February 22, 2015

Rascovar: Sticky tax conundrum on Internet hotel bookers

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Hotel Sign by Love My Tours on Flickr

Photo of hotel sign by Love My Tours on Flickr Creative Commons License

By Barry Rascovar

For MarylandReporter.com

Sometimes a simple, sensible-sounding tax reform runs smack into sticky realities. The result is a puzzle for Maryland legislators trying to do the right thing.

That’s the case this session with bills (SB190, HB209) designed to clarify state law regarding the “taxable price” of discounted hotel rooms sold over the internet by travel websites.

Advocates claim companies like Orbitz and Expedia are ripping off the state by buying blocks of discounted rooms from hotels, re-selling them to Maryland consumers at higher rates but paying state sales tax on the original, lower purchase price.

If that’s true, we should change Maryland’s tax laws and close this alleged “loophole.”

But it’s a complex situation in which the role of the Internet travel companies isn’t transparent. There’s a yawning gulf between what lawmakers believe and what may be the true facts.

Confusion Abounds

Even the legislature’s fiscal analysts seem confused. They aren’t even sure if the proposed reform will result in more tax revenue. Opponents flatly assert the Department of Legislative Services got the facts wrong.

Travel agents maintain they are not purchasing discounted, hotel room blocks and then re-selling them to the public at a higher price. They maintain they aren’t in the room-selling business.

They say they are acting as an intermediary between the hotel and the consumer. The hotel negotiates a discounted room rate with the travel company, which then advertises this discounted rate. When a sale is made, the customer pays the discounted rate to the hotel, plus a service charge or fee that goes to the intermediary.

That extra charge isn’t taxed.

The travel agents claim the hotels pay all the room taxes on the discounted, negotiated price. There’s no jacked-up extra room charge to consumers by Orbitz or Expedia other than that service fee.

Murky Issue

If all this is true, legislators need to take a closer look at those tax-reform bills. It may be a case of not understanding the true situation.

But it gets murkier.

The comptroller’s office is suing Internet travel agents on much the same grounds. The case is before the Maryland Tax Court. Meanwhile, four counties already have sued the big internet travel sites and settled out of court.

While all this is going on in court, it seems senseless for the General Assembly to further confuse matters in ways that could mess up the current tax case and lead to years and years of new litigation.

There are other problems with the bills.

The measures would tax local travel agents, local tour operators and vacation rental managers. It would impose a new administrative burden on many small travel-related businesses.

Double Tax?

It also could wind up as a double tax on these local travel businesses, since they already pay a corporate income tax on their service fees.

Here’s another complication: This would amount to a new tax on services — an area where Maryland has tried not to impose levies. Is this opening the door to a broad application of the state sales tax to all service businesses?

Given the results of the last election, a drive to add more tax levies that will be paid by consumers seems ill-timed and poorly thought through. That’s especially true given the uncertainty about what’s really going on in the discounted hotel room-rate industry.

This is not the first tax squabble where well-meaning lawmakers have run into unexpected obstacles because the issue is poorly understood and hard to simplify.

For years, liberal lawmakers have pushed for a “unitary tax” on out-of-state corporations. The bill runs into insurmountable headwaters each session because it’s not a black-or-white issue. Previous studies show the reform might prove counter-productive and yield little in new revenue over the long haul.

Tread With Care

The best course for legislators on the room-tax issue is to proceed with caution.

Let the comptroller’s court case play out. That will provide additional definition of the “taxable price” of these discounted rooms, which is strongly under dispute.

There’s also need for more legislative study.

How do these Internet travel sites really work? Do they jack up discounted room rates or not? Are they true intermediaries between the hotels and consumers, collecting only a service charge?

If the state starts taxing this travel-agent service, shouldn’t it do so uniformly on all business services? Would this be wise tax policy? Would it put Maryland businesses at a competitive disadvantage?

The more we learn about this room-tax issue, the cloudier things get.

With so much room for doubt, legislators would do well to pass on these tax-reform bills until they get a clear picture of what’s at stake and how the discount room-rental industry really works.

Barry Rascovar’s blog is www.politicalmaryland.com. He can be reached at brascovar@hotmail.com

  • Skip727

    Companies like Orbitz and Expedia don’t want the consumer to KNOW what the ‘discounted’ price THEY , the companies, pay before re-selling the rooms. If they don’t jack up prices, then why not just show want the discounted room rate they pay is?

  • MD observer

    Good analysis and solid advice.

  • Dale McNamee

    I went on several hotel websites and see that the prices they quote don’t include taxes & hotel fees… Are they misleading the public ?

    Also, why do they sell rooms to Orbitz,Expedia,etc. when they can sell the same rooms to the public for the same discounted rate ? They already do so in certain cases to boost occupancy during the week… (Empty rooms don’t make money)… With weekly & daily rates… Especially during the winter… Just check out Ocean City hotel rates during the summer & during the winter… Quite a difference ! Especially during the “Reach the Beach” season !

    I think that what we’re hearing are the whines of the “non-competitives” who use the force of government to crush the competitors…

    I think that there are far more pressing problems that the House of Delegates & Senate SHOULD be focused on !

    P.S. I’ve never been deceived by any of the on’line sites as to the room prices they quote… Taxes are never mentioned and fees ( in-room movies,etc.) are based on usage…