We all love to travel. And, the majority of Americans book their travel through an online website. Often, it’s not the website of a hotel, airline or rental car company. Instead, many consumers visit online travel companies (OTCs) like Expedia, Travelocity and Orbitz, which showcase many options, brands and price ranges. By visiting and shopping on an OTC site, consumers are able to essentially ‘one-stop shop’ their vacations from soup to nuts.
OTCs work by purchasing unsold inventory right from the service provider. The goal of hotels, airlines and car rental companies is to fill seats and beds during a specified period, even if it means that they are doing so at a discount.
Many hotels contract with online travel companies to increase their room occupancies. In some cases, a hotel enters a contract with an OTC to provide rooms at a discounted rate (the “wholesale cost”). The OTC then advertises the rooms for sale on their websites at the hotel’s retail price. This is the rate consumers see when looking for a hotel room. The final price that consumers pay is this rate, plus unspecified “taxes and fees” – the final price is generally equal to (or greater than) the retail price, plus tax charged by hotels.
Why do consumers pay equal to or more than what they would by visiting the chosen hotel’s website? Well, there is the convenience factor; many consumers don’t have the time to look up every hotel’s rates in Orlando, as well as airlines and rental cars. It’s easier and faster to just book through an OTC – all things being equal.
Sounds like a win-win for everyone right? Well, sadly there is a loser in this equation, and it comes down to the taxes – how much is charged and where it goes.
OTCs remit tax only on the discounted or wholesale cost that they paid directly to the hotel, NOT on the retail price that they charge and collect from consumers. This equates to hundreds of thousands of dollars in lost tax revenues every year.
Many states and localities throughout the country contend that through this practice, OTCs are not remitting the full amount of taxes owed to the jurisdiction. If OTCs are allowed to continue this practice, jurisdictions will essentially be advocating a higher effective tax rate for in-state hotels as compared to OTCs. This will create two different tax treatments and rob state coffers of needed revenues.
While so many of you reading this column might say, ‘so what?’ By not addressing and rectifying the issue, OTCs are allowed to circumvent the tax system without penalty – thereby, not paying their fair share of taxes. What this means, is that various states are being short-changed in a still-struggling economy. As we all know, a shortfall in a state’s budget almost always equals higher taxes and cutting necessary funding to valuable programs.
How do we solve this problem? We need laws that clarify that OTCs must remit taxes on the full retail rate that they charge to consumers, not the wholesale rate. In Rhode Island, we currently have a piece of legislation to address this issue. Governor Chafee’s FY 2015 budget provision clarifies hotel tax remittance and if passed, will prevent OTCs from using loopholes in current tax law to gain special treatment.
We always talk about level playing fields in our industry – it’s time that we all operated by the same rules.
A veteran of more than 25 years in the hospitality industry, Ms. Venturini is considered by many, to be the voice of the industry in the State of Rhode Island. She has been instrumental in improving the industry’s educational and training programs in the State, as well as enhancing the bottom line of the business she represents. Ms. Venturini splits her time between the office and the State House, a constant presence for her membership.