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The hotel tax flap

When the General Assembly reconvenes next month one of the first orders of business, as it is every session, will be to consider the governor's vetoes. There's at least one sitting in the stack that's practically begging to be overridden — legislation clarifying that when a traveler pays Maryland's tax on hotel stays, he's actually paying Maryland's tax on hotel stays.

Doesn't sound like rocket science, does it? Alas, the issue of how the sales tax should be applied to hotel room purchases has gotten fogged up worse than a mirror after a hot shower — chiefly because online travel companies have figured out how they can profit from it and shortchange the state's tax collector. It's a strategy they've pursued in other states as well, and the matter is being contested in court. Here's how it works:

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Online travel companies like Travelocity, Orbitz and Expedia buy blocks of hotel rooms at a discounted price then charge their customers the full retail price. But when it's time to settle up with the tax man, they apply Maryland's 6 percent "sales and use tax" to the wholesale price they paid, not the retail price the customer paid. This practice shortchanges the state, allows the companies to pocket the difference and gives them an advantage against the hotel operators themselves.

That's why legislation clarifying how the sales tax should be applied to hotel stays has long had the support of one of Maryland's largest employers, Bethesda-based Marriott International. The Maryland Chamber of Commerce is on board, too, and Comptroller Peter Franchot has been leading the charge to collect back-taxes from the online companies.

But here's where it ran into trouble. Opponents of the measure kept referring to it as a tax increase, a term that even when falsely applied has an effect on the GOP similar to Kryptonite in the comic books. Politicians who claim to stand up for fairness and Maryland's business community suddenly get weak in the knees. The measure passed the legislature overwhelmingly but only on partisan lines.

And when it arrived on the desk of Gov. Larry Hogan, a Republican who built his entire political campaign on improving the state's business climate and reducing the cost of government? He issued a veto, suggesting that since the legislation was being "actively" litigated by Mr. Franchot, the matter should wait for a ruling from the state tax court.

That's a pretty slender argument to hide behind. A favorable court ruling would certainly be welcome, but that doesn't preclude the General Assembly from setting the record straight right here and right now — as it has had to on any number of occasions as the Maryland tax code catches up with the digital economy.

It would be a mistake to portray what is essentially a clarification in the law as some kind of money grab by Annapolis. For one thing, it's just not that much money — the most recent estimate is less than $4 million annually — and for another, it won't make any difference to the consumer. But most important, it's about supporting state-based bricks-and-mortar businesses that suffer a competitive disadvantage if they must pay a higher tax than out-of-state online travel companies.

Isn't keeping balanced and predictable laws — maintaining a "level" competitive playing field — part of promoting a "business friendly" atmosphere? The sooner the tax code is amended to reflect common sense, the better. Mr. Hogan is welcome to allocate the additional revenue to improving the finances of the state employee pension or some other favored cause.

Of course, online travel companies can argue that squeezing them has consequences, too. It might make it slightly more difficult for them to sell hotel rooms, forcing them to either raise their prices or reduce their profits. That might be true, but that doesn't mean they deserve special treatment, which is what they essentially receive now. After all, just because Rite Aid could sell more pharmaceuticals if Maryland charged them a lower sales tax than was applied to Walgreen's doesn't make such a policy appropriate or fair.

No doubt Democratic leaders will make a fuss if they override Mr. Hogan. Success is certainly not guaranteed, particularly in the House of Delegates where the measure passed one vote short of the 85 needed to override. But whether the governor loses face or not, it's the right thing to do. Ultimately, that's the only standard that should count.

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