In a hunt for more revenue, Maryland officials are weighing ways to pressure hotel-booking websites such as Expedia and Orbitz to pay more taxes — a tactic that has netted some cities, counties and states tens of millions of dollars, but left others mired in lengthy legal battles.
The premise is simple. Maryland now collects sales taxes based on the bulk rates that the websites pay hotels for their rooms. But some officials say the taxes should be based on the higher prices for which the websites sell the rooms to customers.
Martin O'Malley put it recently: The typical booking website "somehow avoids paying the local hotel room tax."
The idea comes in lean budget times for the state: The General Assembly increased fees and taxes this year to meet a budget shortfall, tolls are increasing and a Senate budget panel is set to consider an array of new taxes, including expanding the sales tax to other Internet services.
But it's been the source of tension between O'Malley and Comptroller Peter Franchot, the state's independently elected tax collector. Owing to a quirk in Maryland law, Franchot must conduct a separate audit before the state can start a legal process to claim the taxes.
Despite at least a year of urging from O'Malley, Franchot has made no public progress on the audit the governor has requested. Franchot declined to discuss the matter for this article, saying that he is bound by tax law not to discuss or disclose the existence — or outcomes — of audits.
There's good reason for Maryland officials looking to boost revenue to turn toward the websites. Baltimore City and Worcester County both collected money after suing websites, including Expedia and Orbitz, for back taxes. And in Baltimore at least, some of the companies are paying higher taxes going forward.
Baltimore and Montgomery counties and the District of Columbia have also filed lawsuits seeking more taxes.
"We believe Maryland has a very, very strong claim," said John Crongeyer, an Atlanta lawyer who specializes in suing the booking sites and wants to represent the state.
Crongeyer, who has represented Baltimore city and Baltimore and Montgomery counties, estimates that the state is owed roughly $30 million in back taxes and penalties. He says the state should be receiving between $1.4 million to $4 million a year.
(By way of comparison, the state expects $4 million a year from doubling the fee for issuing a birth certificate.)
Around the country there are more than 80 similar lawsuits percolating, with mixed results. A Texas jury found recently that the online booking companies owed the state about $20 million. But in March a Los Angeles Superior Court judge threw out a finding that the companies owed the City of Santa Monica $3 million.
An industry spokesman says the lawsuits rely on a fundamental misunderstanding of the companies' business model.
Arthur B. Sackler, the executive director of the Interactive Travel Services Association, says the difference between what the companies pay for rooms and what they sell them for should be viewed as a service charge, not part of the taxable price.
Taxing the price paid by consumers, Sackler says, hurts the fragile industry by unnecessarily driving up rates.
"Anything that burdens more travel and tourism is a negative for the state," he said. "This is a tax on consumers. It will be passed through one way or another."
E-mails to Travelocity, Orbitiz and Expedia were not returned.
The travel companies are not afraid to play rough: Orbitz and other companies stopped listing hotels in Columbus, Ohio, after officials there sued.
"Companies have made the decision that, because the cost of the tax is higher than the revenue, they start sending travelers and tourists to competing destinations," Sackler said.
Md. officials go after taxes from travel websites
O'Malley looking to follow Baltimore, counties in search for revenue
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