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States’ Debate on Tax Base for Online Travel Companies Continues

I have been writing ad nauseum for the past few years on the Online Travel Company (“OTC”) debate. Being that my home state of Florida relies so heavily on the tourism industry, this has been a pressing issue for some time. It was reported this week by the Washington Post and BNA Tax that the debate has drawn national attention. Specifically, an influential task force known as the National Conference of State Legislatures (“NCSL”) examined the issue in an attempt to achieve national uniformity.

For those of you who have not been following the debate, the issue can most easily be explained by using a simple example. Consider you are going on a vacation and you find a room at a hotel, using Expedia, Orbitz, or Travelocity, for $100 online. Mechanically, how this works, is that you, the customer, purchases a room for $100. In the background, the OTC (Expedia, Orbitz, etc) has contracted with the hotel to purchase the room for $80. To keep numbers simple, let’s suppose that there is a 10% bed-tax on the room. In this simple scenario, how much should the state get? Some believe the state should get $10, the tax on the full $100 and the $10 balance is the OTC’s profit. Others believe the state should only get $8 and the OTC makes $12 profit instead of $10. The OTC’s argue that they are merely the middleman and not actually renting the room. This small discrepancy results in hundreds of millions of dollars for state and local governments, especially in high tourism states like Florida and California. Further, with slightly different statutory frameworks, states have interpreted this issue very differently.

Recently in Atlanta, the NCSL determined that the preferred method was in the states’ favor and pushed for tax on the higher price. This method has also allegedly been backed by the hotel industry. Conversely, the travel companies still maintain that this change will not only hurt them but it will also penalize the offline travel agents.

Despite the recommendations by the NCSL, the state of the law remains in flux. Some states like Missouri have passed OTC-favorable legislation, which exempts the so-called “facilitation fees” from state and local taxes. Other states such a New York, North Carolina, and the District of Colombia have passed legislation which imposes tax on the higher amount. According to the Washington Post, sixteen other states took up bills to tax the higher price but all fell short except for Oregon, who recently passed a law.

The more troubling issue for state and local tax professionals are all of the remaining states. Many states, such as Florida, have relied on the courts to interpret the current laws that were written decades before there were OTC’s. More problematic, in states like Florida, is that often times state agencies and local jurisdictions will simply ignore court decisions outside of their district and wait for legislative guidance. This leaves companies with the same business model and different results between states and many times even different results on taxation within the same state. It is important as a state and local tax professional to keep up to date with this area of the law that seems to change monthly.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA , based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390. Please also visit his blog , Facebook, and Twitter.