Online Travel Agencies Win Tax Dispute in Missouri

July 1, 2011

On Wednesday, the Missouri Supreme Court ruled in favor of online travel agencies in their continuing battle against states over hotel occupancy taxes.

Missouri argued that online travel agencies were not paying enough taxes because they were not taxed on the difference between the amount the hotel receives for a room and the amount the travel service receives after a customer books that room. In other words, the amount that goes to the hotel for the hotel room is subject to hotel tax, while the amount that goes to the online travel service is not.

These companies argued that they were not subject to the tax because Missouri law states “under no circumstances shall a travel agent or intermediary be deemed an operator of a hotel.” Because online travel services do not own or sell the rooms (the customer is the purchaser of record), hotel tax is only due on the amount received by the hotel and not for amounts paid to others for related services.

Wednesday’s ruling in favor of these agencies is just another chapter in a continuing debate. Last year, we published a report supporting the conclusion that these agencies should not be taxed because they are offering a service that is nontaxable under most states’ sales taxes:

Taxes on hotel rooms are generally little more than a way of shifting the tax burden to non-residents (and nonvoters). When com­pared to taxes on other transactions, they are typically imposed at a much higher rate… Far from leveling the playing field or col­lecting taxes already owed, recent state and local lawsuits against online travel companies impose new taxes in a way not justified by the principles of sound tax policy.

While Missouri may have ruled in favor of online travel agencies, not every state is so kind. Earlier this year, New York drafted legislation specifically imposing a hotel tax on these services as well as other “room remarketers.” We viewed this as a way for the state to “extract a bit more from non-voting non-residents.”

Similarly, Washington, D.C. passed the “Payment of Full Hotel Taxes by Online Vendors Clarification Act of 2010” which amended the city’s tax code to remove any ambiguity. D.C. officials estimate this could lead to between $4 million and $10 million annually in additional revenue.

Some organizations, however, are skeptical. According to the National Taxpayers Union, this law will “divert bookings, from both large and small operators, to neighboring cities such as Arlington, Alexandria, and Bethesda, which will deprive the District of hotel tax revenue and badly needed economic activity that visitors to our nation’s capital provide.”

Even the passing of this legislation has not settled the issue. In March, D.C. sued the online travel services Orbitz Worldwide, Travelocity.com, Priceline.com and Expedia in an attempt to collect these taxes. If the court rules in favor of D.C., these agencies may be forced to pay “taxes, penalties and interest on the uncollected taxes dating back to 1998.”

For more on this issue, see our report here.

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