Judge rules that OTAs owe Hawaii $150 million in taxes, interest

By Danny King and Shane Nelson
WaikikiA Hawaii tax appeals court judge has ruled that online travel agencies (OTAs) such as Expedia, Travelocity, Orbitz and Priceline owe the state about $150 million in what the judge says are unpaid back taxes and interest relating to revenue from online hotel bookings.

Judge Gary Chang said the OTAs owe about $110 million in unpaid general excise taxes and another $40 million in interest. The taxes apply to the more than $2.7 billion in Hawaii hotel room sales made by online travel companies since 2000, suggesting that OTAs withheld about 4% of the room revenue they've booked during the past dozen years from state coffers.

"Hawaii hotels are good corporate citizens, paying their fair share of taxes to support the state's infrastructure," Hawaii Attorney General David Louie said in a Jan. 14 statement. Online travel agencies "need to also play by the rules and pay their fair share."

With the ruling in place, Hawaii may get an annual boost in general excise tax revenue of about $20 million, according to state officials.
OTA representatives decried the decision as one that may hurt the state's tourism economy because higher costs incurred by intermediaries will be passed on to customers.

"Because demand for travel to Hawaii is acutely sensitive to price changes, this change in tax treatment will harm consumers and significantly reduce demand for Hawaii vacations," said Washington-based trade group Travel Tech (formerly the Interactive Travel Services Association, or ITSA), in a statement. "Travel Tech members intend to challenge this ruling."

Travelocity declined to comment, referring questions to Travel Tech, while neither Expedia, Priceline nor Orbitz responded to requests for comment. Expedia, Priceline, Travelocity and Orbitz collectively account for more than 90% of U.S. travel sold through OTAs.
The ruling marks the latest salvo in the longtime battle over hotel taxes between OTAs and state and local governments.

Broadly, OTAs have argued that they should pay taxes only on the wholesale rates they pay hotel owners for the right to sell the rooms on their websites, while governments have argued that the taxes should be based on the top-line retail rate paid by consumers.

As a result, more than two dozen local governments have taken on the OTAs in court because the giant online agencies typically pay about 25% less per room than they charge their customer, leaving millions of dollars' worth of occupancy taxes in dispute.

Municipalities that have taken on the OTAs in court and lost include Houston; Philadelphia; Anaheim, Calif.; and Branson, Mo. Notably, a 2010 ruling that awarded the city of San Diego $21.2 million was overturned in September 2011.

Conversely, Washington last September won a court ruling against the OTAs, marking what had been the highest-profile legal victory by a municipality in the five-plus years that local taxing authorities and the OTAs have been fighting over the issue.

Furthermore, in 2011, Florida's Orange County, which includes Orlando's Walt Disney World, reached a settlement with Expedia in which Expedia paid the county an undisclosed amount to resolve a 2006 case.

Naturally, many U.S. hoteliers are in favor of governments cracking down on OTAs for what they say are unpaid taxes because that removes the burden of hoteliers having to, or being asked to, make up the shortfall in tax revenue.

"Hotels are the first place they're going to go after to collect those taxes," said American Hotel & Lodging Association Executive Vice President Marlene Colucci, speaking last week on a panel at the Americas Lodging Investment Summit in Los Angeles. "We're very pleased with [the Hawaii decision]. … The tricky part is figuring out whether the OTAs will go ahead and pay."

As for Hawaii, financial responsibility for tourism-related taxes is all the more relevant because so much of the state's economy is built on a tourism industry that's rebounded strongly in recent years.

The state attracted nearly 7.2 million inbound visitors by air in 2011, up about 3% from 2010 and marking a 12% jump from 2009's total, according to the Hawaii Tourism Authority.

As a result, hotel revenue is surging. Oahu was the fastest-growing U.S. hotel market last year, when revenue per available room surged 17% from 2011, Smith Travel Research said last week. And Oahu's average room rates last year jumped 11% to $183.51, second only to New York's average of $251.59.

"Maui's on fire," said Choice Hotels International Vice President C.A. Anderson, speaking on a panel at the lodging summit last week. "And Honolulu's a very strong market."
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