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Florida Tourist Development Tax Association

Florida Tourist Development Tax Association. OTC Litigation & Legislative Highlights Nationwide July 28, 2011. Overview. Terminology Models Examples Arguments Legislation & Litigation Administrative Responses. Terminology. OTC Terminology. Online Travel Companies (OTC)

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Florida Tourist Development Tax Association

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  1. Florida Tourist Development Tax Association OTC Litigation & Legislative Highlights Nationwide July 28, 2011

  2. Overview • Terminology • Models • Examples • Arguments • Legislation & Litigation • Administrative Responses

  3. Terminology

  4. OTC Terminology • Online Travel Companies (OTC) • Referred to as Third Party Intermediary or Room Remarketer. • Arranges for the transfer of occupancy of accommodations. • Discounted Rate – Agreed rate charged to the OTC by the hotel operator. • Posted Rate – Room rate paid by the customer to the OTC. • Facilitation Fee: • Profit margin (mark-up) earned by the OTC. • Difference between Posted & Discounted rate. • Service Fee: • Form of service charge set by OTC website. • Bundled with tax & shown as “Taxes & Services Fees”.

  5. Models

  6. Three Models • Direct Hotel Booking • Commissionable Travel Agent Model • Travel agent (i.e. American Express). • Commission received by travel agent. • Merchant Model – Wholesale • Transparent • Consumer selects both the rate and the hotel. • Opaque • Consumer selects price, area and hotel class, • Actual hotel name revealed only after payment.

  7. Examples

  8. Consumer Hotel Website Hotel Tax Jurisdiction Example – Direct Hotel Booking • Consumer confirms reservation on Hotel Website at $100 without up-front payment • Hotel Website sends reservation information to specific hotel selected by consumer. • Room rate + applicable taxes ($110) are paid directly by guest to hotel at check-out • Taxes on room rate ($10) are remitted by hotel to appropriate tax jurisdiction Note – Tax Rate 10% for illustration purposes • Consumer pays$110at check out • -Room rate $100 • -Tax on gross room rate $10 Reservation Information Reservation Information Room rate + tax $100+$10=$110 Tax $10

  9. Consumer Website/T.A. Hotel Tax Jurisdiction Website Example - Travel Agent (Commissionable) • Consumer confirms reservation at $100 without up-front payment • Website or travel agent sends reservation information to hotel • Room rate + applicable taxes ($110) are paid directly by guest to hotel at check-out • Website or travel agent compensated by commission ($10) paid by hotel • Taxes on room rate ($10) are remitted by hotel to appropriate tax jurisdiction Note – Tax Rate 10% for illustration purposes • Consumer pays$110at check out • -Room rate $100 • -Tax on gross room rate $10 • -Commission rate 10% (paid by hotel) Reservation Information Reservation Information Room rate + tax $100+$10=$110 Commission$10 Tax $10

  10. Consumer Website Hotel Tax Jurisdiction Example – OTC Merchant Model • Customer pays$110 in advance • -”Discounted Rate” $100 • -Tax on discounted rate $8 • -Website service fee $2 • At time of booking, OTC website collects from consumer: • “Posted rate” ($100) (set by OTC) comprised of: -$80 Discounted rate (set by hotel) -$20 Facilitation fee (set by online website) • Taxes based on thediscounted rate($80 * 10%)($8) • Website service fee ($2)(Set and charged by OTC website) • Consumer stays at property(Hotel has not yet received room & tax from OTC) • OTC later pays hotel discounted rate ($80) + taxes ondiscounted rate($8)(Previously collected by OTC at time of booking) • Hotel remits taxes on discounted rate ($8) to appropriate tax jurisdiction Note – Tax Rate 10% for illustration purposes Discount rate + Facilitation fee + tax + Service fee $80+$20+$8+$2 =$110 Reservation Information Reservation Information Discounted rate + tax $80+$8=$88 Tax $8

