Hawaii: General Excise Tax and Online Travel Companies

Do you dream of vacationing in Hawaii? Do you imagine surfing in the warm waters of Waikiki, riding a bike down the Haleakala volcano at sunrise, and feasting on fish tacos? It does sound idyllic, especially during dark winter days.

Now think about where you'll stay, and remember you'll have to pay taxes for the privilege of staying there.

The GET

Hawaii doesn't have a sales tax, but it does impose the general excise tax (GET) "at every level of transaction on goods and services… ." The GET is 4% throughout most of Hawaii, and 4.712% on Oahu.

Snapshot

To date, online travel companies such as Hotels.com, Expedia, and the like, have not collected and remitted the GET on sales of hotel rooms in Hawaii. For this, they were taken to court. Hawaii Governor Neil Abercrombie asked the Attorney General and the Tax Director to "aggressively and relentlessly go after these taxes that were due and owing." The case covers the period 2000 through 2011.

Echoing the Main Street Fairness discussions that have circulated around online retailers such as Amazon.com and brick-and-mortar businesses, Attorney General David Louie noted that "Hawaii hotels are good corporate citizens, paying their fair share of taxes to support the state's infrastructure… and the Online Travel Companies need to also play by the rules and pay their fair share."

Judge Gary W.B. Chang of the Tax Appeal Court agreed. He ruled this week that the GET "is a 'privilege tax imposed on businesses for the privilege of doing business in the State of Hawaii.'" He determined that the tax applied to the sale of Hawaii hotel rooms by online travel companies. On the other hand, he decided that the transient accommodations tax did not apply to these transactions.

Unpaid taxes for the eleven year period amount to approximately $110 million, plus interest of $40 million. Yikes. The ruling could also require the online travel companies to collect the GET on all transactions beginning in 2012. That would mean an additional bill of roughly $20 million for last year's unpaid general excise taxes.

The online travel companies reportedly collected money to cover the general excise tax on all hotel room transactions, but never remitted the money to the state. (hawaiireporter.com).

Not So Fast

While the ruling garnered praise from the governor, the Attorney General, and the Director of Taxation, it was criticized by Travel Technology Association, the organization that represents online travel companies such as Hotwire, Orbitz, and Travelocity. A statement released by the Travel Technology Association sounded ominous:

"This ruling will significantly increase costs for all … travel intermediaries that facilitate travel to Hawaii. Because demand for travel to Hawaii is acutely sensitive to price changes, this change in tax treatment will harm consumers and significantly reduce demand for Hawaii vacations."

The statement went on to warn that the ruling would be challenged. On a more positive note, it continued, "Travel Tech members intend to … work cooperatively with tourism leaders and lawmakers to minimize the ruling's damage to the Hawaii tourism economy."

The issue of whether or not online travel companies should collect and remit sales tax on hotel rooms is not unique to Hawaii. The District of Columbia won a summary judgement last fall holding four online travel companies liable for unpaid taxes on hotel rooms. In Ohio, a district court ruled that travel companies "had no obligation to collect and remit guest taxes… ."

The state of Hawaii will seek penalties from online travel companies in the Tax Appeal Court on March 8, 2013. A trial date has been set for April 15, 2013.

photo credit: paul bica via photopin cc