Thursday, February 10, 2011

The Truth About OTCs* and Why You Should Care - OP/ED

This is an opinion/editorial from the desk of Shelly Green, President and Chief Executive Officer of the Durham Convention & Visitors Bureau.

You may have read recently about a lawsuit filed in North Carolina by a group of *Online Travel Companies (OTCs) including Travelocity, Orbitz and Here’s a summary of the issue and why DCVB believes OTCs should follow the law as written.
The General Assembly of North Carolina enacted legislation last summer requiring OTCs, when selling hotel rooms to consumers, to start paying taxes on the full amount charged to the customer as of January 1, 2011.

Specifically, the new law clarifies:

• Gross receipts from the rental of hotel rooms now includes the sales price of the rental as if it were tangible property, as well as charges designated as “fees” when they are required to complete the purchase.

• Any person or company that provides an accommodation for rent is considered a retailer.

To date, OTCs (sometimes called TPIs – Third Party Intermediaries) have been remitting occupancy taxes and sales taxes to communities based only on the wholesale rate they purchase rooms from hotels, not the full amount paid by the consumer.

Here’s a diagram that demonstrates what happens to tax revenue when using an intermediary.

Considering that prior to the recession, hotel sales in Durham County were around $150 million, this adds up to a big problem.

DCVB and many cities, counties, hotels and CVBs throughout North Carolina believe OTCs should pay taxes on the full rates charged to consumers. Why? Because many believe consumers are paying these taxes already. Look at this real life example.

The difference between the first case (booking through an OTC) and the second case (booking directly through the hotel) is that Durham collects $14.71 in taxes when the hotel books the room. When an OTC books the room, the amount of taxes remitted are considerably less.

I’m going to guess (and I really don’t know any individual hotel’s net or wholesale rate, which is the rate they sell their room to the intermediary) that the taxes remitted on this same room when sold through an intermediary are closer to $10-11. So, local government is getting up to a third less tax revenue than they should.

What compounds this even more is the vast percentage of rooms sold through intermediaries…in some hotels more than half of their total inventory.

At first blush, you may think the OTCs are doing the work and they deserve to make a fair profit. I agree. They are making a substantial profit from the difference in the rate they buy a room from a hotel and what they charge the consumer. On a room sold for $100, that profit is likely in the neighborhood of $20-$30. And remember, that’s per room…per day.  (Now you know why you can't turn on the television without seeing an advertisement from any number of OTCs.  They are spending billions trying to steal market share away from each other.)

OTCs are fighting this all over the nation. They argue they are not retailers because they do not have physical possession of the room…they are merely service providers and should not pay taxes on services. They have invested millions in lobbying efforts nationally to introduce the Internet Travel Tax Fairness Act (ITTFA), which would prohibit a State or municipality from collecting occupancy taxes on the OTCs’ share of the revenues from the internet bookings.

They have also launched a misleading campaign aimed at consumers alleging, “Local politicians are threatening to impose new taxes on customers booking travel online." They are urging travelers across the nation to "take a stand against new travel taxes."

However, the Internet Travel Tax Fairness Act does not involve any "new taxes." Instead, the ITTFA would exempt OTAs from having to pay the same amount of existing state and local hotel taxes currently paid by all hotel brands.

Stay tuned. Although we do not know precisely how much revenue this could mean to local governments here is our best estimate of the impact. It can quickly amount to about $3 million a year.

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