  11. Example – Hotel Booking vs. OTC

  12. Direct Hotel Booking $100 room rate booked by consumer $100 received by hotel N/A $10 in taxes collected (Note A) $10 in taxes remitted to Tax Jurisdiction $100 Net profit to hotel N/A $10 Total paid in taxes $0 Difference in tax Note A - Tax rate @10% Merchant Model $100 room rate booked by consumer $80 paid to hotel $20 margin retained by OTC $10 in “Taxes & Service Fees” (Note A) $8 in taxes remitted to hotel $80 Net profit to hotel $22 retained by OTC $8 Total paid in taxes $2 Difference in tax Comparison – Hotel vs. OTC Booking

  13. Issues • Is the Facilitation Fee and Service Fee subject to state & local sales tax and/or occupancy taxes? • OTCs claim: • This is a retail transaction with two components: • Room rental component and • Service component. • OTCs argue that they are service providers – merely facilitating the rental of a hotel room by a customer. • If the Facilitation Fee and Service Fee is subject to tax, who (hotel operator or OTC) should collect and remit the tax and file the appropriate tax return? • Dual remittance system, or • Single remittance system

  14. Dual vs. Single Remittance • Dual Remittance: • OTC collects tax on the posted rate & remits tax on discounted rate to the hotel. • Hotel remits tax to the state & local jurisdictions based on the discounted rate. • OTC remits tax to the state & local jurisdictions based on the difference between the posted rate and the discounted rate. • Single remittance • OTC collects tax on the posted rate. • OTC will remit the full amount of tax to the hotel. • Hotel responsible for remitting the full amount of tax to the state & local jurisdictions.

  15. Single Remittance - Safe Harbor Provision • No assessment shall be made against an accommodations provider (Hotel) for any of the amount of tax due related to the Online Travel Companies (OTC’s) accommodations fee (the difference between the full room charge and the discounted room charge) that is neither collected by the OTC nor provided to the Hotel from the OTC.   • Assessment for unpaid tax associated with the OTC’s accommodations fee may only be pursued against an OTC and not against the Hotel.   • If the OTC provides sufficient evidence that such tax was properly remitted to the Hotel to be reported and paid, such jurisdiction may then have the right to pursue the Hotel for such unpaid taxes.

  16. Brief Recap • Applicable taxes are already being collected by OTC websites on wholesale rate and remitted via local hotels. • Hotels are not aware of actual selling price to consumer. • Complete data on amounts received from consumers resides only in the hands of the OTCs. • OTC websites are able to collect taxes on entire consumer payment as applicable net rate revenue taxes are levied today.

  17. ArgumentsTax Jurisdictions vs. OTCs

  18. Tax Jurisdictions

  19. Arguments – Tax Jurisdictions • Tax Jurisdictions claim: • OTCs are: • Hotel operators, • Control occupancy and/or are • Resellers of hotel rooms. • OTCs should pay tax on the full amount paid by the consumer, not the lesser discounted rate the hotels receive.

  20. Impact on Tax Jurisdictions • Jurisdictions understand that hotel taxes are a vital revenue source. • Tax revenues are used for a variety of public purposes: • Promote and advertise tourism • Pay bond obligations. • Convention center development • Cultural and art centers development • Sports arenas, coliseums • Convention and publicity bureaus • Tourist information centers • Fund park facilities & improvements • Shoreline protection

  21. OTCs

  22. Arguments – OTCs • Nexus • Taxing the travel agency commission • New tax • Internet Tax Freedom Act Moratorium • Higher cost to traveler • Others: • OTCs do not purchase rooms • Double taxation to OTCs • Administrative tax compliance burden • Dampen tourism & reduce number of visitors, • Result in job losses to travel industry • Diminish tax revenues. • Create major paperwork for small businesses, • Disincentive for OTCs to do business in jurisdictions.

  23. 1. Nexus Substantial nexus must exist between the taxing jurisdiction and the OTCs • OTCs have substantial nexus. • Travelscape employees & representatives visited South Carolina. • This enabled Travelscape to establish & maintain hotel relationships. • Those relationships helped Travelscape to establish & maintain a market in the state for its sales. South Carolina Supreme Court. Travelscape, LLC v. SC DOR, January 18, 2011.

