By Amanda Belarmino
Online travel agencies (OTAs) such as Expedia and Booking.com are the channel of choice for approximately 14 percent of all hotel bookings in the United States. Typically, these channels are responsible for collecting occupancy tax directly from the guest and then pay the hotel directly for the reservations. Recently, OTAs have come under scrutiny for the way they collect occupancy tax. Typically, taxes and fees are bundled together on the OTA website and the guest does not know what portion are taxes and what portion are fees. Furthermore, when the guest selects the option to pay at the hotel, the hotel charges tax on the full rate paid (retail) while the OTA only charges tax on the amount paid to the hotel (wholesale). Since the OTA receives a commission of between 20 to 30 percent, this discrepancy in tax collection can result in millions of dollars of losses to cities, counties and states.
Los Angeles was the first to file a lawsuit against OTAs for unpaid taxes in 2004, and as of early 2016, officials in municipalities in 34 states, Puerto Rico and Washington, D.C. had filed lawsuits against OTAs regarding their collection of occupancy tax. The state of Oregon, the state of New York and the city of Washington, D.C. have all modified their tax codes to clarify that OTAs owe taxes on the retail price of a hotel room rather than the wholesale rate. However, the bulk of the court cases (39 to be exact) ruled in favor of the OTAs, stating that OTAs do not hold title to the hotel rooms and therefore are not subject to the same occupancy tax laws as hotels. The determining factor in these cases seems to be the way the laws are written. In municipalities where the law clearly states that occupancy tax is on the amount the customer pays, the rulings have gone against the OTAs; but, in municipalities where the law states that the tax is collected on the amount received by the hotel, the rulings have gone against the OTA. The following are highlights from these lawsuits.
California
The California Supreme Court ruled that OTAs are exempt from paying occupancy tax under current law. The court ruled that the amount of tax paid should be based on the amount paid by the guest; but, that hotels are obligated to pay it, not the OTAs. Some municipalities are considering lawsuits against hotels to collect the back taxes.
Florida
In a case including 17 counties, the Florida Supreme Court ruled that OTAs are not hotels and are not subject to paying occupancy tax based on their commission, but only the amount paid to the hotel.
Georgia
In the 2009 case Expedia vs. City of Columbus (GA), the ruling found that, while OTAs are not obligated to collect taxes, they present themselves as doing so. Additionally, Expedia delisted hotels in Columbus until the lawsuit was settled. In the 2011 City of Atlanta vs. Hotels.com case, the court ruled that OTA services are taxable because occupancy tax is levied on the guest and not on the hotel owner or operator.
Montana
Based upon the language of the occupancy tax legislature, OTAs are neither owners nor operators and therefore not subject to the 4 percent occupancy tax. They are, however, subject to paying a 3 percent sales tax on hotel room nights sold.
Texas
In a suit brought by the city of San Antonio, the trial court found that OTAs can control hotel inventory and do have to pay occupancy tax. An appeal is pending.
Washington, D.C.
OTAs are responsible for paying the full amount of occupancy tax to the municipality.
The differences in rulings reflect the differences in occupancy tax laws by municipality and may signal future legislative changes to prevent a loss of revenue to municipalities. AH&LA “strongly supports policies that close loopholes giving the OTAs a free pass on remitting the full amount of tax owed … and believe that a clear disclosure of fees collected by OTAs is critical for consumer trust in booking.” Additionally, in cases decided in favor of the municipalities, the results of these rulings lead to other questions that may directly impact hotel owners and operators. For example, if the commission paid to OTAs are taxable, are resort fees and valet charges now subject to occupancy tax? When hotels bundle room rate with other services, is the entire bundle now subject to occupancy tax? Should the federal government get involved to answer the question once and for all? Stay tuned as these and other adventures in OTA occupancy tax litigation make their way through the courts.
Look for revenue recognition guidance in light of these changes to be provided by HFTP in August 2017.
Sources:
OTA Tax Parity
Litigation Ongoing against Online Travel Companies for Hotel Occupancy Taxes
A Mess of Millions: OTAs and the Truth Behind Their Unpaid Hotel Taxes
Amanda Mapel Belarmino is a Ph.D. candidate at the Conrad N. Hilton College of Hotel and Restaurant Management at the University of Houston. Her research areas include revenue management and peer-to-peer accommodations, and she had published peer reviews articles in Current Issues in Tourism and The International Journal of Contemporary Hospitality Management. Her undergraduate degree is in hotel administration from Cornell University, and her Masters of Science is in hospitality management from the University of Houston. She has 20 years of management experience is casinos, hotels and restaurants, including positions with the Arizona Biltmore, Caesar’s Entertainment, Hyatt Hotels and McAlister’s Deli.
