Imagine if a discount retailer, a Costco or Sam's Club or the equivalent, bought excess inventory from a manufacturer and then sold those items at a higher price. How would Maryland's sales tax be applied when the goods were sold to actual customers — toward the wholesale price or the retail? That might be the easiest tax question ever posed: Of course it would be applied to the retail price, as it is every day in every store in this state.
Yet online travel companies, Travelocity, Expedia, Orbitz and Priceline to name the most prominent examples, don't see it that way. When they book blocks of hotel rooms at a discount rate and resell them to online customers, they've applied Maryland's sales tax to their wholesale purchase price, not their retail sales price.
The practice has been controversial to say the least, and not just in Maryland. Across the country, it's estimated that state and local governments are losing $300 million to $400 million each year in uncollected tax revenues. The companies have been sued (Maryland's comptroller is currently seeking eight years of back taxes from them), and many states have been clarifying tax law to help settle the matter once and for all.
State Sen. Richard Madaleno Jr. of Montgomery County has offered just such a bill, and it could help the state collect an extra $3 million to $4 million annually in tax revenues, money that could help close a $750 million budget gap and restore funding to public education, albeit somewhat modestly. The legislation would seem a no-brainer under the circumstances given that applying the sales tax in any other manner makes no sense.
But here's the problem. In the last election, the words, "tax increase," have come to be regarded as something only slightly more shocking than "Fifty Shades of Grey" and a whole lot less popular with the general public, and particularly with Gov. Larry Hogan. (OK, so we don't actually know what he thinks of the movie, but you get the point.) And online travel companies have been portraying Senator Madaleno's measure as a tax increase since it would, after all, raise what they pay in taxes and potentially cause their customers to pay more to book hotel rooms if they pass those charges along.
The danger then is that lawmakers will be afraid to approve a bill that imposes what most would regard as common sense. It's only because Maryland tax law was written long before an Internet was ever contemplated that the Expedias of the world can hide behind the fact that they are not hotels charging for their own rooms.
That kind of short-sighted view is actually anti-business, as it puts actual hotels and motels at a disadvantage since they have no tax loophole — or at least perceived tax loophole — to inflate their profits. Those are companies that are invested in Maryland, pay their taxes, support their employees and contribute to communities.
Small wonder that local governments have been going after online travel companies for hotel occupancy taxes, too. Baltimore City and Baltimore and Montgomery counties as well as Worcester County, home of hotel-rich Ocean City, were among the jurisdictions that sued those companies for a similar tax dodge and subsequently received millions of dollars in confidential settlements over back taxes.
This is not to suggest that Orbitz and other online companies don't provide a useful service that benefits Maryland's economy. They facilitate the booking of hotel rooms, which helps boost the hotel trade and the local tourism industry. Maryland, as Mr. Hogan likes to say, is open for business, and that includes the booking of discount hotel rooms.
But fair is fair. If Joe Blow books a hotel room through such a service for $200, taxes are due based on that amount, not on $150 or whatever the wholesale price might have been. There ought to be no exemption because Travelocity is acting as an intermediary. Otherwise, the whole nature of retail trade is undermined and Costco will rightly wonder why it has to apply the sales tax to the price it charges for tube socks at the cash register and not the price it paid the sportswear manufacturer for them in the first place.