  24. 2. Taxing Travel Agency Commission • The commissionable travel agent model is entirely different than the OTC merchant model • Travel agents typically charge a commission. • OTCs charge a markup. • Under the commissionable travel agent model: • The full room rate is taxed and, • The hotel pays a % commission out of the fully-taxed room charge. • Tax jurisdictions are not attempting to tax the travel agent commission. • Tax jurisdictions are attempting to tax the OTC markup.

  25. 3. New Tax Is this a new tax? • Hotels incur the same kinds of marketing and room booking services (sometimes referred to as centralized services) as OTCs. • Hotels are not allowed to deduct an allocated amount of their services from the retail room charge • Not taxing the OTC markup in effect creates a loophole, producing a tax windfall for the OTCs.

  26. 4. Internet Tax Freedom Act Moratorium Internet Tax Freedom Act of 1998 (ITFA) • Placed a moratorium on the imposition of taxes on • Internet access services and, • Multiple or discriminatory taxes on electronic commerce.. • State & Local jurisdictions may not: • Impose a tax on charges to access the internet, and • Collect tax on internet purchases at a rate different than purchases made through other mediums (such as traditional "brick and mortar" stores).

  27. 5. Higher cost to traveler • Market is highly competitive. • OTCs are charging their customers profit-maximizing room rates. • If OTCs raise rates to cover the tax, customers can easily compare the OTC rate to the rate charged on the hotel website. • OTCs will most likely bear the cost for most or all of the taxes.

  28. 6. Other Arguments • OTCs do not purchase rooms • Double taxation to OTCs • Administrative tax compliance burden • Dampen tourism & reduce number of visitors, • Result in job losses to travel industry • Diminish tax revenues. • Create major paperwork for small businesses, • Disincentive for OTCs to do business in jurisdictions.

  29. Legislation & Litigation

  30. Legislation & Litigation • State and Local tax jurisdictions have sought to address the issue through: • Legislation, • Litigation • Administrative provisions • Several jurisdictions are taking steps legislatively to: • Amend statutes & ordinances • Modernize the language, and • Clarify that the full room rate is subject to tax.

  31. Current Statutes & Ordinances • How are taxes measured or based for hotel/lodging accommodations? • Retail sales • Sales price • Amount paid to hotel/hotel operator • Amount paid for the room • Amount paid by the guest • Occupancy or right of occupancy • Accommodations • Other

  32. Florida Statutes 212.03(1)  • It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of renting, leasing, letting, or granting a license to use any living quarters or sleeping or housekeeping accommodations in, from, or a part of, or in connection with any hotel, apartment house, roominghouse, tourist or trailer camp, mobile home park, recreational vehicle park, condominium, or timeshare resort. • For the exercise of such taxable privilege, a tax is hereby levied in an amount equal to 6 percent of and on the total rental charged for such living quarters or sleeping or housekeeping accommodations by the person charging or collecting the rental. • Such tax shall apply to hotels, apartment houses, roominghouses, tourist or trailer camps, mobile home parks, recreational vehicle parks, condominiums, or timeshare resorts, whether or not these facilities have dining rooms, cafes, or other places where meals or lunches are sold or served to guests.

  33. Florida Statutes 212.03(2)  • The tax provided for herein shall be in addition to the total amount of the rental, shall be charged by the lessor or person receiving the rent in and by said rental arrangement to the lessee or person paying the rental, and shall be due and payable at the time of the receipt of such rental payment by the lessor or person, as defined in this chapter, who receives said rental or payment. • The owner, lessor, or person receiving the rent shall remit the tax to the department at the times and in the manner hereinafter provided for dealers to remit taxes under this chapter. • The same duties imposed by this chapter upon dealers in tangible personal property respecting the collection and remission of the tax; the making of returns; the keeping of books, records, and accounts; and the compliance with the rules and regulations of the department in the administration of this chapter shall apply to and be binding upon all persons who manage or operate hotels, apartment houses, roominghouses, tourist and trailer camps, and the rental of condominium units, and to all persons who collect or receive such rents on behalf of such owner or lessor taxable under this chapter.

