The Travel Technology Association

Testimony of Stephen Shur in Opposition to HB 150: The Travel Services Tax

My name is Stephen Shur, and I am the President of the Travel Technology Association. My organization represents companies like Orbitz, Expedia, Priceline,Kayak, TripAdvisor and many others. I am here today in opposition to HB150, a bill that would tax the service fees of travel agents, both online and throughout Ohio.

Our industry is responsible for booking millions of room nights in Ohio annually. Hotels willingly and enthusiastically partner with my members to help market unsold rooms.

  • First, and most importantly, online travel agents don’t buy rooms in bulk at wholesale rates and resell them at retail rates.
  • The hotel controls the inventory and sets the price.
  • The terms wholesale and retail have no meaning in the travel agency arena.
  • The tax is based on the amount required by the hotel to allow someone to occupy the room on a given night.
  • There is no current ambiguity in Ohio’s tax code. The tax is based on the amount charged by the hotel operator.
  • OTAs do not operate hotels. Online travel agents are just that, travel agents. They connect travelers with hotels and charge the traveler a service fee for the service they provide.
  • The playing field between hotels and OTAs is not “uneven”. OTAs are a valued marketing channel for large hotel chains and independent hotels.
  • Hilton CEO said this in an article on April 7, 2016: “The OTAs are a good partner for us to be able to access customers that we might not otherwise be able to access.”
  • For independent hotels, the value of OTAs is even greater.
  • By partnering with OTAs, independent hotels get to compete for travelers with the major hotel chains when their property shows up on a comparison screen next to Marriott and Hilton.

In the context of the question of whether the proper taxes are being collected and remitted, there is no loophole. The tax is based on the rate that the hotel sets. They provide the good, in this case, the hotel room, to the traveler. Online travel agents do not operate hotels or have control of inventory nor do they set the price that the consumer pays for the room. The hotels can remove their rooms from OTA sites in real time, at any time.

Further, as in the case of AAA discounts or AARP discounts, the tax paid is based on the discounted room rate that is set and agreed to by the hotel.

There is no basis for the revenue projections put forth by the hotel industry as a result of this new tax on travel agents. In other states, where similar unrealistic claims were made, the actual revenue was far below that promised by the hotel industry.

  • In Minnesota, the projection was $9M per year. The actual was 1/3 of that. (see addendum)
  • In Rhode Island, the promised revenue was $820,000 in the first year. Due to remittance protocol challenges within the state Department of Revenue, the state has yet to collect any tax revenue.
    Oregon has been in litigation since 2012 and has collected no revenue from this tax.
  • North Carolina has not collected any tax revenue either due to challenges related to which party is responsible for the tax and to whom it is remitted, the state or local jurisdictions.

Contrary to the Ohio Hotel & Lodging Association testimony, hotels absolutely negotiate room rates with OTAs. Contract terms between hotels and OTAs are typically three or five year agreements. These agreements, negotiated by the two parties, include the room rate rates, any promotional considerations, and other legal terms such as non-disclosure clauses and others. A recent article made this clear.

“Hilton Negotiated Favorable Concessions From Online Booking Sites”

“Hilton Worldwide completed a series of negotiations with major online travel agencies over the last quarter and wrangled important economic and marketing concessions, according to CEO Chris Nassetta.”

Yes, hotels offer a variety of room rates to travelers based on supply and demand, time of booking, source of booking and many other factors. In each case, the tax is based on the amount the hotel requires for that guest to occupy the room. This holds true with direct bookings on the hotel’s website or app, a booking made through the hotel’s call center, last minute walk-in bookings, OTA bookings or other affiliate partner bookings such as AAA, Sam’s Club or AARP. The fact is there are numerous rates offered on numerous platforms and the tax is based on the amount the hotels collect for the room, in any scenario. Not the room plus the $35 annual AAA membership fee, for example.

A new tax. Impact on Ohio Travel Agents.

According to the American Society of Travel Agents, which represents brick and mortar travel agencies including 355 travel agencies with over 2,000 employees in the state, in its written testimony to this committee:

“Policymakers are often told that these proposals would simply close a “loophole” that allows big online travel companies (OTCs), such as Priceline and Expedia, to shortchange state and local governments on hotel occupancy tax and will have no impact on traditional “brick and mortar” travel agents. This is simply not the case.

“The definition of an “accommodations intermediary” in HB 150 will capture traditional travel agents. Any fees these agents charge their customers for hotel bookings in the state above the cost of the room itself will be subject to both Ohio sales tax and county and city hotel taxes as well. This is problematic because as our industry has evolved, travel agents are relying less on commissions from travel suppliers such as hotels and airlines and more on professional fees that agents charge their customers…Taxing this income – already subject to federal and state income taxes – creates a disincentive for travel agents to spend their time bringing people to the State of Ohio.”

The litmus test of whether this is a new tax or not is this:

If travel agents don’t owe sales and use taxes on their fee revenue today, but would under this legislation, then there is only one conclusion, this is a new tax on Ohio small businesses. This also applies to Ohio event planners, wedding planners and tour operators, all of whom charge a service fee to their clients for booking hotel rooms.

