The crux is whether occupancy taxes should be based on the discounted rate online companies such as Expedia (EXPE) and Orbitz (OWW) negotiate with and pay to hotels, or the higher, retail room rate actually paid by guests. Online travel companies pocket the difference as their fee.
The discrepancy over the proper tax amount has led some local governments to rewrite ordinances and to at least 40 lawsuits filed by those on both sides of the issue.
Government officials say cities are losing an estimated $1 billion a year in revenue that would go toward promoting tourism and in some cases, paying for schools, law enforcement and other municipal services. Those dollars are especially important during the current economic downturn, some say, when treasuries are lean and every penny counts.
Further explanation of the matter details the tax-evasion argument:
Consumers basically pay the same overall amount whether they book a room directly with a hotel or through a third-party site, travel industry and government representatives say.
“The difference is how that money is divided up later on,” says Marlene Colucci, executive vice president for public policy at the American Hotel & Lodging Association.
For instance, a consumer pays a room rate of $100. A local occupancy tax of 10% tacks on another $10, and so the guest pays $110.
But an online travel site may have negotiated a discounted room rate of $80 with that hotel. A guest who booked through that third-party portal still pays $110, but the online company will give the hotel $80 for the room, plus $8 for the tax, keeping the remaining $22 as its fee. If the room had been booked directly with the hotel, the municipality would receive $10 in taxes.
Several cities argue that they are owed that $10 regardless of how the guest reserved the room. New York City revised its ordinance in September 2009 to make it clear that taxes are owed on what the consumer pays.
“Our goal is to make sure that everyone plays by the same rules,” says David Frankel, New York City’s finance commissioner. “By closing this loophole, we have ensured that the hotel occupancy tax is the same whether you booked a room directly with a hotel, through a travel agent or over the Internet.”
Baltimore similarly amended its law in September 2007 but has been in litigation for more than two years with Expedia, Travelocity and Hotels.com, says George Nilson, Baltimore’s city solicitor.