HB 571 Online Travel Company Tax Parity - PowerPoint Presentation

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HB 571 Online Travel Company Tax Parity

House Ways and Means CommitteeSlide2

Travel consumer books identical room in same hotel on same night

Consumer “A” uses online travel company (OTC) website

OTC

Room costs consumer $100, plus $17.50* in taxes

OTC

Tax Jurisdictions

OTC remits

only

$14.00

in taxes on $80 to state and local jurisdictions

OTC

keeps

$3.50 as a

dividend at expense of government and taxpayers

Travel consumer books identical room in same hotel on same night

Consumer “B” books through hotel directly (including the hotel brand website)

Room costs consumer $100, plus $17.50* in taxes

Hotel remits

full

$17.50

in taxes due on $100 to state and local jurisdictions

Tax Jurisdictions

In both scenarios, the consumer pays the exact same amount, $117.50, for the room, but only the hotel remits tax based on this amount.

OTCs remit tax on a lower rate, and the state and its communities are deprived of critical revenue.

Remission of taxes paid by consumer

Out-of-state online travel companies (OTCs) remit less taxes than others selling the same room in the same hotel on the same night -- and cost Ohio, its communities, and taxpayers in the process.

*example actual tax rate at checkout:

Columbus/Franklin Co. = 17.5%Slide3

HB 571

Recovering the Spread

Recovering the Spread Amount is significant, as according to some government officials, state and local governments are losing tens of millions a year in such revenue.Portland, Oregon and Multnomah County, Oregon: Expedia paid $2.3 million under protest (Jan. 2015)San Francisco: Expedia paid $48 million under protest (2009)San Francisco: Expedia paid $25.5 million under protest (2014)

Hawaii: Expedia paid $171 million to the state (2013)Hawaii: Expedia, Hotels.com and Hotwire $20.5 million (2013) for 2012 tax year non-commissioned hotel reservations Hawaii: Assessed Expedia $28.5 million for non-commissioned travel agency services relating to hotel reservations and car rental for the tax year 2013Ohio Estimate: $25,000,000 to $50,000,000 per year Based on a 10-20% difference between “wholesale” rate and “retail” rate.Slide4

HB 571

Recovering the Spread

“We have established a reserve for the potential settlement of issues related to hotel occupancy tax litigation, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $43 million as of December 31, 2015 and $62 million as of December 31, 2014.” – Expedia Form 10-K, U.S. Securities and Exchange Commission, 2017Slide5

HB 571

Opponents Will Argue

TAX INCREASE INCREASE COST OF TRAVEL DORMANT COMMERCE CLAUSE Slide6

HB 571

TAX INCREASE Argument

To forestall these legislative efforts, opponents have argued that the clarifying legislation amounts to a tax increase. This argument is without merit. The room guest bears the economic burden of the occupancy tax. Secondly, the legislation makes no reference to changing existing tax rates. It merely ensures equal application of the existing rate to all identical transactions.The taxes in question aren’t “new” taxes. They have existed for many decades.Slide7

HB 571 Side-by-Side

Online Travel Company booking site

Hotel brand booking siteSlide8

HB 571

INCREASE COST OF TRAVEL:

Increasing the room rate would place OTCs at a competitive disadvantage, as acknowledged in an unsealed Expedia internal memorandum dated July 28, 2003 (quoted below): “Regarding the question of whether we should pass on occupancy tax costs to our customers, the current answer is ‘no’ – or maybe a more accurate answer is that we do not currently believe that is possible from a competitive standpoint.”Slide9

HB 571

DORMANT COMMERCE CLAUSE

 The dormant Commerce Clause is a judicial doctrine that prevents States from enacting laws that unduly burden interstate commerce. OTCs often argue that since their transactions occur online, they do not have “substantial nexus” with the taxing jurisdiction. NO court has yet accepted this argumentSlide10

