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Lawmakers stir travel industry furor over taxing online hotel bookings

Lawmakers are considering legislation aimed at changing how online travel companies pay taxes on Maryland hotel bookings.
Lawmakers are considering legislation aimed at changing how online travel companies pay taxes on Maryland hotel bookings. (Joe Raedle, Getty Images)

Legislation aimed at changing how online travel companies pay taxes on Maryland hotel bookings is roiling the business community, pitting big chains like Bethesda-based Marriott International against Internet giants such as Expedia, Orbitz and Priceline. It's also upsetting small travel agencies, who fear they're going to be hurt in the tug of war.

Proponents say the bill would close a loophole in Maryland law that allows online travel companies to pay less in sales tax on hotel bookings than the hotels themselves must charge when the same room is booked directly with them. After passing the Senate this week by a vote of 32-15, the measure is scheduled for a House hearing Wednesday.

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Though legislative analysts say it's impossible to estimate how much revenue the state could gain from the legislation, supporters suggest it could be $3 million to $4 million annually. But that's not the point, they insist; rather it's to bring Maryland's tax code into the Internet Age.

"This is in fact a tax fairness measure that modernizes our code for the 21st century," said Sen. Richard S. Madaleno Jr., a Montgomery County Democrat and bill sponsor. "It is not to raise money on consumers. It is not an effort for us to find more money for the state. It is an effort to level the playing field."

But opponents complain the measure would levy a new tax on the fees charged by both online and brick-and-mortar travel firms for the service they provide. And they warn consumers will wind up paying it, adding to the cost of a hotel stay in Maryland and potentially hurting the state's tourism industry.

"This new tax is not only going to hit out-of-state travelers, but it's going to hit Marylanders booking hotels in the state," said Philip Minardi, spokesman for the Travel Technology Association.

Online travel agencies booked more than 1.5 million "room nights" last year in Maryland, he said, and more than 250,000 of those were booked by state residents.

At issue is the 6 percent sales tax levied on every hotel or motel stay in Maryland. When consumers reserve a room directly from the establishment, they get an invoice showing taxes and fees charged on top of the listed price.

But online travel companies contract with hotels to book rooms at discounted rates. The price listed for the consumer there is often the same as the hotel's listed rate, with the difference going to the online companies as a service fee. But the state only gets tax paid on the hidden, discounted room rate, not the room rate listed by the online company.

"If you or I were to go to a store, and buy a shirt, we would pay the tax on the retail price of the shirt," said Madaleno. "The company that sold us the shirt would not in turn just remit to the state the sales tax on the wholesale price of the shirt."

This is a battle being played out across the country. State and local governments nationwide have been sparring in court for years with online travel companies over the taxes due on their hotel bookings.

Minardi contended the industry has won nearly every ruling to date. But Hawaii's top court recently rendered a split decision, holding online companies liable for tens of millions of dollars not paid on one lodging-related tax while absolving them of another.

Many court cases have wound up being settled, including lawsuits brought by Baltimore City and Baltimore, Montgomery and Worcester counties. One big case is pending: The Maryland comptroller's office is seeking $6 million it claims Travelocity owes for unpaid sales taxes between 2003 and 2011.

Lawmakers elsewhere have struggled with the issue. According to the National Conference of State Legislatures, seven states — Georgia, South Carolina, North Carolina, New York, Minnesota, Wyoming and Oregon — and the District of Columbia require taxes be paid on the amount a consumer pays for a hotel room whether paid in person or through a website. But industry opposition has persuaded other states, including Virginia, to reject legislation similar to what Maryland is considering.

The Maryland bill has the support of hotel chains, notably Marriott and Gaylord, anchor of the National Harbor resort outside Washington, plus the Maryland Hotel and Lodging Association. Although hotels often contract with online travel companies to book their rooms, the two industries also compete for the traveling consumer.

"What we're seeking in this bill is parity in the way taxes are collected on hotel reservations," said Thomas Maloney, government affairs director for Marriott, which has 75 hotels and 10,500 employees in the state.

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Other supporters of the legislation include the Maryland Chamber of Commerce, the Maryland Tourism Coalition and Ocean City's Hotel-Motel-Restaurant Association.

Expedia, Orbitz and Priceline have all weighed in against the bill, as have other online commerce groups. The Harford County Chamber of Commerce also parted company with the state chamber, opposing the bill. And independent hotel owners have sided with the online travel companies, which they rely on to help them compete for lodgers with the big chains.

And while online booking sites have upended their industry, travel agents have spoken out against the legislation, saying they fear it will impact their "brick-and-mortar" businesses too, because they also make money booking hotel rooms.

To address travel agents' concerns, Madaleno said the Senate bill was amended to clarify that sales tax would not be due on the commissions agents traditionally collect for booking a hotel room for a consumer.

But Jay Ellenby, president and CEO of Safe Harbors Travel Group in Bel Air, said he's worried the bill still could hurt small agencies like his, which employs 26. Travel agents don't get as many commissions as they used to from hotels, he said, so they increasingly have to rely on charging service fees to customers for bookings.

"With the adjustments made I'm not really convinced it's going to protect us," Ellenby said.

And even if the legislation is interpreted to exempt add-on fees from taxation, he predicted that reporting requirements could add to his bookkeeping burden. The overall impact may be no worse than what he called an "ankle biter," but he argued that the legislation is just not clear and "doesn't make sense."

Not every agent sees it that way. Larry Swerdlin, owner of Burton Travel in Owings Mills, said he's in agreement with Marriott and others that the online companies ought to pay the same taxes, if it can be sorted out.

But Eben A. Peck, senior vice president with the American Society of Travel Agents, said he doubts that can be done.

"There's no earthly way to draw a bright line between what [online travel companies] do and what everyone else does," Peck said.

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Picking up on travel industry complaints, two national conservative political groups — Americans for Tax Reform and Americans for Prosperity — have joined in criticism.

And with the business community divided, the issue poses a challenge for Gov. Larry Hogan, who's championed the slogan that Maryland is "open for business." His press secretary, Erin Montgomery, said the governor is studying the legislation.

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