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Whoever wins in tax war, guests will still pay the bill

November 15, 2009

hotelNext time you book a hotel room online, consider what happens to the taxes you’ve paid.

Occupancy taxes can take a big bite out of your vacation budget. San Francisco hits its hotel guests with a 14 percent tax. Washington’s is 14.5 percent. Chicago adds 15.4 percent.

Where does all the money go? That’s a question the courts have tried to answer in recent months.

Online travel companies, which make money by negotiating a lower rate with a hotel and then offering it at a higher price to travelers, believe they should pay hotel taxes based on the lower rate they negotiated with the hotel. Some cities disagree, alleging the companies should remit all the taxes they’ve collected — not just a portion.


A group of Texas cities late last month won a $20 million verdict in a class-action suit against Expedia, Orbitz, Priceline and Travelocity, among others. In the summer, the San Francisco tax assessor ordered many of the same travel companies to pay the city $41 million (the online travel companies have appealed for a refund).

Earlier this year, an independent hearing officer also ordered several online travel companies to pay Anaheim, Calif., $21 million in back taxes. And just two weeks ago, the state of Florida sued Expedia and Orbitz, alleging that while the online travel companies had been collecting taxes from consumers all along, they have only been paying a portion of the taxes owed to taxing authorities and keeping the rest as profit. “The taxes are being collected from the consumer, but are not being remitted in full,” a spokeswoman for Florida’s attorney general told me.

So what does any of this have to do with your next trip?

Nothing. And everything.

It’s meaningless on one level, because you probably don’t care where your hotel taxes go. When you’re visiting another city, your tax dollars could be funding tourism development, schools, roads or a gleaming new stadium. You don’t get to decide. It’s classic taxation without representation, and you can be forgiven for not caring whether your online travel company is pocketing a few extra bucks.

But you should still care about the outcome of this fight, according to the players. I spoke with the Interactive Travel Services Association (ITSA), which represents the major online travel companies, and a representative told me that this is already directly affecting you. “Defending against all of this litigation makes travel more expensive, because it costs significant time and resources,” says Andrew Weinstein, an ITSA spokesman.

That assumes the big three online travel agencies likely to be affected by these court cases — Expedia, Orbitz and Travelocity — are the only places where you can buy discounted hotel rooms. They aren’t. Not only are there hundreds of other Web sites that sell bargain rooms, but don’t forget off-line, human travel agents who can still find a great hotel rate, thank you very much.

Steven Wolens, the lead counsel for Dallas-based McKool Smith, who represented several of the Texas cities in last month’s case, as well as Anaheim and San Francisco, says that this argument affects you if you live in one of the communities fighting for the tax revenue. “Taxpayers should care about this, because that money is being used to fund convention centers, schools and other projects,” he says.

Had online companies paid the taxes they were supposed to during the past decade, he says, Washington would have an extra $125 million in its coffers (a figure that includes interest and penalties).

I can certainly see both sides of this issue. But is there a solution?

One fix is to clarify current laws. For example, in September, New York’s hotel tax began requiring online companies to remit taxes based on the additional amount they charge the occupant. A tweak to the hotel tax may prevent a costly trip to court for other municipalities.

Then again, it might not. Several taxing authorities, including Los Angeles and the state of Texas, clarified their rules the way New York did, but the online travel companies ignored them, according to Wolens.

ITSA hopes to address this issue at the federal level by persuading Congress to pass legislation that would clarify its members’ status as intermediaries, presumably in their favor.

How about travelers? Well, you have no control over where your hotel taxes go, but you can control how much you pay. A recent study by the NBTA Foundation, the education and research foundation of the National Business Travel Association, identified the most-taxed cities for travelers. Chicago, Seattle and Dallas topped the list. At the bottom were such destinations as Portland, Ore., Detroit and Honolulu.

When it comes to hotel taxes and who gets to keep them, there isn’t much you can do. But you can do something about where you go on vacation — and where you book it.