While a few courts have ruled against OTAs on the question of whether OTAs are hotel operators and the applicability of hotel taxes to travel agent service fees, the overwhelming majority of courts have ruled in favor of the OTAs on this question, including the Supreme Courts of Florida and Hawaii in 2015.

Many states and jurisdictions have not realized the stated benefits of these new taxes. As noted earlier, many states are bogged down in remittance challenges. Who is responsible for tax remittance in a typical transaction? There’s the room rate, the taxes on the room rate, the service fee and under this bill, the tax on the service fee. So how does the state reconcile this? Which party collects and remits which part of the tax? What happens in a package scenario where a traveler books a flight, room and car? What percentage of the service fee is attributable to the room vs the flight, vs the car? States are prohibited from taxing commercial air travel and thus, how is the taxation of packages resolved?

In addition, in a broad sense, these new taxes provide a disincentive for travel agents, both online and in Ohio to steer travelers to Ohio destinations. 40% of visitors to OTA sites do so without a destination in mind. OTAs can steer travelers to or from a state based on marketing, advertising and promotions. If someone is looking for an amusement park experience, they might be steered toward Wisconsin Dells instead of Cedar Point, for example.

This notion was confirmed in a recent article on the travel industry news site, Skift:

“As one of thebusiest booking sitesin the U.S., Expedia has enhanced ability to influence where travelers decide to vacation. This includes telling customers how many people booked a particular hotel, and it extends to running marketing campaigns for destinations”

Independent hotels will suffer as a result of these new taxes. As OTAs steer travelers to other states, Ohio’s independent hotels will see a drop in visibility and fewer bookings as a result.

Ohio rooms will become more expensive and less competitive with neighboring states. If enacted, the taxes imposed on OTA fees will be taken into consideration during the next negotiation with Ohio hotels. Like all taxes, they will ultimately be passed on to the consumer. The room rates will rise as a result.

Leisure travelers are hyper sensitive to price. Priceline found that when a room rate is raised by 1%, bookings drop 2%. Neighboring states that don’t impose such taxes will stand to benefit at Ohio’s expense.

Unlike most new taxes on services, taxing OTA and Ohio travel agent fees is unique. If an Ohio service provider is taxed $100, the state gets $100. With this proposed new tax on travel agents, the opportunity cost of losing a traveler to another state is significant. Travelers spend money on goods and services while in the state, far beyond the hotel room. What Ohio’s travel and tourism economy will lose by a reduction in visitorship will far outpace any revenue gained by taxing travel agent fees. There is a widely recognized multiplier effect in when travelers visit Ohio which would be jeopardized by this tax. The goal should be to grow travel and tourism, not reduce it by taxing it.

The opportunity cost of this tax is high. It’s not about raising revenue. It’s not about closing a loophole that doesn’t exist. It’s not about leveling any playing field. It’s simply a new state sales and lodging tax on services and a disincentive for online travel agents and Ohio travel agents to steer people to Ohio hotels. I urge you to reject this proposal.

Thank you.

Addenda:

Minnesota Case Study

Analysis of Court Decisions Related to Taxation of OTA Fees

Hotel & Lodging Association infographic-corrected for accuracy

Case Study: Minnesota

Impact of Travel Services Tax Law Passed in 2011

THE PROMISE:

November 3, 2011

Headline: Tax changes for online hotel booking create level playing field

“Governor Dayton proposed closing the loophole in his budget. The proposal resurfaced as part of budget negotiations and was included in the final tax bill.It will raise $9 million in FY 2012-13.”[i]

THE REALITY:

According to Minnesota Department of Revenue[ii],

The tax on travel agent services generated $3,505,079 in FY 2012-13, far below the projected $9 million.

THE IMPACT OF ONEROUS NEW TAXES ON MINNESOTA’S TOURISM ECONOMY

Year / 2011 / 2013
MN Visitors (in millions) / 70.36 / 68.93

Year-over-year total change in visitors:-1.43 million visitors

Year-over-year percent change in visitors:-2.03%

By Comparison, Wisconsin, which competes with Minnesota for tourists, saw an INCREASE in visitors over the same timeframe

Year / 2011 / 2013
WI Visitors (in millions) / 95.4 / 100

Year-over-year total change in visitors: +4.6 million visitors

Year-over-year percent change in visitors: 4.82%

While Wisconsin’s tourism is growing, Minnesota’s is DECLINING!

Taxing online and community travel agents is a losing proposition for all:

✓It will harm the state’s tourism economy.

✓It won’t generate the revenue promised.

✓It will make travel to and within the state more expensive and less competitive with other states.

✓It will encourage online and community travel agents to steer travelers elsewhere.

✓It’s a new tax on services.

✓It’s a vote for a tax increase/new tax on small businesses.

[i]

[ii] Compiled by the Minnesota Department of Revenue Sales and Use Tax Division using taxpayer data retrieved from Gentax. The data was retrieved from Gentax on January 29, 2014. The information was compiled based on new taxpayer registrations on or after July 1, 2011 under NAICS codes 561500, 561510, 561520, 561599, and 721199.

