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Maryland vs. The Travel Gnome

by Brent Mead / /

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

Across the country, almost all state and local governments apply an occupancy tax, in one form or another, on hotel rooms. More often than not, such taxes are higher than the base sales and use tax. What is at issue in Maryland, and under legal challenge in at least 80 other jurisdictions, is how that occupancy rate is applied to online travel companies who book rooms for clients.

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

However, the state’s view is a fundamental misunderstanding of the online travel business model. Travelocity and its brethren do not own or operate any hotels and they do not act as resellers. They are merely agents who connect sellers (hotels) with customers. No different than a personal shopper really.

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

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