HB 571

DORMANT COMMERCE CLAUSE

 “The analysis herein assumes that Travelscape has nexus, or a taxable presence, in each jurisdiction discussed below. Although Travelscape may have some arguments to defend this nexus assumption, it is likely the applicable jurisdictions will aggressively pursue tax collection given Expedia’s continued presence in each of these markets, if the jurisdiction determines the services are taxable.”- Unsealed memorandum from PricewaterhouseCoopers to Expedia - January 31, 2003Slide11

HB 571

National Perspective

 National Council of State Legislatures issued guidance in 2014:“To ensure full collection of taxes that are due and to promote equity and fairness in the tax code, states should consider requiring online travel companies to remit taxes based on the rental price paid by the user.”Slide12

HB 571

National Perspective

 The Supreme Court of Georgia in 2009:“[Occupancy taxes] do not contemplate taxing the transaction between Expedia, or any other intermediary such as a traditional travel agent, and the hotel. The facts also show that Expedia is not the end-consumer, is not a member of the public at large, and it is not the occupant of the hotel room. Therefore, the wholesale rate which Expedia, a non-occupant, pays for the room cannot be the rate on which the tax is based.”Slide13

HB 571

National Perspective

 US District Court for the Northern District of Illinois ruled in 2011: “[T]he legislature intended to tax the amount customers pay to occupy a hotel room in Rosemont... There is no dispute, however, that [the OTCs] do not obtain the right to occupy any room at any time during a transaction and their customers do so only after paying [the OTCs]. Because the record establishes that [the OTCs’] customers cannot occupy hotel rooms in Rosemont unless they pay the full amount [the OTCs] charge, [the OTCs’] fees and mark-ups are part of the rental rate subject to Tax.”Slide14

HB 571

National Perspective

 The Colorado Supreme Court ruled on April 24, 2017:“Although the OTCs maintain that even in merchant-model transactions they do not sell, or furnish for consideration, a right to occupy or use the hotel rooms in question, no matter what terminology they may choose to use in describing their transactions, as a functional matter that is precisely what they do

.” Slide15

HB 571 Broad-based support

Local governments support tax parity…Slide16

HB 571 Broad-based support

Local communities support tax parity…

…and moreSlide17

HB 571 Broad-based support

Travel economy interests support tax parity…Slide18

HB 571 Don’t Take My Word For It…

OTCs Knowingly Avoid The Payment Of Taxes

OTCs knew as early as 2003, as one Florida lawmaker put it,“…that they owed the taxes to the state, and have been purposefully and intentionally failing to pay the taxes, hoping that they wouldn't be sued before they could change state law.”“It appears that the total price that customers pay to the companies for hotel rooms is subject to taxation in most jurisdictions analyzed.” - Holland & Knight LLP, Memorandum on Hotel Occupancy Taxes “The tax is assessed on the entire price of the occupancy, and tax authorities typically define this as the entire price that the consumer perceived to be the price of the hotel room.”

- MBS Occupancy Tax AnalysisSlide19

HB 571 Don’t Take My Word For It…

Resist, delay and make it as difficult as possible…

“It appears that the stakes are high enough that OTCs should resist, delay and make it as difficult as possible for any state to require us to collect occupancy tax.” - MBS Occupancy Tax AnalysisSlide20

HB 571 Don’t Take My Word For It…

Should OTCs be collecting tax at the total price the customer pays?

“Based on our review of the statute and regulations… tax is likely due on the total charge made to the customer… Various local taxes are imposed and administered by the respective locality. The imposition of the tax is identical to the state. Therefore, the local taxes are also likely due on the total charge to the customer.” - PricewaterhouseCoopers, Transaction Tax Risk Narrative Memo to ExpediaSlide21

HB 571 Don’t Take My Word For It…

Should OTCs be collecting tax at the total price the customer pays?

“Not sure we will forever have the LUXURY of having this back-end ‘taxes and service fees’ line item.” - Internal memo from Expedia Attorneys