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Maryland vs. The Travel Gnome

by Brent Mead / /

This morning’s Baltimore Sun chroniclesthe latest development in Maryland’s assault against online businesses. As aprelude to next week’s Amazon tax hearing, the state took aim at online travelcompanies such as Travelocity and Orbitz.

Across the country, almost all state and local governmentsapply an occupancy tax, in one form or another, on hotel rooms. More often thannot, such taxes are higher than the base sales and use tax. What is at issue inMaryland, and under legal challenge in at least 80 other jurisdictions, is howthat occupancy rate is applied to online travel companies who book rooms forclients.

 Currently, a companylike Travelocity will enter an agreement with a hotel to reserve multiple roomsand then book those rooms for customers. The online companies claim thedifference in price between what the room is reserved for and then booked foris the company’s service fee, and not subject to taxation.  NTU generally takes thisview. States such as Maryland contend occupancy taxes should apply to thehigher retail rate.

However, the state’s view is a fundamental misunderstandingof the online travel business model. Travelocity and its brethren do not own oroperate any hotels and they do not act as resellers. They are merely agents whoconnect sellers (hotels) with customers. No different than a personal shopperreally.

Also at issue is a basic matter of fairness.  GovernorO'Malley's desired lawsuit would target out-of-state businesses only. Oldfashioned travel agencies are not being discussed as part of any lawsuit,despite performing a nearly identical function. Unfortunately, Maryland issimply following the trend of state governments looking beyond their bordersfor additional tax revenue. By only going after out-of-state groups,politicians can avoid appearing to raise taxes on their voters, even thoughthese taxes will get passed down onto all consumers.

Finally, similar to Amazon taxes, we are talking about asmall slice of revenue – at most $30 million per year. In order to claw backthose revenues, states must go through years of legal challenges, which haveproven unsuccessful elsewhere.When your state is already the 44th worst for business climate, one needs toquestion the efficacy of pursuing a multi-million challenge against a growingsector of the economy, which is likely to fail.