Monday, July 6, 2009

NYC to OTAs: We Want Our Tax on Retail, Not Net

Just before the July 4th Holiday, Mayor Bloomberg signed Resolution 1012 which will, in theory, force the online travel agencies to collect New York City's occupancy tax on the full amount paid by consumers rather than the net amount that actually is remitted to the hotels.

The full text with changes underlined tax law is here.

With this law, the City has redefined the definition of the consideration paid for occupancy to include "any service fee and/or booking fees that are a condition of occupancy" in order to include OTA's margins.

They have also added a new term known as a "room remarketer" which, according to NYC, is "Any person, excluding the operator, having any right, access, ability or authority, through an internet transaction or any other means whatsoever, to offer, reserve, book, arrange for, remarket, distribute, broker, resell, or facilitate the transfer of rooms the occupancy of which is subject to tax under this chapter." At least the Online Travel Agencies are finally getting credit for what they do - marketing rooms.

And best of all is a new term known as "additional rent" which is the "excess of rent received from an occupant by a room remarketer over the net rent" In the OTA lexicon, this would be known as margin.

What is most interesting about this law is that the OTAs will be responsible for remitting their portion of the occupancy tax directly to the city. In the past, the OTAs have sent the tax on the net rate to the hotel which has then paid the city. Under the new law, the OTAs will be forced to directly remit the tax on the "additional rent" to the city.

The OTAs, spurred on by Orbitz, have already largely given up the practice of adding additional fees in with the taxes during the check-out process. However, this change will either force the OTAs to become non-competitive with hotel brand websites and pass along the additional taxes to the consumers or further erode the industry's margins.

A very simple example:
Rate on $100
Net Rate to OTA from hotel: $80
Tax rate: 10%

Today, OTA sells this room for $100 and remits $88 to cover the room and tax and earns $12.
In the new world, will probably still sell this room for $100 to remain competitive with the hotel's own websites. However, the OTA will now be forced to pay the 10% on both margin and net rate. In our simpleton example, this OTA will now remit $90 and earn $10. Good for the City, not so good for the OTAs.

This new law takes effect on September 1st, 2009.


  1. It's interesting that NYC specifically targets room remarketers, a designation that covers the online travel agencies (who argue they are not hotel operators). But, if Mayor Bloomberg expects some immediate payout, then guess again.

    The City of Los Angeles, for one, rewrote its ordinance to specifically cover tax payments by online travel agencies some five years ago, and the battle still is being slugged out in the courts.

    San Francisco recently assessed Expedia and Hotwire a cool $35.6 million for hotel taxes dating to the beginning of 2000. San Francisco has a "pay first" provision, and a judge sided with the city on that issue, meaning that Expedia and Hotwire would have to ante up the monies before appealing the tax liability. Expedia is appealing the adverse pay-first ruling.

    The OTAs dropped out of the Columbus, Ga., market when the state Supreme Court ruled that Expedia would have to begin paying hotel tax on the net rate.

    However, the OTAs likely will continue to sell hotel rooms on a merchant model basis in New York City and San Francisco for as long as they can. Methinks a lot more is at stake in those locales than in Columbus, Ga.

  2. This is nothing more than an attempt at an incremental revene grab. What is next, travel wholesalers that buy the business in bulk and then sell it overseas under a different rate structure?

    This is no different then what is going on in the car rental industry.....It is pure "Taxation without Representation". The Car Rental Industry is getting slammed with fees to do everything from infrastructure repair to building sports arenas.

    The municipalities and leglislators are all scrambling to make up budget shortfalls, and the path of least resistance is to tax those that do have the ability to vote.

    Tourism drives many of these markets, NY is a great example. I only have to look back to the days of a former Mayor who had to reduce the bed tax in New York in order to spur tourism anfter a steep decline.

  3. Lodgers tax by nature is taxation witout representation. That is so when charged by the hotel or OTA. BTW, I am opposed to lodgers taxes except if and when they are virtually 100% used for area promo. In my area, something less than 50% is used in that manner.

    It is pattently unfair and unreasonable for the OTA to calculate and collect sales and/or occupacny taxes (regardless of what they call it, service fee, blah, blah) on the gross rate and not pay it to the taxing authority. I for one wish every authority would go after the OTAs. In fact, if any taxing authorities are reading, perhaps this idea is of interest...get your lawsuit set as a class action suit. That may completely gain their attention.

    Although I am a pro business and anti government person, I include the OTAs in with the government like entity. They bring inordinate power to any negotiation, they are anti competitive, they are unfair in their business practices, they usurp the hotel name with their PPC ads, they hide (are very hard to find the right person to talk to), they hire foreigners to "handle" customer service.

    Unfortunately, they do send some business so I'll remain anonymous.

  4. "Unfortunately, they do send some business so I'll remain anonymous"

    I think this is the crux of the situation. I've worked on both sides of the fence (supplier and OTA) and understand your concerns deeply. That said, if you don't like the way they act, why dont you take your inventory off the offending site(s) and generate the business elsewhere? To your post and point, retraining consumers is a really hard thing to do!