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State Legislators’ Task Force Gets It Right on Taxation of Online Hotel Bookings

For many years, online travel companies (OTCs) like Expedia and Priceline have avoided paying the appropriate amount of state and local sales and lodging taxes on hotel rooms they book.  The companies calculate tax only on the wholesale room rate they pay the hotels, not the higher retail room rate they charge consumers.  Now, a National Conference of State Legislatures’ (NCSL) committee rightly is calling for an end to the practice.

Local governments have taken the lead in trying to close this loophole.  They’ve brought dozens of lawsuits against the companies, many of them still working their way through state courts.

The states have lagged behind, even though they, too, are losing substantial sales and lodging tax revenues.  This could change, however, as a result of a policy resolution adopted last week by a key NCSL committee calling on the states to consider changing their laws to require “OTCs to remit taxes based on the full rental price paid by the user.”  The full NCSL Executive Committee is likely to approve this resolution at its October meeting.

As I explained in an April 2011 report, there is no merit to the OTCs’ claims that hotel taxes should only apply to the wholesale room rate they pay hotels rather than the retail room rate they charge consumers.  Consider, for example, that if a consumer uses a conventional travel agent to book a room, the tax is calculated on the retail room rate, not the room rate minus the travel agent’s commission.

This loophole costs states and localities between $275 million and $400 million in hotel tax revenues each year.  Collecting that revenue won’t solve their budget problems, of course, but it could help states reverse some cuts in financial aid for college students, put their pension funds on more solid footing, or invest in infrastructure maintenance that they’ve deferred.  It will also ensure a level playing field for hotel chains, who want to use the OTCs to help them market their rooms but shouldn’t have to pay a disproportionate share of lodging taxes.

NCSL should be commended for taking a firm stand on the issue.  It’s time for the states to update their laws and close this loophole once and for all.