Scrambling to find new sources of revenue, the state is looking into taxing services provided by online travel agencies, such as Expedia, Travelocity, and Priceline.
Among the alternatives being considered by the Revenue Law Study Committee — which is looking at a host of tax reform proposals — is the notion of taxing the service fee online travel companies charge for booking hotel rooms. Doing so, legislative researchers said at a meeting earlier this month, could raise between $6 million and $8 million a year in new state revenues.
The state now applies the sales tax rate to hotel rentals, with 5.75 percent going to the state treasury and the remaining 2 percent to 2.25 percent directed to local governments. Many cities and counties charge separate hotel occupancy taxes, with rates ranging from 3 percent to 8 percent.
Trina Griffin, a member of the General Assembly’s research division, suggested the current state and local sales taxes applied to hotel rentals could be extended to online travel agents’ service fees by considering the fees a “markup” on the price of hotel rooms.
“Online travel companies (OTCs) contract with hotels for the right to broker or facilitate room reservations at a discounted rate,” stated a slide in Griffin’s PowerPoint presentation to the committee. The OTC then sells the room to a customer at a slightly higher price, which reflects the discounted room rate, a service fee, and a tax recovery charge. The hotel gets the room rate, the OTC collects the service fee, and the taxes are forwarded to the government.
The tax is based on the discounted room rate, which she refers to as the “wholesale rate,” and not on the amount the customer actually pays, which she calls the “retail” or “mark up” rate. Some state officials think taxes should be assessed on the full price of the room rather than the discounted rate the hotels collect.
Andrew Weinstein, a spokesperson for the Interactive Travel Services Association, the online travel agents’ trade group, says online travel agents should not be taxed as hotel operators because they do not operate hotels.
Moreover, the difference between the amount the hotel receives and the amount the customer pays is not a markup on the price of the room, he said. It is a service fee, plain and simple.
The fee, ranging from 5 percent to 30 percent of the room rate, is a service charge for providing a Web site consumers can navigate and for facilitating the reservation, Weinstein said.
“It’s a creative interpretation of the law to twist service charges into part of the cost of the hotel room,” he said. “The occupancy tax was intended to be interpreted narrowly to apply only to the cost of the room.”
Room service and parking services, for example, are not taxed, he said.
Weinstein suggested any such proposal at the state or local level would have tough sledding in court. Although several cities and counties across the country have sued online travel companies to collect the tax, most have lost their cases. And when local governments have won, the decisions are being appealed. Six of the seven federal courts that have ruled on the issue have sided with the travel companies.
“The facts are on our side, the law is on our side and, most importantly, common sense is on our side,” Weinstein said. “If you’re not a hotel, you shouldn’t pay hotel taxes.”
Griffin said the state will most likely wait for pending court cases to be decided. If federal courts of appeal cannot agree on the legality of the tax, the issue could reach the U.S. Supreme Court, she said.
North Carolina would have another option if the occupancy tax cannot be applied to online travel agencies, Griffin said. Lawmakers could enact a new tax that would apply specifically to the service fee.
Creating a new tax would not make generate as much money as applying an old one, since the state could not collect the new tax retroactively, as cities that have extended hotel taxes to online travel agencies have attempted to do.
Weinstein said that while enacting a separate service tax would be more honest than applying the occupancy tax, the endeavor would still backfire.
“A tax that hit the tourism industry would have a counterproductive impact,” he said. While cities and states might “collect more money temporarily, they’d lose revenue in the long run by discouraging tourism.”
He also said it would be unfair to tax Internet-based travel agencies for their services without also taxing brick-and-mortar travel agencies.
Roy Cordato, vice president for research at the John Locke Foundation, agrees with Weinstein.
Tax laws should not discriminate against Internet companies, Cordato said. Nor should they treat certain goods or services differently than others.
North Carolina now taxes only a handful of services, including telecommunications, video programming, electricity, and laundry and dry cleaning services. Lawmakers are looking into taxing more services, including haircuts and lawn mowing.
Cordato said this is not fair. If you’re going to tax some services, tax all of them, he argued.
As they stand, he said, “all service taxes are discriminatory.” Government picks and chooses services to tax “based on where the money is” easiest to collect, not necessarily where the most revenue can be found.
“This is nothing more than a money grab,” Cordato concluded. “They’re doing this because they don’t want to make hard choices with respect to spending.”
Sara Burrows is an associate editor of Carolina Journal.