Monday, February 16, 2009

Municipalities have reservations on OTAs hotel room tax policies

Today's New York Times has finally given the ongoing Online Travel Agency (OTA) tax issue its due in the mainstream (non-travel) media.

The tax issue arises because the OTAs (Expedia, Travelocity, Priceline, Orbitz et al) contract with hotels for hotel inventory under what is known as the "merchant model." The online version was perfected by years ago but has been standard practice in the hotel industry since Mary and Joseph were walked a couple of thousand years ago. In a nutshell, the OTAs are given a reduced, wholesale rate which is lower than the regular rate the hotel offers guests if you call or visit the hotel's website etc. The OTA collects the taxes based on this rate which is the rate the hotel is actually charging the OTA. Of course, the guest pays more to the OTA (it is called profit margin generally) but the OTA remits taxes to the local tax authority based on the amount that they have contracted with the hotel - the amount that actually is passed to the hotel.


Using simple math, if a hotel is charging $100 per night and the tax rate is 10% and you book directly with the hotel, you'll be charged $110 when you check out of which $100 goes to the hotel and $10 goes to the tax man.

Let's assume you buy the same room via an OTA and the OTA has contracted with the hotel for the SAME room for $85 (a 15% gross margin.) You'll pay the OTA the same $110 when you book. The OTA will then remit the $85 back to the hotel, along with $8.50 in taxes.

So, if you are a tax collector (or a lawyer operating on a contingency fee) you look at this situation and think you are losing out on $1.50 in tax.

This "logic" defies standard practice that has been around long before the advent of the Internet. The wholesale model has been around for years - ever bought a package tour? Tour operators (e.g. Liberty GoGo, Thomas Cook, Apple Vacations) that price, market and sell package tours have worked with wholesale rates since their inception. They pay occupancy taxes based on the rates they actually pay at the hotel - just like the OTAs do.

Indeed, one of the lawyers leading the charge for Anaheim says ' “That’s the insidious nature of this scam,” said Patrick O’Connell, a lawyer at Baron & Budd, a Dallas-based firm that represents municipalities seeking tax revenue. “The hotel pays tax on the amount that the hotel was paid.” ' Wow, what a concept - the hotel pays tax on the amount of money that crossed its doorstep.

Consumers are not harmed in this situation - Joe Hotel Guest would have paid the same amount if they had bought it directly or via an OTA. In fact, Joe Hotel Guest probably booked at an OTA because he found value in booking there - maybe it was wide variety of hotels, maybe it was great content, maybe it was a special package rate.

Finally, we think local cities, towns and counties should think about how many visitors Expedia, Priceline, Orbitz and Travelocity bring their way. These days especially, they should be happy for additional travelers who spend money in local restaurants, shops attractions, rental car agencies and yes, hotels.

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