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Opinion

State, local officials declare war on vacation

State and local officials in more than 30 states have sued online travel agencies (OTA) over their alleged refusal to pay their “fair share” of hotel occupancy taxes.

A woman on vacation.

A woman on vacation. Photo Credit: Getty Images / iStock

As summer gets into full swing, Americans will scour the beaches in hope of some prime real estate for their sand castles and seagull snacks. But, every year, nearly half of Americans say they won’t be taking a summer vacation because of the high cost of travel.

The good news is that the increase in the number of online booking companies has led to more price competition among hotels and resorts. And, flexible booking arrangements are making travel more affordable. The increase in options and travel savings by websites has led to widespread consumer appreciation for booking websites, and much-needed vacations.

Despite a beneficial outcome for customers, online agencies and hotels, not everyone is pleased with the rise of internet booking platforms like Expedia or hotels.com. State and local officials in more than 30 states have sued online travel agencies (OTA) over their alleged refusal to pay their “fair share” of hotel occupancy taxes. They claim that, through loopholes, OTAs are able to lower their tax bill and exploit an artificial advantage over traditional travel agencies. Their proposed “fix,” however, would single out booking websites as the only service providers to pay occupancy taxes.

This unfair disadvantage is not only outside the scope of their service, it would mean higher prices for millions of customers relying on OTAs to book an inexpensive last-minute vacation.

The current debate over hotel occupancy taxes hinges on how exactly services should be taxed. Normally, if a customer goes directly to a hotel website and purchases a stay, they pay an occupancy tax assessed in the state and locality where the hotel is physically located. The hotel collects the tax from the customer, and in turn remits the tax to the government.

The situation gets a little more complicated, though, when OTAs enter the picture. Booking websites are often able to use their leverage to buy rooms from hotels at bargain rates, and sell the rooms to website visitors at a discount with a small service fee.

The online agencies basically “flip” the rooms and profit, even as the customer realizes savings and hotels get more exposure. Customers pay “tax” on the higher price that OTAs show on their websites, but OTAs only pass along part of that tax to hotels (who in turn pay the government).

These booking websites reasonably claim that, since they only paid a discounted rate for the hotel rooms, they should have to pass along only the tax on the bargain prices for said rooms. Any markup that the customers have to pay is the cost of the service that online agencies provide.

If a customer bought a hotel room directly from the hotel’s website and paid $100, that customer would have to pay the occupancy tax (let’s say 10 percent) on the amount. The $10 in tax would then go to the government via the hotel. On a site like Expedia, the online agency is the direct purchaser of the hotel room, and can get a $100 room for $90 due to their market sway. But because they bought the room for $90, they pay $9 in tax instead of the $10 normally paid by a customer in this situation.

Advocates of higher OTA taxation claim it’s unfair that websites pay lower occupancy taxes than customers would directly, but these websites are no different than middle men, buyers and procurers in other industries getting a better price for their customers. Paying for these procurement services is a separate issue from paying for the product being procured. Singling out OTAs for taxation, then, invites a double standard and opens the door to the taxation of more and more services.

Consider the case of other services that help customers navigate through markets. If a disabled individual cannot leave the house to go shopping, that individual may hire a shopper to procure products on his or her behalf. If this shopper has some savvy in coupon clipping and can acquire discounts, she will have a low final bill and a correspondingly-low sales tax bill. Even if the disabled client wouldn’t be able to secure the same discounts, the government wouldn’t force the shopper to pay sales tax on price without coupons. If any buyer obtains a discounted price, the government can only ask for sales tax on the discounted amount.

Online agencies accomplish what many traditional agents could not — supply lower prices and more options for cash- and time-strapped customers. Levying hundreds of millions of dollars in additional taxes on OTAs would inevitably be passed along to customers, making it more difficult to secure deals and rack up rewards points. By keeping taxation light and fair, states and localities could ensure that more and more Americans make it to the beach this summer.

Ross Marchand is the director of policy for the Taxpayers Protection Alliance. He wrote this for InsideSources.com.

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