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Online Travel Companies v Taxmen

  • Oct 9, 2014 | Gail Cole

 A Maui hotel.

States want online travel companies to collect and remit transaction taxes on the charges for their services. Online travel companies (OTCs) don’t want to collect and remit those taxes. That’s an oversimplification, but it explains why online travel companies are spending so much time and money in court these days, most recently in Hawaii and California.

Joseph Henchman of the Tax Foundation writes in a May 2012 article that in the battle between states and OTCs over taxes, “OTCs have prevailed in cases in 18 (out of 25) states, while governments have prevailed in cases in 3 states and the District of Columbia.” That continues to be the trend in the ongoing battle between OTCs and state and local governments.

OTCs do collect and remit taxes in many states—typically on the wholesale amount. State and local governments argue they should collect and remit taxes on the retail amount. These cases end up in court when governments slap tax bills on OTCs for the unpaid difference (plus penalties and interest).

We’re not talking about peanuts. Data collected by the American Hotel & Lodging Association puts total U.S. hotel bookings by OTCs in 2010 at $10.4 billion--$7.7 billion of which was paid to the hotels. Tax was paid on much if not all of that $7.7 billion; no tax was paid on the rest, the remaining $2.7 billion markup. Professor James Mak of the University of Hawaii-Manoa estimates that state and local governments lost out on approximately $340 million in 2010 because of this model.

In California alone, unpaid travel transaction taxes for one company (Priceline) “could range from $57 million to $342 million, assuming tax rates ranging between 3 percent and 18 percent.” Those figures do not include potential interest or penalties.  Altogether, OTCs could end up owing both California and Hawaii more than $1.1 billion in unpaid taxes, interest and penalties.

In other words, if OTCs are spending a lot to fight such assessments, they are spending in order to save.

State by state snapshot

California: Courts have found OTCs not liable for transient occupancy tax (TOT) on their service charges or markups. TOT is due only on the wholesale price, not the retail price. The California Supreme Court is expected to settle the matter (In RE Transient Occupancy Tax Cases).

Florida: Lower courts have backed OTCs in their practice of taxing the wholesale price rather than the retail price of rooms. The issue has been taken up by the Florida Supreme Court.

Hawaii: In August 2013, OTCs were told they had to collect and remit Hawaii’s general excise tax (GET) and that they were liable for unpaid GET between 2000 and 2011. The state was awarded $247 million for unpaid taxes, interest and penalties. However, OTCs were found not liable for $434 million in unpaid transient accommodation tax (TAT). Both OTCs and the state have appealed to the Hawaii Supreme Court, which heard oral arguments on October 2, 2014.

North Carolina: When two counties took OTCs to court because they were remitting taxes on the wholesale price rather than the retail price of rooms, OTCs were found to be not liable for any county occupancy taxes.

Ohio: OTCs were found in 2012 to have no obligation to collect and remit guest taxes because they were not vendors, operators or hotels.

South Carolina: OTCs may be liable to collect and remit accommodations sales tax.

Washington DC: OTCs were found in 2012 to be liable for tax on the retail price, not the wholesale price, of rooms sold.

Wyoming: OTCs must base tax on the retail price of rooms sold, not the wholesale price paid to the lodging establishments. OTCs were found last spring to have nexus in Wyoming, in spite their lack of physical presence.

This is an incomplete list but it gives a good indication of the state of OTCs and transaction taxes throughout the country.

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photo credit: staticantics via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.