurisdictions insist that the entire price paid by customers to reserve the room should be subject to tax.

 A recent development on this issue comes out of Texas, where a federal judge denied the OTCs' motion to throw out a 2009 decision that was in favor of 173 cities. The OTCs had filed the motion following the Texas Supreme Court's denial of a petition for review in October 2012, sought by the city of Houston in that city's case against the OTCs. The federal judge disagreed with the OTCs' contention that the decision in their case should be overturned to conform with the decision in favor of Houston.

 A parallel can be drawn between the OTC issue and the controversy surrounding the tax treatment of deal-of-the-day instruments. At the most basic level, the choice is whether tax is imposed on a discounted amount (the amount a customer pays for a deal-of-the day voucher, and the amount the OTC agrees to pay to a hotel for a room), or on the full amount of the good, service, or room (the price of the good before the deal-of-the-day voucher is applied, and the amount the customer pays to the OTC to reserve a room).

 While more state tax departments are issuing guidance on the full price versus discounted price issue for transactions involving discount vouchers, the tax situation remains unsettled in many jurisdictions. Among the approximately dozen states that have provided specific guidance are California, Illinois, Kansas, Massachusetts, Missouri, New York, Nebraska, and Washington. Most of the states that have provided guidance impose sales tax on the amount the customer paid for the item (the "discounted price" ) when that amount is known (e.g., tax would be imposed on the $50 actually paid for an item even though the full value was $100). In contrast, a minority of the states impose sales tax on the full value of the item acquired (e.g., tax would be imposed on $100 for the item even though the customer actually paid $50 as a result of the certificate).

Strictly applying the majority rule (tax imposed on the discounted price) to the OTC situation does not account for the substantive difference between the discounted price in the two situations. If a judge applied the logic of the majority to the OTC situation (i.e., apply tax to the amount actually paid for the room), tax would be imposed on the full value, including the "fee" amount paid by customers to the OTCs, rather than the discounted amount the OTCs paid to the hotels.

 By Christine Boeckel

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