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Cities Pursue Discriminatory Taxation of Online Travel Services

Real Motivation Is to Shift Tax Burdens to Non-Residents; Result Is Harm to Interstate Commerce

Tax Foundation

Introduction

In cities in 22 states, local officials have com­menced legal action against online travel companies like Expedia, Hotels.com, Orbitz, Priceline and Travelocity for what they claim are uncollected taxes. Travelers pay these websites when they use them to book a hotel room, with most of the payment going to the hotel but some to the website.

Every jurisdiction in the United States with a hotel has a tax on hotel rooms, and it often is imposed at a rate higher than taxes on other goods and services.

The legal dispute centers on whether hotel taxes should be assessed on travel booking services, which in turn depends on whether cities' hotel occupancy taxes should be calculated on the amount the hotel receives (which assumes that hotel taxes are paid only on the basis of hotel occupancy), or the amount the consumer pays (which assumes that the online companies are agents or resellers, not facilitators). Online travel companies neither own nor resell hotel rooms.

Taxes on hotel rooms are generally little more than a way of shifting the tax burden to non-residents (and nonvoters). When com­pared to taxes on other transactions, they are typically imposed at a much higher rate. These city litigation efforts are attempting to extract yet more revenue from travelers, this time by taxing Internet-based travel facilitation services.

Such taxes can be justified if they are neu­tral and do not discriminate between residents and non-residents. Unfortunately some state and local governments have demonstrated that their goal is more than just collecting taxes due; it is, as commentator William Hays Weissman conjectured, "to abolish an effective business model involving Internet commerce."

Cities' litigation strategies also raise serious oversight questions because they hire contin­gency fee lawyers to pursue these lawsuits. Some cities have also backed off pursuing litiga­tion, particularly because easy revenue is not forthcoming.

Far from leveling the playing field or col­lecting taxes already owed, recent state and local lawsuits against online travel companies impose new taxes in a way not justified by the principles of sound tax policy. Proposed federal legislation would halt this predation and preserve the status quo of hotel occupancy taxes based only on hotel occupancy, not other services.

Key Findings

  • Local officials in 22 states have sought to reinterpret hotel occupancy tax ordinances to apply to amounts paid by consumers for online travel booking services, with limited success.
  • In traditional hotel transactions, travelers book a room and pay a hotel tax (and sometimes also sales tax) based on the amount they pay the hotel. Online travel companies facilitate such transactions between consumers and hotels, and keep part of what the consumer pays as a service fee.
  • Online travel companies do not own or operate hotels and generally do not resell hotel rooms as wholesalers, placing their facili­tation services outside the proper scope of hotel occupancy taxes. There is no evidence that companies collect taxes and "pocket" them.
  • Taxation of retail services is justifiable, but when cities tax only Internet-based travel facilitation services (and do so at a high rate), such discriminatory taxation suggests that the real motivation is to shift tax burdens to non-residents, which burdens the free flow of interstate commerce.
  • Cities should not expect easy revenue from pursuing such claims but rather extended litigation and a negative impact on tourism.
  • Proposed federal action to establish hotel occupancy as the proper base would be in line with existing precedents, maintain settled tax practices, and prevent damage to the national economy. Such action would not jeopardize currently collected state and local hotel tax revenue.

Attached Files

The mission of the Tax Foundation is to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government. From its founding in 1937, the Tax Foundation has been grounded in the belief that the dissemination of basic information about government finance is the foundation of sound policy in a free society.

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