(Photo: Pieter Musterd/Flickr Creative Commons)

Christopher Elliott is the author of Scammed: How to Save Your Money and Find Better Service in a World of Schemes, Swindles, and Shady Deals. Critics have called it “eye-opening” and “inspiring” — it’ll “grab your attention and won’t let go.” Order your copy now on Amazon, Barnes & Noble or iTunes.

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15 comments

  • MarkieA

    Let me get this straight. Online travel companies charge the consumer the usurious tax rate imposed by the various municipalities, but then don’t remit those taxes to the city? Sounds fraudulent to me. Then the ITSA claims that we should care about this because it costs these online agencies a whole of money – which they then have to pass on to us – to defend their fraudulent activity in court? Hmm! Seems to me that there’s an easier, less expensive way to go about this. Pay the city the full amount in the first place! Sheesh! You know, if you’re doing something wrong, and you get caught, you could just fess up and set things to right; you don’t HAVE to make a court case out of it. I know that that’s not the American way these days, but really….

  • Dave

    If money is collected as “tax” and then not remitted to the taxing authority, that is clearly fraud. If a business tries withholding tax from employees and not paying it the IRS will soon come down on it like a metric ton of bricks, and rightly so! They they tell us our hotel costs will be higher so they can defend themselves against charges of fraud. How ludicrous! If you charge it as tax you gotta pay it as tax!

  • Evan

    Unfortunately, there’s widespread precedent for the practice of retailers getting to keep all or part of what’s labeled taxes on a receipt, typically as part of economic development programs for luring businesses and jobs. How the funds can still be labeled “sales tax” for the consumer is a mystery to me…

    Granted the conditions in this travel case aren’t completely similar to local retailers’, but it is an accepted, not well-publicized, practice.

  • Josh

    Once again, the answer is that hotels should be required to advertise only the complete final price, taxes included (they can certainly break out the taxes on an informational screen if they want), so people can comparison shop between cities/areas. If the final price of hotels in city A are higher than next-door city B (or other-area-under-consideration city C), then city A deserves to lose the business and tax revenue (and have businesses close/not open there). That’s the best way to keep the local politicians in check…

  • David H

    I’m confused.

    It seems that some cities/states want the taxes on what the customer pays the Online Travel Agent but others want taxes on what the OTA pays the hotel. Am I reading this right?

    Surely the destinination city/state should only be receiving taxes on the part of the vacation taken there, no including the cost of flights except the landing fees. Are states going to be asking for taxes for overflights from travellers too?

  • Anne

    I work for a hotel and here is how the tax thing goes down where I work. If you pay $100.00 for your room and the third-party site keeps 40% then they will skim $40.00 off immediately. The remaining 60% is divided up by tax. Say the tax where I work is 10%. So the hotel would keep $54.55 and send $5.45 in as taxes. So, instead of $9.09 in taxes the state gets $5.45. That’s pretty significant.

  • Eric

    OK. Here’s how I read this. Seems to be a lot of confusion.

    A hotel has a room that goes for $100/night. The hotel sells a block of these rooms to Travelocity for $50/night. Travelocity then turns around and sells a room to you for $75 a night. Travelocity only wants to remit the tax on their cost of $50. The cities want Travelocity to remit the tax on the entire $75. If Travelocity is collecting this fee, and they’re calling it a tax, then they are going to have to remit it to the local governments. The travel websites are going to lose in court every time on this one.

    If Travelocity only wants to remit the tax on the $50 they paid for the room, I can understand that, but if that’s the case, then Travelocity should ONLY be able to charge you for the tax on that same $50, not the inflated $75.

  • Carver Farrow

    No. This is not what is happening. Its entirely different. What is missing from this article is its lack of emphasis on the fact that we are talking about CITY taxes, not state sales tax.

    Lets say that you book a room on Expedia for $75, and Expedia pays Hilton $50 for that room. And CITY taxes are 10 percent. Expedia is charging and collecting taxes only on the $50 or $5.00. Thus , excluding state taxes, the total charge to the consumer would be

    $75.00+$5.00 or $80.

