As exemplified below, the battles between online travel companies (or OTCs) and state and local taxing authorities are not yielding a clear winner. The resulting disparate tax consequences explains why the Asian American Hotel Owners Association, a trade group representing over 10,000 hotel owners, sent a letter to each Congressman encouraging states to apply occupancy taxes fairly and appropriately and to close the OTC “loophole.”
In a case we referenced in a prior post, a Texas Court of Appeals affirmed summary judgement in City of Houston v. Hotels.com LP and agreed with the trial court that OTCs are required to pay local hotel occupancy taxes on the wholesale amount paid for the hotel room, and not the full retail amount paid by the OTC’s customers.
The applicable hotel tax rate was 9% in this case, and it was chargeable against "the cost of occupancy." In the example outlined in the opinion, the OTC advertises (and sells) a hotel room for $200.00, but is only obligated to remit $175 to the hotel under the applicable agreement. As construed by the court, the "cost of occupancy" was only $175. As a consequence, the tax payable was $15.75 (175x0.9), not the $18 (200x.09) sought by the local government. Thus, the customer would pay an extra $2.25 in taxes to reserve a hotel room in Houston through the hotel's website.
The South Carolina Department of Revenue has notified "all the OTCs" that they must begin reporting state and local taxes due on the entire gross proceeds of sales of all hotel accommodations made by OTCs in the state starting November 1, 2011. The mandate results from a ruling by the South Carolina Supreme Court that upheld a prior administrative ruling that OTCs were required to pay taxes based upon the full price paid by customers, and not just the discounted, negotiated rate worked out between OTCs and hotels. We previously reported on this case here.