Are cities being penny-wise and pound foolish with online travel taxes?

by Charlie Leocha on December 19, 2010


Washington, DC, has entered the great online travel hotel tax chase. Somehow, the city which for years has charged taxes to hotels for rooms that they sell have decided that they need to charge taxes to those who resell hotel rooms at a mark-up, even though they are not hotels who are collecting the money.

This is a basic money grab for the cities, but it chases pennies while it promises to cost the DC citizens and the the city’s tourism infrastructure far more. The Washington Post notes the impending change in tax rules.

On Tuesday, the council is scheduled to take a final vote on a bill that would require online vendors to pay the District’s hotel tax on the full price customers pay for hotel or motel rooms in the city. The vote comes on the heels of efforts across the country, often unsuccessfully, to get online travel vendors to pay.

Council members said that online travel sites charge consumers the city’s 14.5 percent tax based on the final selling price of the room. But city officials say Web-based companies are remitting back to the District the tax collected only on wholesale prices, not retail.

Should the DC city council pass this new tax bill that extends taxes to transactions taking place outside of the District, they will be looking at something like an increase in tax collections of $10 million dollars. Now $10 million is $10 million, but the deficit for the District is something on the order of $440 million. So putting everything into perspective, the increase in tax collections will be 2.3 percent of the city’s deficit.

That total of $10 million is actually pennies when it comes to the overall problem. Isn’t a paltry 2 percent of your deficit worth the good will of the online (and off-line) travel agent community that promotes your city?

Online travel agents don’t just take the service fees that they collect and then spend them on company parties. They take that money and invest it in marketing their most remunerative destinations. That normally means those destinations that don’t pile new taxes on them in an effort to knock off 2 percent of their budget deficit.

A smart, forward-looking city council might approach the online travel agent community and the traditional travel agents who seem also to be caught up in the snare of poorly written legislation, to find out how they can get help promoting Washington, DC, as a tourism destination.

Here are some of the benefits DC will lose by taxing travel agent sales of hotel rooms.

They lose advertising dollars. Online travel agents have an enormous reach and an ability to turn “lookers into bookers” with special packages and with destination features that would cost city marketing departments far more than any $10 million collected by this new tax.

They lose tourist who may be encouraged to book elsewhere. In this case, hotels in Alexandria and Arlington will become more competitive and profitable for travel agents to sell. These hotels almost all have excellent metro connections for tourism in DC (often better than those for DC hotels), better parking setups and have better tax structures for tourism. All nearby Virginia and Maryland hotels are more convenient to the area’s major airports. Suggesting that tourists stay outside of the District becomes a no-brainer.

They lose special package pricing. Almost all of the dynamic packages created on Web travel sites depend on combining the wholesale price with airfares. This new tax proposed by the DC council will eliminate that option, since the pricing components will be highlighted.

They lose tax collections from those who would have stayed in DC, but chose to go elsewhere. In other words, DC will lose the multiplier effect of taxation. Tourists who come to the District do not only spend money on their hotels. If they drive there are parking fees to be collected. There are gifts, all taxable, to be sold. There are souvenirs to be sold, all taxable. There are dinners in restaurants to be eaten, all taxable.

Most cities have realized that the taxes they collect from changing their hotel tax structure result in a net loss of taxes collected in other areas of the tourism economy and a lost of valuable tourism advertising. DC should follow in the footsteps of voters in San Francisco who rejected a proposal to make that city’s full hotel tax apply to online vendors.

Before voting to collect more taxes and give travel agents — online, brick-and-mortar and corporte — a reason to book away from your city, take another look at the tourism dynamic they can generate for your city. It seems like a pretty easy decision in these days of a dog-eat-dog battle for tourism dollars. Why settle for pennies when far more is on the horizon.

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  • bodega

    Whatever the room rate is charged to the traveler, any taxes are paid on that should be paid to the entities just as they are when you pay a walk up rate at the hotel desk. It doesn’t matter what the net rate is, any tax collected is just that, a tax. Taxes are not a money maker for the seller.

    When we sell a product at our family business, we have to report all taxes based on the sale price, not on our net rate.

  • R Webster

    Is this an article or an opinion piece?

    I would think that travelers paying these hotel taxes would want them to be fully remitted to local governments so that the private organizations charged with marketing those destinations and providing information to travelers could go about doing those important tasks.

    Destinations appreciate how on-line sellers can help fill hotel rooms. That is not in disptute. Making certain that tax laws are brought up to date to ensure the entire taxable amount of the hotel/occupancy tax is properly remitted to the appropriate state/local governments is the issue.

  • Pingback: Research & Commentary: Florida’s Online Travel Agent Tax | habbat.info

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