Connecticut’s taxman says websites that buy up hotel rooms then market and resell them to consumers – think Orbitz, Travelocity, and Norwalk-based Priceline – are not paying their fair share of hotel taxes.
The Department of Revenue Services Commissioner Kevin Sullivan endorsed a bill Monday that seeks to tax hotel rooms resold by online travel companies like it currently does with brick and mortar hotels. He told the Finance, Revenue, and Bonding Commission that it’s a measure that should have been in place a long time ago.
According to Sullivan, the tax would bring in about $6 or $7 million, but he stressed that the bill is motivated by “fairness” rather than the need to increase revenue.
The legislature and Gov. Dannel P. Malloy have both said they’re not looking to increase taxes this year.
Priceline President and CEO Chris Soder told the committee the bill would be a “tourism killer” and cost the state money over time.
He cited research from the trade group Internet Travel Services Association (ITSA) that shows for every one percent increase in price, there is a corresponding two per cent drop in demand.
“I look at, for example Mystic Seaport compared to similar destinations in Rhode Island. I say ‘those are pretty comparable’, so a customer could easily say for the amount of a 3 percent difference, ‘I could easily go to Rhode Island’,” Soder said.
He said contrary to popular belief Priceline’s business model helps support hotels by selling rooms they were unable to sell. Some believe the company buys up blocks of rooms at a wholesale rate and then resells them after tacking on a “service fee.”
“We do not buy blocks of hotel rooms and resell them,” Soder said. “We run a website. We provide a service that allows hotels to market themselves to consumers around the world. Hotels remain in control of which rates they want to provide to us; we do not commit to an inventory of hotel rooms.”
But that raised questions about why the Connecticut Lodging Association, an association representing the state’s hotels, was supporting the legislation.
Chuck Moran, the association’s legislative director wrote in submitted testimony that the current tax structure is “neither fair nor justified.”
He said “online travel companies” should have to remit tax to the state the same way members of the Connecticut Lodging Association do, but right now they only pay tax on the discounted wholesale rate of the room when hotels and motels pay the full tax on rooms sold to consumers.
But not all lodging organizations agreed.
The Independent Lodging Industry Association, a California-based lobbying group, testified against the legislation claiming “Independent hotel owners rely on travel agents and online travel companies to help sell hotel rooms that would otherwise go unsold.”
However, the administration isn’t buying it.
Secretary of the Office of Policy and Management Ben Barnes lent his support to the bill explaining that when the tax code was written, it assumed that the hotel itself would be the ultimate entity that would sell the room, and didn’t account for the innovation of such Internet-based middlemen.
According to Barnes, the current tax system amounted to the state collecting tax on the “wholesale” price of the rooms, rather than the ultimate “retail” price.
The re-categorization of the websites’ markup as a service fee, “undercuts our ability to levy sales taxes on the retail price of goods in the Internet age,” Barnes said.
“A room is a room is a room, and at the end of the day… the remarketer is still getting the advantage of selling that room,” Sullivan said.
But Sen. Scott Frantz, R-Greenwich, said that he was wary of exacting another tax on business.
“I would caution that before we rush to put a new tax like this in there, regardless of the justification, that we take a very close look at what the effect is on business. My guess is that it may have a negative effect on the state of Connecticut,” he said.
Sullivan said he thought it was “far fetched” to imagine a situation where online re-marketing companies stop doing business with hotels in Connecticut as a result of the tax.
The commissioner further assured the committee that the tax would not apply to similar service providers like travel agents and event planners, only the online room resellers.
New York City, New York state, North and South Carolina, and Minnesota have similar tax legislation currently on the books.