Friday, June 19, 2009

Industry Insider: Hotel-Tax Battle 'Could Get Ugly'

When the microphones and tape recorders are switched off, what are travel industry insiders saying about the protracted hotel-tax battle that municipalities and the online travel agencies are waging in court rooms and tax assessors’ offices across the country?

Someone, whom I shall call "Industry Pundit" to protect the innocent, exchanged some e-mails with me after I let him know that Expedia began remitting taxes on the retail rate for merchant-hotel bookings in Columbus, Ga., to comply with a court order. And, of course, news of that development leaked out after the Georgia Supreme Court gave Expedia a bashing.

Industry Pundit: But didn't Expedia just move to retail (GDS) rates in Columbus rather than pay taxes on the full consumer rate that was still sold on a merchant basis? I'm not at/near a computer so I can't really tell.

Dennis: Expedia stopped its merchant-hotel business in Columbus before a court order in mid-September ordered them to pay taxes on the retail rate. But they had bookings in the pipeline [meaning guests would complete their stays after the court order took effect] so Expedia paid taxes on the retail rate for these to comply with the court order.

Not much money is involved, but I think this is the first time that money has changed hands and taxes paid on the retail rate.

Industry Pundit: Interesting. It could get ugly.

Dennis: How could it get uglier? I can see the OTAs withdrawing from Georgia. Period.

Industry Pundit: Texas is next in line. California after that. New York, too. Lots of people [meaning cities and states] with their hands out.

Dennis: Ugly:) And, so much for the OTAs having the momentum (not).

Industry Pundit: But we'll see. I do think they need a new strategy. Juries will see them as just another corporate bad-guy stiffing people like AIG. Not good for lawsuits or sales.


Alas, that was the dialogue. The speculation about the OTAs' next moves on the hotel-tax front continues.

Another insider, who's really inside the loop, told me: "Getting lots of feedback/theories as to why Expedia paid."

Meanwhile, Robert K. Cole , who is not the Industry Pundit or other industry insider cited above but has some ideas of his own on the subject, believes more OTAs will swap merchant for retails sales as margins get compressed and settlement and legal costs rise.

Indeed, the genie is out of the bottle.


SeanONeill said...

Dennis, I simply don't understand. The OTAs do *not* own hotels. It's the hotels that should pay the taxes in their jurisdiction. Similarly, when Amazon gets a wholesale rate on books and then sells them at a retail rate, isn't it remiting taxes the same way as Expedia is? I simply don't understand why this retail/wholesale thing is unique to the travel space.
The latest decision looked like a decision on statutory claims and the terms of the contracts, not on the validity of the principles involved.

Dennis Schaal said...

Sean: Honestly, I don't know enough about how Amazon's wholesale model works and the differences between the hotel-merchant model and how wholesaling works in other industries. Maybe someone else can chime in here on that.

On the Georgia Supreme Court ruling, the court declined to determine whether acted as a hotel operator or "inn-keeper," but determined that, because of its own contracts with hotels, acts as a tax collector. And, the court determined that any "entity" that acts as a tax collector must remit the tax on the full retail rate.

It looks like this ruling will have a far-reaching impact in Georgia because the court interpreted state and local statutes there. The City of Atanta is suing and Rome, Ga., is seeking class-action certification on behalf of other Georgia municipalities.

The laws of course differ city to city and state to state, but this is a big mess for the OTAs, and they are starting to withdraw from the morass where rulings go against them.

You can understand, as Robert Kole points out, that municipalities are miffed that they collect one tax amount from the hotels and another from the OTAs just because of differing business models related to the sale of the same room.

My big beef, and I'm sure your readers would agree, is that I have the right to know what I am paying for when I book a hotel room. If I'm going to pay a service fee to the OTAs, I want to know how much I am paying. Maybe I'd rather shop at a different OTA that charges a different fee.

Hey, transparency -- that's what it is all about.