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

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By Christopher Elliott

Next 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.

Taxation turmoil

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. It alleged 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.

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Online travel company litigation

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 we can forgive you 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.

This assumes that the big three online travel agencies likely to be affected by these court cases are Expedia, Orbitz, and Travelocity. It is the only places where you can buy discounted hotel rooms. They aren’t. There are hundreds of other Web sites that sell bargain rooms. Off-line, human travel agents can still find a great hotel rate, thank you very much.

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

Potential solutions and the traveler’s perspective

He says that if online companies had paid the taxes they were supposed to during the past decade, Washington would have an extra $125 million in its coffers. This figure 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. 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. (Here’s everything that you want to know about money and travel.)

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.

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Christopher Elliott

Christopher Elliott is the founder of Elliott Advocacy, a 501(c)(3) nonprofit organization that empowers consumers to solve their problems and helps those who can't. He's the author of numerous books on consumer advocacy and writes three nationally syndicated columns. He also publishes the Elliott Report, a news site for consumers, and Elliott Confidential, a critically acclaimed newsletter about customer service. If you have a consumer problem you can't solve, contact him directly through his advocacy website. You can also follow him on X, Facebook, and LinkedIn, or sign up for his daily newsletter.

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