Online Travel Companies Take Tax Fight to Consumers; Triangle May Be Losing Millions

July 29th, 2010 by Desiree Parker

Travelocity is sending out emails asking their customers to help stop politicians “from raising taxes on your travel” by signing an online petition to support new federal legislation.

Online travel companies (OTCs) are trying to protect their profits as localities across the country, including those in the Historic Triangle, fight to collect taxes on fees for discounted online travel rates. These companies want Congress to pass a bill that would keep local governments from collecting taxes on the retail room rates they book for travelers.

Companies like Travelocity believe now is the time to lobby Congress and rally consumer support – without giving the public too many details on the issue.

The OTCs want the new bill to pass so they no longer have to continue arguing their case in various courts and paying costly settlements, while local government organizations and traditional lodging groups staunchly oppose it, saying it cuts into their revenues.

Room occupancy rates

Williamsburg hotel second quarter occupancy rates, based on estimates by Smith Travel (Colonial Williamsburg properties and a few others do not share their numbers with Smith Travel).
2010 Q2 35.4 percent
2009 Q2 36.9 percent
2008 Q2 40.8 percent
2007 Q2 46.4 percent
Local hoteliers say 58 percent occupancy means a decent profit, and that’s the number they are aiming for.

When a customer books a room through an OTC, they see a rate, $100, for example, that they assume is the cost of the room. The OTC pays the hotel a reduced rate, usually between 20 and 30 percent less, so of the customer’s $100, the hotel gets the reduced rate of $70. The tax collected by the municipality is a percentage of the $70 – paid by the hotel. The remaining $30 goes to the OTC as their fee, which they lump together as “tax recovery charges and service fees.” The crux of the debate is whether this additional money should be taxed, and whether the fee is misrepresented to the customer as part of the advertised room rate.

The Triangle currently has the lowest hotel occupancy rate in the state at just over 35 percent occupancy through the second quarter of the year, based on estimates from Smith Travel Research. This is almost 10 percent less than Bristol, Virginia, which does not have an economy driven by tourism.

Since 2007, Williamsburg has been dead last in occupancy rates compared to all other localities in the state in the same period (see breakout box). The area localities have been suffering with low lodging tax revenues for years, and losing taxes on the fee could add up to significant losses since lodging taxes account for millions of dollars in revenue each year. For Williamsburg, occupancy taxes make up 15 percent of all the city’s tax revenues.

WYDaily did a previous story on the issue last year, which discussed several cases in various courts around the country in which localities are filing suits against groups of OTCs. Since then, OTCs have won some cases but have also lost some significant ones, including one in Columbus, Georgia. The state Supreme Court judge in the case ruled that OTCs should pay taxes to the city based on the advertised cost of a room.

At the time, OTCs “delisted” Columbus and began sending customers looking for rooms there to other nearby areas.

A 2009 Washington state consumer class action suit ended with a judgment in favor of the plaintiffs, which became the largest class action judgment in the state’s history. The judge found that $184.5 million in damages was warranted, but the final amount settled on was not disclosed. In June this year, Expedia began issuing online travel credits to people who traveled to Washington state between January 10, 2001 and June 11, 2008.

The Internet Travel Tax Fairness Act (ITTFA) is the bill the OTCs have been trying to push through Congress since last year to protect themselves (and their profits) from cases like those listed above. It would keep localities from taxing the OTC fees, would extend the tax exception to traditional travel agents who currently pay fees on retail room rates, and would keep jurisdictions from suing OTCs for additional taxes.

The companies have been sending out emails to customers recently, accusing localities of increasing travel costs and hurting local business and urging them to contact their senators to support the ITTFA legislation. They do not explain in the emails what prompted the bill, why local governments are upset or how their fee system works.

One email from Travelocity reads: “Local governments are threatening to raise your travel costs by adding new taxes on the fees you pay when you book hotel rooms through Travelocity and other online travel sites. We’re fighting to stop these politicians from raising taxes on your travel, but we need your help.”

The email goes on to say: “While families across the country are struggling to make ends meet, let alone afford their summer vacation, the last thing politicians should be doing is adding yet another tax on travel. If they succeed, not only will your travel costs increase, but your local businesses could be hurt as well.

“When taxes increase, individuals, families, and business travelers travel less. When these tourists stay home they don’t spend their hard earned dollars in your Main Street shops and businesses. That’s bad for jobs and for local economies.”

The three localities in the Triangle are part of the Virginia Municipal League, a group representing state municipalities, which, along with several other organizations like the American Hotel and Lodging Association, the National Association of Counties, the National League of Cities, the U.S. Conference of Mayors, the Federation of Tax Administrators and Destination Marketing Association International, have been lobbying congress to keep the ITTFA at bay.

In a joint letter to Congress expressing their concern over the proposed legislation, the groups write: “State and local governments are not proposing a new tax on internet commerce. Well before the establishment of OTCs, hotel occupancy taxes have been collected.”

They point out that these taxes are important revenue sources for and often fund tourism promotion, convention centers, and other local projects and government employees. “In these extremely difficult budget times when Congress is considering funding to aid local jurisdictions, taking away their taxing authority is counterproductive and damaging,” the letter reads.

“The result for hotels is that hotel channels are put at a competitive disadvantage against all third party intermediaries. Additionally, as local governments look to make up budget shortfalls and their taxing authority is preempted by federal legislation, they may be forced to levy additional taxes on constituents and businesses, including hotels, in their own jurisdictions.”

