Hawaii high court says OTAs not liable for occupancy taxes

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Hawaii's supreme court last week ruled that the state cannot hold online travel agencies (OTAs) responsible for paying occupancy taxes for booked rooms, but to cover general excise taxes the state will keep a portion of the $247 million the OTAs paid in a 2013 lower court ruling.



OTA representatives and Hawaii's attorney general both touted the ruling as a victory.

According to the March 17 ruling, the state will refund "the vast majority" of the $247 million that nine OTAs, including Expedia, Priceline, Orbitz and Travelocity, paid into a fund as a result of a lower-court ruling.

The court ruled that the OTAs owed excise taxes on the revenue they had generated since 2000, even though the companies had no physical presence on the islands. Hawaii Attorney General Doug Chin estimated the amount the state will keep in back taxes at "up to tens of millions of dollars," while local reports are pegging the amount the state will keep from the OTAs at about $70 million.

The excise taxes apply to the more than $2.7 billion in Hawaii hotel room sales made by OTAs since 2000, suggesting that OTAs withheld from state coffers about 4% of the room revenue they had booked during the past dozen years.

"On top of those back taxes, we believe online travel companies must pay [general excise] taxes to the State of Hawaii for the past years up to the present and going forward, based on this ruling," Chin said in a March 17 statement. "These online travel companies derived substantial revenues from the sale of Hawaii hotel rooms and they need to pay their fair share."

The state also had been seeking more than $400 million in what it said were unpaid hotel-room occupancy taxes, but the state supreme court ruled that the OTAs were not responsible for those taxes.

"Online travel companies are not hotels, and therefore should not be paying hotel taxes," Travel Tech President Steve Shur said in a separate statement released March 17. "We applaud today's confirmation and well-reasoned decision by the Hawaii Supreme Court that Hawaii hotel taxes do not apply to [OTAs] and the amount they charge for their online services."

Hawaii is one of the more than two dozen state and local governments that have taken on the OTAs in court because the giant online agencies typically pay hoteliers about 25% less per room than they charge their customer, then pay taxes on the discounted rate instead of the full rate, 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. On the flip side, Washington, D.C., and Florida's Orange County, which includes Orlando's Walt Disney World, have won legal victories against OTAs involving occupancy-tax payments.

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 its tourism industry, which has rebounded strongly in recent years. In terms of demand per hotel, Oahu is the second most lucrative U.S. market, after New York City, with islandwide occupancy surpassing 84% last year, according to STR.

Investors appeared to view the Hawaii decision as favorable to the OTAs. Shares of Expedia, the OTA that books the most U.S. travel, rose almost 2% on March 18, the first trading day after the ruling, while Priceline shares were up 2.4%. Expedia acquired Travelocity in January and reached an agreement to acquire Orbitz last month.
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