  34. Report No. 2005-131- Prepared for the Florida Senate Application of the Tourist Development Tax to the Sale of Discounted Hotel Rooms Over the Internet and the Hotel Rewards Points Program • In Florida, tax on transient rentals is due on the total rental charged for the transient rental. • Tourist development tax is collected and remitted based on the total consideration charged for the accommodation. • The current practice of Internet intermediaries remitting taxes on the discounted rate paid by the Internet intermediaries to the hotels and not on the higher amounts actually paid by the customer occupying the room is in violation of Florida law. Page 27

  35. Legislation

  36. Legislation Proposed by the OTCs • Federal • Proposed bill - Internet Travel Tax Fairness Act (ITTFA) • Prohibit all states & municipalities from taxing anything beyond the wholesale rate for rooms reserved through an OTC.  • Prohibits hotels and other accommodation providers from creating an OTC. • OTCs attempted to attach this provision to several bills in Congress, without success. • California • Proposed bill prohibits CA municipalities from taxing anything beyondthe wholesale rate for rooms reserved through an OTC.  • Several attempts by the OTCs to attach this provision to legislation have been defeated.

  37. Legislation Proposed by the OTCs • Florida • SB 376 prohibits FL Counties from taxing anything beyond the wholesale rate for rooms reserved through an OTC.  • The bill was defeated in the 2011 legislative session. • Missouri – HB1442 (Passed July 8, 2010) • Transient accommodations tax will apply solely to amounts actually received by the hotel operator. • Under no circumstances shall a travel agent or intermediary be deemed an operator of a hotel.

  38. Legislation Proposed by the OTCs • American Legislative Exchange Council (ALEC) • Assists in developing model laws for state legislatures. • Model OTC bill: • Clarifies that a service which helps travelers research, compare & book hotel reservations is not subject to taxes imposed on hotel operators. • Approved by ALEC Board of Directors, September 19, 2010.

  39. Legislation Proposed by the OTCs • OTCs claim: • Proposed legislation would halt the imposition of newtaxes, and • Preserve the status quo of hotel occupancy taxes based only on hotel occupancy, not other services. • Tax Jurisdiction claim: • Preemption of state & local taxing authorities over the OTCs: • Most jurisdictions oppose any federal legislative initiatives that would preempt state & local taxing authority over OTCs. • Will adversely affect state & local government budgets • Hotel Industry claim: • Tax jurisdictions would be prohibited from taxing the OTCs directly. • Create an exemption (tax loophole) for one industry • Jurisdiction’s only recourse would be to assess the hotels for the tax.

  40. Legislation Requiring OTCs to Remit Tax • New York • Enforces sales tax on hotel rooms sold by OTCs • Requires dual-remittance, making OTCs report their own tax. • Effective 9/1/10. • North Carolina (SB 897) • Requires OTCs to report the total room price to the hotel, and • Hotel remits the total tax on the sale price reported by the OTC. • Single remittance. • Effective 1/1/11.

  41. Legislation Requiring OTCs to Remit Tax • District of Columbia • An amendment passed at the end of 2010 requiring OTCs to pay hotel occupancy taxes on the full price of the room paid by consumers making reservations through the OTCs' websites. • Effective 4/8/11. • San Francisco • Hotels must require OTCs to collect & remit tax on full amount paid by guests. • If OTCs fail to remit the full tax, the City will hold the hotels responsible.

  42. Other OTC Legislation • Arizona – City of Phoenix (AZ League of Cities) considering legislation to tax the OTC’s on the entire room rate. • Connecticut – HB 6626 a bill that taxes the OTC’s on the entire room rate. • Hawaii – SB1321 a bill that taxes the OTC’s on the entire room rate. • Ohio – Considering legislation that taxes the OTC’s on entire room rate. • Pennsylvania – HB1651 a bill that taxes the OTC’s on the entire room rate • San Francisco – Proposition J and Proposition K • Both sought to close remittance gap but Prop. J would have added 2% increase in hotel tax. • Both measured failed in the November 2010 election.