The letter concludes, “ITTFA merely shifts the OTCs’ tax burden onto others to the detriment of our communities and public sector jobs. No industry should be allowed to manipulate the tax code to secure a competitive advantage over hoteliers while simultaneously shortchanging cities.”

Hotels use these sites in order to fill otherwise vacant rooms. If the OTCs are cutting into their profits, why do hotels use them?

Williamsburg Hotel Motel Association President Chris Canavos says the sites offer brand recognition and give local hotels national exposure. He points out, “That’s their business model, and they gain ground when the market is weak… in depressed times, [using an OTC] gives me an advantage and helps fill empty rooms. Will I take $80, or nothing? In a destination like Williamsburg that’s not performing, these companies feed off it.”

He says if the market is better, the OTCs won’t get their reduced rate from hotels that are relatively full. “At the end of the day, hoteliers would prefer not to use them,” Canavos says.

But when asked if he thinks the fee should be taxed, he says, “Would that cause the destination to lose business? There could be collateral damage” if a bill such as ITTFA is passed.

Visit the American Hotel and Lodging Association website to see their perspective on the issue. Visit the OTC’s Interactive Travel Services Association website to read more about their position.

6 Responses to Online Travel Companies Take Tax Fight to Consumers; Triangle May Be Losing Millions

  1. Don Mitchell

    July 29, 2010 at 1:28 pm

    Just one more case of government (at all levels) trying to extort money from those to whom they provide no services. It’s the sales tax issue all over again but in spades since the local governments want to collect taxes on money which never enters or leaves their venues.

  2. Anonymous

    July 29, 2010 at 2:02 pm

    So it sounds like local government is getting their tax money, but they essentially want to tax the OTC’s cut as well. I wonder if additional taxes will help or hurt hotels….
    If a local government increases the tax by taxing a larger portion then the OTC will need to raise their rate. This will lead to fewer bookings (see price elasticity of demand). This will reduce the demand for hotel rooms which will reduce the local government’s tax revenue for hotels and what the traveler would have spent locally. As an example which is higher a 5% tax on $70 or a 5% tax on zero dollars? If localities (including our own) were smarter they would shave lodging taxes way down. Get the tourists here and then tax them on the goods they purchase.
    I argue that people will almost always spend more when taxes are lower, but I can guarantee that they won’t spend more if taxes are higher.

  3. Anonymous

    July 29, 2010 at 2:20 pm

    IF we don’t all wake up and fight this stuff our country will be gone. There may be a time when civil disobedience will be the only way. Wouldn’t it be powerful if enough people had the guts to stand and tell these politicians, local and distant that enough is enough. You may jail me if I did it alone but you can’t jail a whole town who as one body decided that enough was truly enough. History has shown this to be the case in the past and we the now passivist Americans electorate may once again be reminded of our true heritage and find ourselves asked to rise up again.

  4. Anonymous

    July 29, 2010 at 2:31 pm

    The worst example of hypocrisy and poorly thought out decision makings is at the WADMC/MRTF level. Dick Schreiber made a motion and everyone at WADMC except for Chris Canavos and Walt Zaremba voted to send our local hotel booking system and call center to an OTA in California. This was executed by Dan Dipiazio and Susan Bak both in the attraction business and the “experts” on MRTF. This decision has led to lower occupancy, poor customer service, lower tax revenue and lost jobs. You can say that WHMA needed to improve the way that they were booking business. We can also say that even when WHMA was operating poorly it was more successful at booking business than what we are doing now. With all of this talk of collaboration. We used to collaborate between Gowilliamsburg and VisitWilliamsburg. WADMC/MRTF ruined that collaboration. Now it’s time to fix it and start working together again! Check out the Gowilliamsburg website, call the rez center, Walk into the visitor center, take a look at the magazine WHMA produces. They are on the right track and the rest of us need to give them our full support.

  5. Anonymous

    July 29, 2010 at 3:17 pm

    Jsmith: Please explain this to the Dems in DC. The Country will thank you.

  6. Anonymous

    July 30, 2010 at 5:36 pm

    Wow, some of us are finding serious issues where there ain’t none. This dispute is really very petty in nature. The question is should the local government receive tax revenue based on what the traveler pays for the room or on what the hotel/motel receives? Used to be that there wasn’t an important difference between the two.

    If Travelocity quotes a tourist a charge of 100 dollars a night for a room in James City, and pays the operator 75 dollars, should James City receive tax computed on 75 or 100 dollars?

    Of course, if the tax is based on the lower amount, what Travelocity pays the motel operator, then Travelocity gets to keep more of the traveler’s payment. (Travelocity doesn’t include a separate line item in its bills for taxes.)

    So, those of you who think this is a call to revolution, well, you might have a long wait at the ramparts before I show up on this one.

    Travelocity’s lack of transparency doesn’t help its case. It has a line item in its quote called “Taxes and Processing Fees” that it adds to the room rate quote. Doesn’t break out taxes separately. So the less it pays in taxes, the more the “fees” (its own revenue) becomes.

    If that’s the answer, the local government may decide to make up for that by raising the tax rate — increasing the pain for travelers who use Travelocity and those who don’t. Raise it enough and people may not come as much.

    If Travelocity pays based on the higher number, then it may choose to increase its own charges, resulting in higher charges to the traveler.

    What is the right answer? In this case, it’s more of a “let’s make a decision and get on with life.”

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