No doubt this was the largest and most high profile tax case to come out of Hawaii in many years. The OTCs are potentially on the hook for taxes of $500 million or more!
The Hawaii tax appeal court ruled that online travel companies are not liable for transient accommodation taxes on their online hotel bookings. The court noted that online travel companies are similar in nature to travel agents that do not pay the transient accommodation tax on their sales. The result is that the court made a determination that the transient accommodations tax does NOT pyramid (i.e. multiple layers of tax on the same transaction) in the same way the GET does.
The parties will have another hearing in December 2012 to determine whether OTCs are liable for Hawaii GET on their Hawaii hotel bookings. I’d bet that they are liable at least on their profit margin and fees generated. This would be a GET scheme similar to how a travel agent is taxed on their commissions from the hotels and any fees charged to the customer. No doubt this could produce a tax bill in the tens of millions of dollars or more.
Click here for news coverage.
I wrote earlier that the Hawaii attorney general is seeking upwards of $500 million from online travel companies (OTCs) such as Expedia and Travelocity for unpaid transient accommodations and general excise taxes.
While the vast majority of courts nationwide have held that OTCs do not owe hotel taxes on their retail markup, the DC Superior Court has granted partial summary judgment that OTCs are liable for DC’s gross sales tax on their hotel room retail markups. For DC, this could mean an additional $6 million annual revenue plus another $200 million in back taxes, penalties, and interest.
The court reasoned that OTCs are considered taxable “vendors” under the DC gross sales tax law. No doubt the Hawaii attorney general will cite to this case in his briefs to the tax appeal court. However, its persuasive value may be limited as Hawaii taxes hotel “operators” and not necessarily hotel “vendors.”
On August 28, 2012, the Hawaii Tax Review Commission released its “Study of the Hawaii Tax System: Final Report” . While most of its findings were bland, it recommended the more controversial action of raising the GET from 4% to 4.5%:
Increase the GET rate to 4.5 percent
Hawaii’s GET rate is among the lowest in the country for states with this sort of broad-based consumption tax. While Hawaii has not raised its rate in over 35 years, over half of the states have raised this rate since 2000 – in many cases multiple times. Given the need to restore structural balance, an incremental increase in the GET rate is the logical method to improve the long-term financial outlook. While the GET is considered regressive, other recommended changes would reduce some of that impact.
Legislators on both sides of the aisle voiced their vehement opposition to this proposal in the report. Click here to read more. While increasing the GET seems to be dead on arrival, other proposals made in the report may get a legislative boost:
- Make permanent Act 105 (2011), which eliminated certain GET exemptions and deductions (i.e. for subcontracting and subleasing).
- Capping open ended tax credits such as the renewable energy and film tax credits with targeted grants and loan programs.
- Restoring the temporary increases on transient accommodation tax and rental cars, shifting the tax burden to tourists.
- Expand nexus.
These proposals build upon and tweak what has already passed the legislature and could provide added revenue and reduced tax expenditures with limited political backlash.
Of course, any Hawaii tax debate would not be complete without a discussion of gambling. Not surprisingly, the report declined to endorse gambling as a source of added tax revenue. Chinatown underground game rooms aside, Winner’z Zone has been operating “legal” casinos all over Honolulu for quite a while now.
While Hawaii may be an expensive business travel destination, Hawaii’s taxes on travel appear to be a mitigating factor. The Global Business Travel Association Foundation has released its annual rankings of 50 top travel destinations based on daily taxes on things such as hotel stays, restaurants, and car rentals. Chicago taxes travelers the most at $40.31 per day while Honolulu taxes travelers a mere $24.38 per day. The lowest tax city for travelers is Fort Lauderdale at $22.21 per day.
In Honolulu the taxes on travelers are primarily the 4% general excise tax on most purchases including at restaurants plus the 1/2% Honolulu County Surcharge, the 9.25% transient accommodations tax on hotel stays, and $3 per day surcharge on car rentals (down from $7.50 per day prior to June 30, 2012). Tobacco, Liquor, and Fuel taxes could also add to the total visitor tax burden.
Read NBC News’ coverage of the report by clicking here.
The Hawaii AG filed papers with the Hawaii Tax Appeal Court claiming that online travel companies (OTCs) , i.e. Expedia, Travelocity, Orbitz, etc., owe $500 million in unremitted transient accommodation taxes and general excise taxes. Perhaps the OTCs should have settled the case last year. The State of Hawaii only wanted $170 million in March of 2011.
However, Hawaii’s transient accommodations tax case seems weak since the tax is imposed only on the gross proceeds from “furnishing” transient accommodations. I doubt the Hawaii Tax Appeal Court will equate online selling of hotel rooms to “furnishing” them. And even so, only a hotel “operator” is obligated to remit the tax to the state. The OTCs could be in trouble, however, with the State’s general excise tax claim because the general excise tax is a broad based gross receipts tax on virtually all business activity within Hawaii (even some outside the state).
The Hawaii lawsuit comes on the heels of similar proceedings in other jurisdictions where governments have sued OTCs, sometimes using contingency fee counsel, for unpaid hotel occupancy taxes. States and municipalities claim that OTCs should pay their fair share of hotel occupancy taxes on the full price paid by the customer on the hotel room. The OTCs claim that they should only remit the tax on the discounted wholesale rate they pay to hotels. Click here for a listing of recent hotel occupancy tax news from the Interactive Travel Services Association, the OTCs’ trade group. For the most part, OTCs have been winning their court battles because most hotel occupancy tax laws tax only the “operator” of the hotel not the online seller.
In related news, the two individuals have sued major hotel chains (i.e. Hilton, Sheraton, Marriott) for colluding with OTCs to fix the price of hotel bookings.
Update, 9/10/2012, Sixth Circuit Court of Appeals rules that OTCs not subject to hotel occupancy taxes in Ohio because, among other reasons, OTCs do not operate hotels, are not hotels, and are not operators of hotels.