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09062012 Taxing OTC's hurt Tourism Industry?
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Critics Question Claim that Taxing Online Travel Companies Hurts Tourism Industry

For the better part of a decade, online travel companies (OTCs) have tried to dissuade municipalities and states from taxing a contested portion of the price of rooms rented through OTC websites by claiming such a move would raise prices and harm the travel industries.

But two years after New York passed legislation to do just that—and a handful of other states and cities did so either through legislation or litigation—critics of the OTC business model claim there is little or no evidence of such an impact.

“It's laughable on its face,” Shawn McBurney, executive vice president of governmental affairs at the American Hotel and Lodging Association, said of the OTC argument.

“They (OTCs) can't pass the tax along because of competition, so the only effect is lower profits for the OTCs,” he added.

The trade group representing hotels supports having OTCs taxed on the rooms they sell because their own members are required to collect taxes and believe it is inequitable and discriminatory not to tax the OTCs.

The OTCs raise the issue simply to “muddle” the question of whether they should be paying relevant occupancy and sales taxes on the full price of rooms rented through their sites, just as hotels do, McBurney stated.

Cash-Strapped Governments

The issue is important because so many state and local governments, still trying to cope with the effects of the 2008-09 economic downturn, are desperate for revenue.

And there is a lot of money involved.

Michael Mazerov of the left-leaning Center for Budget Policies and Priorities, who has studied the issue, estimates that failure to tax the full retail price charged by OTCs is costing state and municipal governments between a quarter and a half billion dollars each year nationwide.

Moreover, OTCs use the argument to lobby state legislatures for bills that would effectively exempt their markups from the relevant taxes, and to thwart efforts in those states looking to capture taxes on the contested amounts.

At the heart of the dispute is the difference between what OTCs agree to pay hotel owners and operators to list rooms on their sites, and the larger amount they actually charge customers to book the rooms.

The companies claim the difference is a fee for a service—facilitating the transaction—and thus is not subject to occupancy and related sales taxes. Cities, counties, and a growing number of states argue their tax statutes—many of which were written decades before the advent of internet-based commerce—always intended to tax the full price of rooms rented by customers.

But when the jurisdictions try to do just that, either through legislation or litigation, the OTCs warn that the effort to tax their markups will be damaging to consumers, hotel bookings, and the local tourism industry.

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