Cities Pursue Discriminatory Taxation of Online Travel Services; Result is Harm to Interstate Commerce

February 03, 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. Read Tax Foundation Special Report, No. 175, "Cities Pursue Discriminatory Taxation of Online Travel Services."

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).

The key findings:

• Local officials in 22 states have sought to reinterpret hotel occupancy tax ordinances to apply to amounts paid by consumers for online travel booking services, with limited success.

• In traditional hotel transactions, travelers book a room and pay a hotel tax (and sometimes also 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.

• Online travel companies do not own or operate hotels and generally do not resell hotel rooms as wholesalers, placing their facili­tation services outside the proper scope of hotel occupancy taxes. There is no evidence that companies collect taxes and "pocket" them.

• Taxation of retail services is justifiable, but when cities tax only Internet-based travel facilitation services (and do so at a high rate), such discriminatory taxation suggests that the real motivation is to shift tax burdens to non-residents, which burdens the free flow of interstate commerce.

• Cities should not expect easy revenue from pursuing such claims but rather extended litigation and a negative impact on tourism.

• Proposed federal action to establish hotel occupancy as the proper base would be in line with existing precedents, maintain settled tax practices, and prevent damage to the national economy. Such action would not jeopardize currently collected state and local hotel tax revenue.

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