Amounts Reported Breakdown by Calendar Year

2011 – $640,657

2012 – $1,592,605

Taxpayer Registration NAICS Code Breakdown

561500 (Travel Arrangement and Reservation Services) and 561510 (Travel Agencies) – 37 Taxpayers

561520 (Tour Operators) – 21 Taxpayers

561599 (All Other Travel Arrangement and Reservation Services) – 26 Taxpayers

721199 (All Other Traveler Accommodation) – 72 Taxpayers

SUMMARY OF MERITS-BASED DECISIONS:

HOTEL TAX LITIGATION

Chart includes all court cases decided on the merits.

It does not include more than 12 dismissals for procedural reasons such as exhaustion.

U.S. FEDERAL COURT OF APPEALS DECISION

Court / Plaintiff(s) / Date / Decision
4th Circuit Court of Appeals / Pitt County, NC / 01/14/09 / For OTCs
6th Circuit Court of Appeals / Louisville/Jefferson County, KY
Lexington/Fayette County, KY / 12/22/09 / For OTCs
6th Circuit Court of Appeals / City of Columbus, OH / 09/10/12 / For OTCs

STATE APPELLATE DECISIONS

Court / Plaintiff(s) / Date / Decision
Missouri Supreme Court / St. Louis County, MO / 06/28/11 / For OTCs
Alabama Supreme Court / Birmingham & 8 other cities in AL / 04/13/12 / For OTCs
S. Carolina Supreme Court / State of South Carolina / 01/18/11 / For State
Georgia Supreme Court / Cities of Atlanta & Columbus / 05/16/11 / Split Decision
Texas Court of Appeals / City of Houston, TX / 10/25/11 / For OTCs
Kentucky Court of Appeals / City of Bowling Green, KY / 04/29/11 / For OTCs
Commonwealth Court of Pennsylvania / City of Philadelphia, PA / 02/02/12 / For OTCs
California Court of Appeals / City of Santa Monica, CA / 11/01/12 / For OTCs
California Court of Appeals / City of Anaheim, CA / 11/01/12 / For OTCs
Missouri Court of Appeals / City of Branson, MO / 1/23/13 / For OTCs
Florida Court of Appeals / Leon County, FL / 02/28/13 / For OTCs*
Florida Court of Appeals / Leon County, FL (seeking TRT tax) / 08/16/13 / For OTCs
2nd Dep’t Court of Appeals / City of New York / 11/29/11 / For OTCs*
California Court of Appeals / City of San Diego / 03/05/14 / FOR OTCs
N. Carolina Court of Appeals / Wake, Dare, Mecklenburg, and Buncombe Counties / 08/19/14 / FOR OTCs
Colorado Court of Appeals / City and County of Denver / 07/03/14 / FOR OTCs

*Case may still be appealed or appeal pending.

U.S. FEDERAL DISTRICT COURT DECISIONS

Court / Plaintiff(s) / Date / Decision
Eastern District of Texas / Orange, TX / 09/05/07 / For OTCs
Western District of Texas / San Antonio, TX / 10/30/09 / For City*
Northern District of Ohio / Hamilton County, OH / 08/30/13 / For OTCs
District of New Mexico / City of Gallup, NM / 03/29/13 / For OTCs
District of Maryland / Mayor & City of Baltimore, MD / 08/02/11 / Split Decision
Northern District of Illinois / Village of Rosemont, IL / 10/14/11 / For Village
Middle District of Tenn. / City of Goodlettsville (and class) / 02/21/12 / For OTCs
Northern District of GA / City of Rome (and class) / 07/09/12 / Split Decision*
District Court for District of Columbia / Washington, DC / No judgment / For District*
Montana First Judicial District Court / Montana Department of Revenue / 03/06/14 / FOR OTCs

STATE TRIAL COURT DECISIONS

Court / Plaintiff(s) / Date / Decision
District Court of Oklahoma County, OK / State of Oklahoma / 03/11/11 / For OTCs
9th Judicial Circuit Court of Florida / Orange County, FL / 06/22/12 / For OTCs
2nd Judicial Circuit Court / Broward County, FL / 07/13/12 / For OTCs*
N.C. Business Court / Wake, Dare, Mecklenburg, and Buncombe Counties / 12/19/12 / For OTCs*
Superior Court of Los Angeles, CA / City of San Diego / 09/07/11 / For OTCs*
Superior Court of Los Angeles, CA / City of San Francisco / 02/06/13 / For OTCs*
Superior Court of Los Angeles, CA / City of Los Angeles / 04/18/13 / For OTCs*
Hawaii Tax Appeal Court / State of Hawaii / 10/22/12 / For OTCs*
Denver Circuit Court / City of Denver / 03/12/13 / For City*
Chicago Circuit Court / City of Chicago / 06/21/13 / For City*
Saline County Circuit Court / McAllister (Citizen Taxpayer CA) / 05/23/13 / For OTCs
Superior Court of Fulton County, GA / City of Atlanta / 11/01/13 / For OTCs*

*Case may still be appealed or appeal pending.