    Which is traditionally how travel wholesalers operate. Normally, only the person or entity that buys directly from the hotel is liable for city hospitality taxes at the rate paid to the hotel.

    However, the cities are saying that taxes should be paid on the $75.00 which in my example would be $7.50. Thus the total price would be

    $75.00+7.50 or $82.50

    Thus, the online resellers are looking at the doube whammy of having higher prices and having to pay back taxes since they didn’t collect sufficient taxes from their previous transactions.

  • scott L

    If you are required to collect a tax, city state or what ever, you collect it and then pay it the taxing body. If the Online sit collect a tax at what ever price , that amount goes to the taxing body.

    Yes I am bias as I work for a local government agency as we have laid of 12% of our work foce and the rest of us have taken 10% pay cuts over the last year. But yet the public demands the work goes on and done on time.

  • JamesinLondon

    If it’s correct that:- “The taxes are being collected from the consumer, but are not being remitted in full,” a spokeswoman for Florida’s attorney general (explained).
    Have these hotels not overcharged me?
    …and can I not reclaim these overcharged taxes from the hotels? If the hotels have overcharged the taxes (by not paying to the state/city the full amount) then I want a refund.
    Class action anyone….?

  • jrgal331

    Why should the OTA pay occupancy tax? They are simply marketing and selling the hotel room for the operator. They should pay sales tax based on the total amount of their sale, but the hotel operator needs to work the occupancy tax charge into the rate they negotiate with the OTA.

    Occupancy tax laws are written to charge the hotel operator for an occupied room, not the service for selling the toom. Afterall, if you start forcing the OTA to pay occupancy tax, why not charge tour operators and the like. After all, they mark up rooms to the consumer just like the OTAs.

  • Mike

    Carver, perhaps I was reading it wrong, but from what I read, the travel sites were charging tax on the full $75 you would have paid, but only remitting as much tax as necessary on the $50 at the hotel got.

    Here is the rub. if travelocity etc, paid $50 for the room, then all the local cities should be able to collect is tax on that $50 paid for the room. However, these travel sites should not have been able to collect taxes on the additional $25 profit they would be charging you since there really is no tax being remitted. I mean, how is it legal to charge me tax on something when something isn’t taxable? (and how are they not remitting monies collected as tax?)

  • Anne

    @ JamesinLondon

    It is not the hotels setting the price or failing to pay the tax. It is the third-party booking sites. If indeed a hotel charged you more tax than was appropriate you would indeed have a point. But, in this case it is Orbitz (or whoever) that is not charging enough tax and/or failing to remit what the did charge. None of this money is to be returned to the consumer.

  • Carver

    @Mike

    Article aside. I find it impossible to believe that a reputable company or companies would charge taxes and purposely not remit the taxes. Also, when the reseller buys the room, it has no idea how much the room will ultimately sell for.

    So I think my scenario seems the most likely

  • http://www.clarkecomputer.com Charles Clarke

    Obviously how much should be paid in taxes can vary depending on the law for that city. That is why Chris mentioned that some of the cities clarified their laws.

    If the tax is based on how much a guest pays for that room, then tax should be collected on the full amount and remitted to the city. Whether by both the hotel and the OTA or by one of them would depend on the law and the agreement between the hotel and the OTA.

    If the tax is based on how much a hotel receives for a room, then tax would only be collected on how much the hotel is paid. Though I can see how this could be easily abused. “We rent all our rooms to our booking agency for $1/night. They then rent the rooms for whatever they can get. So tax is only owed on $1/night.”

    @Anne – If the hotel is collecting the $100/night and then paying a commission to the OTA, then I would be very surprised if tax wasn’t owed on the $100. If the OTA collected the $100 and then paid the hotel, I could see it vary depending on the local tax law.

    If the OTAs are collecting tax, they should pay it. I’m not sure if the statement “The taxes are being collected from the consumer, but are not being remitted in full,” by the Florida AG spokesperson is accurate or a positioning/political statement. The programming and accounting complexities to do that instead of paying what is collected would make it obvious it is intentional. Fraud and RICO would probably come into play.

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