We've said this before, but we're going to say it again: Somebody needs to put an end to the ludicrous litany of litigation that has been going on about the proper way to calculate occupancy taxes when consumers book through online travel agencies (OTAs).
In the latest development, a Cook County judge in Chicago has ruled that OTAs may owe tens of millions in taxes because they, and the hotels they work with, have been calculating the occupancy tax on their wholesale rates rather than the retail price paid by the consumer.
The decision is the latest replay of a string of tax assessments, lawsuits and other legal maneuvers by local governments that has been playing out from California to Florida over the last seven years.
By now, we're all familiar with the basic conundrum. In a city with a 5% occupancy tax, a hotel takes a room with a rack rate of $200 and offers it to an OTA on a wholesale basis for $80. An online shopper books it for $120, including "taxes and service." The OTA remits $80 to the hotel, plus $4 to cover the tax (5% of $80). The remaining $36 is the OTA's mark-up.
At this point, everybody's happy except the tax collector. Because this room was discounted from the rack rate, he knows he's not going to get his full $10 (5% of $200). But if he knows that the guest paid $120, he figures he's entitled to 5% of that, or $6. Instead, he gets $4.
Give or take a few details, this scenario has given rise to dozens of lawsuits, which is unfortunate because courtrooms are adversarial forums that are not prone to produce win-win solutions. The OTAs have won some, lost some and settled others, but the result is a messy patchwork that's just bad for business.
Besides, there are no bad guys here. The OTAs and the hotels are just trying to make a buck, and the local governments are merely trying to carry out tax laws that may have been written in a simpler day.
Our solution to this mess is to do away with percentage-based occupancy taxes. If cities, counties and states would enact occupancy taxes as a flat dollar fee per night, all of this could be avoided. If the tax is $10, then it is always $10, regardless of whether the room is booked on a merchant-model basis, a commissionable basis or some business model that's yet to be invented.
Flat taxes are often criticized as regressive because they have a greater impact on lower-income consumers, but this is less of a problem if travel taxes are set at reasonable levels in the first place.
An added benefit is that a flat tax becomes instantly transparent to the customer and would no longer be hidden away as an unknown component of "taxes and fees."
Win-win-win.