Thursday, June 18, 2009

Historic: Expedia Remits Hotel Tax on Retail Rate

Did Expedia cross the Rubicon or just put its toes in the water?

At any rate, silently made hotel-merchant model history over the last few months when it remitted taxes on Columbus, Ga., hotel bookings based on the retail rate, which includes taxes and its service fee.

Until now, as online travel agencies fight hotel-tax battles and even win their share of hotel-tax lawsuits across the country, they have been assessed and penalized in some jurisdictions, but no additional tax money is believed to have changed hands as legal appeals were under way.

But, Expedia confirmed to me yesterday that it remitted taxes on the retail rate -- and not merely on the net rate it negotiates with hotels -- in the months since it dropped out of the Columbus, Ga., market so it could comply with a court injunction.

This issue of whether online travel agencies should be taxed on the net rate or the retail rate in merchant-model hotel bookings is at the heart of the tax dispute.

The reason had to remit the taxes on the rate it charges consumers, so it could comply with the court order, is because although consumers pre-pay merchant-model bookings, the hotels invoice Expedia only after the guest stays at the hotel.

This meant that while Expedia stopped selling Columbus, Ga., hotel rooms by mid-September 2008, before a court ordered it to start remitting taxes on the retail rate, the OTA had bookings in the pipeline and travelers staying at the city's hotels after the injunction was issued.

So, Expedia complied with the court order while it was appealing that case to the Georgia Supreme Court. And, earlier this week Expedia lost that appeal in Georgia's highest state court, setting the stage for Columbus, Ga., to dog Expedia for hotel taxes going several years back.

On the Rubicon versus toe-dipping question, I tend to think the latter is in play because the OTAs have indicated they would rather abstain from selling merchant-model hotel rooms in jurisdictions with adverse tax rulings than remit taxes on the higher retail rate. And, on a relative scale, there isn't much tax money involved, perhaps a couple of million dollars at the most, in Expedia's Columbus bookings.

In September, the trial court in the Columbus, Ga., case also ordered Expedia "henceforth" to separately break out hotel taxes and service fees to consumers instead of lumping them together as "taxes and fees" in merchant-model bookings. The court said should detail the taxes and fees either when travelers book on, when they occupy the hotel room, or at both times.

Being transparent about their services fees and therefore their margins is anathema to the OTAs and some of their hotel partners for competitive reasons.

And, this is my problem with the merchant model, as currently practiced. Whether they are legally required to do so or not, the OTAs should spell out to consumers in a transparent manner how much the OTAs charge as a service fee and what the various hotel taxes amount to.

Consumers absolutely have a right to know what they are paying for.

If the OTAs are customer champions, as some claim to be, then hiding behind "taxes and fees" is untenable.

The OTAs have lost recent cases in Columbus, Ga., and Anaheim, Calif., although certainly it is debatable, as Elizabeth B. Herrington, an attorney representing Orbitz, argues, which side has the momentum.

If the OTAs are forced to abandon or severely restrict their merchant-model business, this development would certainly place their business operations under significant stress.

With the recession in full swing, the OTAs already are feeling additional pain because they eliminated booking fees for flights and some have reduced service fees on hotels, as well.

In a new report for PhoCusWright, "Does the Model Work Without Fees?," Jake Fuller details how the OTAs, particularly Orbitz and Travelocity, are experiencing a profit crunch from the fee loss, although waiving fees might enable the OTAs to pick up share from supplier sites.

"Our analysis suggests that OTAs would have to increase ticket volume by 45-90% to fully offset lost fees, and air bookings' share of OTA sales would have to increase from 32% in 2008 to 46-61% (versus the 44% OTA share at the peak in 2002)," Fuller writes.

These pressures are one reason that Expedia is throwing a lot of money into its TripAdvisor advertising/media business, Orbitz is trying to develop a media business and Orbitz and Kayak might be perfect together.

The joke at a recent travel conference was when would Expedia Inc. subsidiary TripAdvisor buy Expedia?

A far-fetched idea, but...

1 comment:

RobertKCole said...

With all the variations in the wording of hotel tax laws enforced by a myriad of local jurisdictions, it is difficult to predict the ultimate outcome for 46+ cases rumored to be in play, but here is my guess at the ultimate end-state for the OTAs:

Bottom line? The genie is out of the hotel merchant tax bottle. The OTA's will have to deal with it.

Three fundamental reasons will serve as the basis for this outcome:

1) With the introduction of Best Available Rate guarantees by hotels on standalone hotel room sales, the hotel defined the retail selling price for the guest room, not the online travel agent. This is a game changer that undermined the previous ability of the distributor to independently define the selling price under the merchant model.

2) Judges and juries will consider the essential question - If two travelers pay identical amounts for a stay (one under the merchant model; the other under the agency/commission model) and the hotel books a net rate that is identical to the post-commission amount, why should a taxation authority receive less tax revenue solely due to a difference in the settlement method?

3) There is no mathematical method to match a defined tax inclusive retail price based on a net wholesale tax exclusive room rate without incorporating the tax rate in the calculation. As a result, if a tax is used as a factor in a calculation, the resulting amount derived from that tax would represent a liability.

The impact may include:

a) More locales updating their hotel tax codes to clearly enable the assessment of taxes on the retail price paid by the consumer.

b) OTA legal costs continuing to rise as more locales follow the course of others to gain access to the newly expanded revenue stream and more cases require defense at the appeal stage.

c) Package merchant model sales unaffected by the rulings as the distributor independently sets the retail price and there is not a direct relationship between the package price and the retail pricing of the underlying travel components.

d) To maintain a competitive product line relative to the rest of the industry. OTAs will not suspend booking standalone hotel reservations in markets that require hotel merchant tax payments.
servations in markets that require hotel merchant tax payments.

e) OTAs will not be required to break out embedded service fees separately from tax amounts as long as they are matching the tax inclusive retail price established by the hotel. They will simply quote the retail room rate and isolate the taxes as if it was a retail agency booking. This should satisfy existing tax reporting and consumer protection statutes.

f) OTA settlement costs increase as they calculate and pay the merchant tax differential directly to the various municipalities.

g) OTA margins will be compressed due to the new liability for hotel merchant taxes payable to municipalities.

h) More OTAs may shift to a retail merchant model and remit the full retail amount to the hotel and receive a commission back from the hotel. This enables OTA to continue to report full revenue from hotel booking.

i) New streamlined settlement processes will be developed to reduce costs and simplify OTA-hotel payments and tax accounting.

i) Destination Marketing Organizations and local jurisdictions benefit from 15 to 20% incremental increases in tax revenues from hotel merchant taxes based on same consumer retail sales figures.

k) Consumer class action suits against OTAs will subside as the merchant tax issue is resolved. These suits are currently a byproduct of the merchant tax gap and are based on the assumption that if the tax amount was not paid to the city, the amount should be refunded to the traveler.

At this point, hotels are not willing to go back to letting OTAs assume responsibility for setting retail pricing on merchant transactions; local municipalities are seeking funding from all sources to support tightly squeezed budgets. The OTAs are unfortunately caught in the middle.