  43. Other OTC Legislation • Texas – HB 1454 Bill that requires hotel occupancy tax be paid on the total price paid for a hotel room. • Virginia – SB 972 introduced January 12, 2011 to tax the OTC’s on entire room rate. (Defeated) • VA legislation called for dual remittance with an election for single remittance.  • Appears to be a provision that was added if the OTCs raise the administrative burdens due to additional tax compliance.

  44. Litigation

  45. Litigation • Many tax jurisdictions have sought clarification through litigation. • Court decisions are mixed because outcome turns on a host of factors: • Judicial interpretation of applicable statutes and ordinances, • Whether the locality complied with mandatory administrative tax assessment procedures prior to bringing suit against the taxpayers, and • The degree of control the OTC exercises with respect to the room rentals. • Statutes and ordinances are vague on the issue. • Expanding interpretation of existing statutes & ordinances to encompass a new way of doing business • Merchant model wasn’t contemplated when the statutes & ordinances were originally drafted.

  46. Decisions in the Jurisdictions Favor • New York • State district judge rejected as “baseless” and contrary to the plain language of enabling legislation the claim by OTCs that NYC had illegally passed a law to require OTCs to collect hotel tax on the entire amount paid by consumers to occupy hotel rooms. • Requires the tax be separatelystated on any bill, statement or charge for the room. New York State Supreme Court, 10/22/10. • South Carolina • OTCs required to remit sales tax on the gross proceeds it received from providing hotel reservations in SC: • Engaged in the business of furnishing accommodations, and • Tax was constitutionally imposed since OTC used employees & representatives to enable the OTC to establish & maintain a market for selling rooms in the state. .  South Carolina State Supreme Court, January 18, 2011  • Georgia • Found that OTCs had agreed to collect hotel taxes through their contracts with the hotels and by virtue of these agreements were duty bound to collect and remit hotel taxes to the appropriate government entity. City of Columbus, GA (GA Supreme Court v. Expedia 6/15/09) & (GA Supreme Court v. Hotels.com 10/5/09)

  47. Decisions in the Jurisdictions Favor • Georgia • OTCs that book hotel rooms in Atlanta must pay the city more in occupancy taxes. However, the court held that the city does not have a remedy for recovering back taxes the companies have failed to pay. The ruling addresses a lawsuit filed by city in 2006 against 17 online companies, including Hotels.com, Expedia, Travelocity and Orbitz. GA Supreme Court , May 16, 2011. • Texas • A jury entered a unanimous verdict that OTCs control the rooms they sell and that additional hotel taxes were due, finding in favor of over 170 Texas cities that have passed laws regarding hotel taxes with the same or similar language. In the matter of City of San Antonio v. Hotels.com, October 30, 2009 • Tennessee • A judge denied the OTCs’ motion to dismiss because it was “clear that the drafters intended to tax the consideration paid by consumers for hotel rooms, and the ‘operator’ language is such that it applies to the [OTCs], regardless of the fact that the [OTCs] did not exist at the time that language was drafted.” The City of Goodlettsville, TN v. Priceline.com, Inc., March. 31, 2009.

  48. Administrative Responses

  49. Administrative Responses • Some jurisdictions have chosen to address the issue by issuing: • Regulations, • Private letter rulings, • Tax bulletins. • Indiana • Letter of Finding No. 08-0435. January 1, 2009 • Tax is due by an OTC on the full amount of room revenue. • City of Chicago amended their ordinance to define operators to be: • Any person who has the right to rent and lease hotel accommodations to the public for consideration. • Terminology includes, persons engaged in the business of selling or reselling hotel accommodations. January 1, 2008 • New York City: • Include “room remarketers” as subject to the tax, and • Imposed the tax on the full retail rental of the room. • Enacted changes to their ordinances, effective September 1, 2009

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