Shocker: San Francisco Assessed Expedia's Vacation-Package Business, Too

When Expedia.com and its sibling Hotwire wired in $35.6 million to the City of San Francisco, and when Priceline transmitted its $3.4 million in taxes, penalties and interest today, these assessments included the online travel companies' large vacation-package businesses -- and not just their standalone merchant-model hotel businesses.

When San Francisco compiled its assessments of the OTCs, including Travelocity, it assigned values to the hotel components within air/hotel or air/car/hotel vacation packages, in addition to assessing tax liabilities for solitary hotel sales.

Including the OTCs' vacation-package businesses in these tax disputes makes their potential liabilities, if the city prevails, much larger than I realized.

I have been writing about the hotel-tax issue for five years, and this was the first time I've heard that packages were part of the equation.

For Expedia.com, its standalone hotel business is much larger than its lodging bookings within vacation packages, but including its package business in tax assessments considerably ups the ante.

That is especially true if other tax jurisdictions are calculating assessments in a similar manner.

And, it also providers greater weight to my theory that the City of San Francisco would consider going after tour operators and wholesalers next.

Tour Operators, Wholesalers Could Be Next in San Francisco Tax Dispute

The online travel companies label San Francisco's pursuit of them on the merchant-model hotel tax issue as "discriminatory," in part because only OTCs, as far as is publicly known, have been targeted.

To date, no tour operators, or travel wholesalers, which employ the merchant model in selling vacation packages, have been the subject of litigation by cities, counties or states.

But, reading between the lines, I believe that San Francisco eventually will go after tour operators and wholesalers selling vacation packages in the city -- especially if San Franscisco prevails in its tax fight against the OTCs.

Jim Emery, San Francisco's chief of complex litigation, declined to comment on whether any tour operators or wholesalers are subject to administrative proceedings or assessments, or even whether this travel industry sector is on the city's radar.

But, Emery adamantly rejected the notion that San Francisco's tax-collection efforts are discriminatory.

Emery said the city's tax office, like that in any jurisdiction, has constraints on its enforcement abilities, and just "because you haven't gotten to someone else" doesn't mean another entity would not escape scrutiny.

"We go where it's coming to our attention that a tax is due and make resource allocations," Emery said.

He added: "It isn't discrimination against anyone in a taxpayer audit if you haven’t gotten to another taxpayer yet."

I'm interpreting that to mean that tour operators and wholesalers could be next on the City of San Francisco's target list.

Orbitz Hotel-Fee Cut: Bid to Increase Nonair Revenue

Orbitz's move today to cut consumer booking fees on hotels, and to show the total price of hotels up-front in the search-results display, instead of at the end of the booking process, is a bold bid to build its hotel business and to reduce its historic reliance on low-margin flight sales.

In 2008, Orbitz garnered roughly 47.5 percent of total net revenue from non-air sales (largely hotels and vacation packages) and 39 percent from airline inventory. (The remaining 13.5 percent came from global distribution system, or GDS, incentives on air, car and hotel sales).

The consumer press, including Budget Travel's Blog, correctly are hailing Orbitz for "tellin' it straight" by showing the fees up-front.

This disadvantages Orbitz at the moment on metasearch websites like Kayak because the total price of hotels through Orbitz and sister company CheapTickets may appear to be higher than competitors' rates on other websites because of apples to oranges comparisons.

Orbitz's decision could be a game-changer on the consumer level because it may change the way travelers shop for hotels -- especially if Expedia and Travelocity match the move. And, I expect they will in some form.

But, the initiative will not move mountains in terms of Orbitz's competitive position. And, I'm betting that Orbitz doesn't expect that it will. In the Orbitz executive suite, the decision-makers clearly believe the competition will match Orbitz's thrust, and parallel booking-fee cuts already may be in the works.

Expedia is the king-maker in the online hotel business and has more resources at its disposal, in the form of more inventory and higher margins, than does Orbitz so I don't expect a major share shift.

Orbitz doesn't have the breadth of hotel inventory that Expedia does, and I doubt that this move will help them make progress on this front.

And, Priceline cut its hotel booking fees in July, and already has been making inroads in hotel sales.

Still, Orbitz's fee-cut and new hotel display should help it improve its consumer image and build up that nonair revenue -- and that is a strategic imperative. Expect a big marketing campaign in tandem with the "Hotel Fee Cut" and "Total Price" promotion.

However, from a business perspective, the booking-fee wars, initiated by Expedia when it removed its booking fee on flights in March, may end up hurting all of the online travel agencies.

"Total Price" is great, but let's hope that the OTAs don't get "totalled" in the price wars.