Traditionally, when travelers book a room they pay a host of sales taxes (state, local, etc...) based on the amount they pay the hotel. Oftentimes travelers book rooms via online travel booking companies, such as Travelocity, which aggregate hotel prices in one central website. These companies collect the hotel rate and a service fee from customers, but only pay taxes on the hotel rates. This is where local officials feel shortchanged. They believe the online companies should be collecting this so-called “bed tax” on the retail cost paid by consumers.
Sound complicated?
Here’s an example: say a visitor books a hotel online and pays $100 for the night. This cost is divided between the hotel and the travel site – in this case, $80 for the hotel room and $20 for the online service fee. Local officials want online companies to collect the tax on the $100 total. This would mean a 7 percent levy would generate $7 for the state. Currently, only the $80 is taxed, resulting in a tax bill of $5.60.
Many states have entered legal battles or expanded their hotel tax laws to force these companies to pony up the dough. Most recently, Montana Gov. Brian Schweitzer publicly hammered Travelocity the same day the company was actually announcing a $500,000 program aimed at promoting tourism in the state. He believes the company owes Montana millions in back taxes.
The kicker is: these online companies are behaving lawfully! According to a report from the Tax Foundation, hotel occupancy laws provide that hotel taxes be paid by hotel occupants, based on the amount the hotel receives. Online sites are simply facilitating the transaction. They do not operate as agents or operators of hotels.
However, some cities have amended their hotel tax to include travel Web sites. These actions have already begun to hurt states in matters of interstate commerce. Facing increased taxes, online booking companies are simply removing hotels in these areas from their websites. For example, in Georgia, online sites redirected inquiries for Columbus to neighboring cities after a court ruling allowed the city to collect taxes on the travel sites’ fees. Similarly, this occurred in January in San Mateo County, California when the local government applied hotel taxes to anyone remotely connected with the transaction. Thankfully, after an outcry from hotels facing the prospects of reduced business, the county reversed course.
It’s painfully clear expansion of these taxes has and will continue to hurt tourism efforts in cities and states. If they continue on their path, states like Montana will completely miss out on large scale tourism investments by online companies. It’s high time motions to expand the bed tax are put to rest.
Also, take a look at my recent post on a similar online tax issue: the “Amazon tax.” It’s another example of state-based policy undermining interstate commerce.