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Expedia, Orbitz, and Priceline are exploiting a major sales tax loophole, and in some states are possibly breaking the law in doing so.  Last week, the Center on Budget and Policy Priorities (CBPP) released a report explaining how this loophole works, and pegging its aggregate size at somewhere in the neighborhood of $400 million per year.  The report urges states and localities to pursue legal action, legislative action, or both in order to remedy this situation.

In the vast majority of cases, online travel companies (OTCs) like Expedia and Priceline currently remit sales and lodging taxes only on the “wholesale” room rate they pay to hotels — not the “retail” room rate they actually charge travelers.  In doing so, the OTCs claim that the difference between the retail and wholesale price is simply a “facilitation fee” that should not be subject to sales taxes.  But as CBPP rightly points out:

“The OTCs are providing the same kinds of marketing and room booking services that the hotels themselves engage in.  If the hotels may not deduct a pro-rated amount of their advertising and website operation expenses from the retail room charge prior to calculating applicable hotel taxes when they incur such expenses directly, there is no possible justification for compelling such a deduction when hotels pay an OTC to provide the same services.”

CBPP recommends that states and localities either sue to recoup the taxes owed by OTCs, or if current statutes are sufficiently unclear with respect to the taxes owed by OTCs, enact new legislation clarifying that taxes should be paid based on the full retail price of the room.  New York City and Washington DC have both taken this latter course of action, while a half dozen states and numerous localities have chosen to pursue legal action.

Read the CBPP report for more detail, including state-by-state revenue estimates, an explanation of why this reform won’t harm tourism, and a closer look at what states and localities must do to close this inequitable and costly tax loophole.