Cashing in on clicks: states look to grab more tax dollars from third-party Internet reservations

Hotel & Motel Management, Oct 4, 2004 by Russell Shaw

NATIONAL REPORT--Although the persistent budget shortfalls that have plagued many states over the last few years are showing signs of abating, most states still face leaner coffers.

This uncertainty has led to new quests for additional revenue. In Massachusetts and Florida, it has sparked legislative attempts to assess sales taxes to the price differential between what third-party reservation sites pay hotels for inventory and what they charge their customers when they book on their site. Both proposals are under study in state legislatures, and are subject to additional study and testimony when the legislative sessions begin in January.

If the tax becomes law, a third-party site that pays a Massachusetts hotel $100 for a room on a given night and then resells that room for $125 would be assessed 5.7 percent of the $25 differential, or $1.43.

In Florida, the state sales tax is 6 percent, which would result in a $1.50 levy on a $25 markup.

That's not counting additional county or city levies assessed to hotel room bookings. These bed taxes often are implemented to subsidize convention center construction and local tourism marketing efforts.

In Massachusetts, for example, a 5.7-percent markup tax would only be the beginning. In Boston, Cambridge, Worcester and Springfield, additional local taxes and convention center subsidy fees could have pushed the assessed tax on the markup to as high as 12.45 percent, or about $3.11 on a $25 roomnight differential.

In Florida, bed taxes run as high as 5 percent. Coupled with the 6 percent state sales tax, an 11 percent levy on a $25 markup would be $2.75.

"The governor was looking at a way the state could generate additional revenue without necessarily increasing [sales, property or income] taxes," said Art Canter, executive director of the Massachusetts Lodging Assn. "They looked at many different ideas and came up with this--charging for the [differential] between what the hotel charges the reseller and the reseller charges the customer."

The tax is being pushed by those who would receive it--the state revenue department, said Tom Waits, c.e.o. of the Florida Hotel & Motel Assn.

Uniform opposition

The proposed tax annoys hoteliers and representative trade groups. Memphis-based Peabody Hotel Group, with franchised hotels in Massachusetts and the Peabody Hotel in Orlando, is closely watching Internet taxation attempts in both states.

"This is a bad way for states to increase revenues," said David Shamoian, executive v.p. of Peabody Hotel Group. "It's clearly confusing to the guest. For hotel operators, it also would put us in violation of our rate nondisclosure agreements with third-party intermediaries."

The bookkeeping issues would be formidable, he said.

"There are times when we don't even know what the third-party intermediary is selling the room for," Shamoian said. "It would just be very, very difficult to keep track."

"This would be an unbelievable administrative burden for the hotel," Canter said. "Every time they received a reservation they would have to find out how much the guest paid."

"There's no way the hotel should take that greater responsibility of collecting for the third-party markup on the room," Waits said.

Canter said that, on average, the differential between third-party booking site wholesale and retail is between 17 percent and 33 percent. The commonwealth of Massachusetts projected that applying the 5.7 percent sales tax on this mark-up would raise between $12 million and $18 million.

Sensing the dollar signs in the eyes of state officials and lawmakers, Canter's group felt a need to frame the harmful effects of such a tax policy. Mitchell Bryk, director of state and local taxes for Starwood Hotels & Resorts Worldwide, was called to testify before the Taxation Committee of the Massachusetts State Senate.

"His testimony was focused on letting legislators know how difficult this would be for the hotelier to implement," Canter said.

Starwood officials approached both the testimony and the overall push toward third-party Internet taxation with trepidation.

Tom Botts, v.p. of distribution strategy and operations for Starwood, said the company is closely monitoring the situation, and the issue is fraught with "sensitivities."

The Massachusetts State House and Senate modified the initial proposal to recommend that reseller companies should voluntarily register with Massachusetts and pay the tax.

This push is unpopular with that segment. Barry Diller, chairman of InterActive Corp., which owns Expedia, Hotels.com and Hotwire, is on record disagreeing with the registration provisions.

If the reseller declined to register, the onus would be on the hotel to collect the money from the reseller for the differential, or to ask the guest to pay it, Canter said.

In Shamoian's view, such a demand would directly hurt properties in jurisdictions where the tax was assessed. Even though the tax on the differential would only be a few dollars a night, there would be an attempt to pass it along to the guest in some way, he said.