February 3, 2010
Discriminatory Taxes on Online Travel Services Impede Interstate Commerce
Tax Foundation Report: 22 Cities Litigating Against Online Travel Companies, Marks an Attempt to Shift Tax Burden to Non-Residents
Washington, DC, February 3, 2010 -- Local governments' efforts to collect discriminatory taxes from online travel services amount to a revenue grab from out-of-staters and ultimately harm interstate commerce, according to a new Tax Foundation report.
City officials in 22 states have, with limited success, sought to reinterpret hotel occupancy taxes to apply to amounts paid by consumers for online travel booking services (such as Expedia, Orbitz and Priceline).
"Hotel taxes are attractive to local politicians because they are a way to shift the tax burden to 'outsiders,'" said Joseph Henchman, the Tax Foundation's Tax Counsel and Director of State Projects, who authored the report. "But because every U.S. city has a hotel tax, we're all somebody else's 'outsider.' And that means everyone is paying high hotel taxes everywhere."
Tax Foundation Special Report, No. 175, "Cities Pursue Discriminatory Taxation of Online Travel Services," is available online at http://www.taxfoundation.org/publications/show/25786.html.
In traditional hotel transactions, travelers book a room and pay a hotel tax (and sometimes a sales tax) based on the amount they pay the hotel. Online travel companies facilitate such transactions between consumers and hotels, and keep part of what the consumer pays as a service fee.
According to the study, hotel occupancy taxes should be calculated on the amount the hotel receives. Since online travel companies do not own or operate hotels and generally do not resell hotel rooms as wholesalers, they are acting as facilitators - meaning their services are outside the scope of hotel occupancy taxes.
While taxation of retail services is justifiable, it's clear that cities' targeting Internet-based travel services for discriminatory taxes marks an attempt to shift the tax burden to non-residents, which impedes the flow of interstate commerce, the report finds.
Pending federal legislation would establish hotel occupancy as the proper base of hotel occupancy taxes and would be in line with existing precedents, maintain settled tax practices and prevent damage to the national economy.
Cities shouldn't expect easy revenue from altering hotel tax ordinances or pursuing legal action; instead, local officials should be prepared for extended litigation and decreased tourism.
"It's important that state and local government officials collect revenue needed to provide the services demanded by their constituents," Henchman said. "But that need does not justify impositions on interstate commerce, burdens on the national economy, or the corruption of sound tax principles."
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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Tax Foundation Special Report, No. 175, "Cities Pursue Discriminatory Taxation of Online Travel Services," is available online at http://www.taxfoundation.org/publications/show/25786.html. To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.