Legislation Looks To Close Tax Loophole On Hotel Rooms

OCEAN CITY — Online hotel booking agencies and travel agents that sell rooms in Ocean City and across the state are crying foul over a bill introduced in the General Assembly that would clarify the sales and use tax laws for accommodations, but state and local lodging associations this week are calling them out on it.

Senate Bill 190, introduced last week by four state senators, would clarify the definition of “taxable price” for the sales and use tax as it applies to third-party vendors, such as Orbitz or Priceline, or regular brick-and-mortar travel agencies. Online travel agents (OTAs) buy blocks of hotel accommodations in areas like Ocean City, for example, at wholesale rates and then sell them to consumers at higher rates.

It’s an established business practice that allows the OTAs to provide lower prices for consumers than what they might get in dealing directly with the hotels. However, a loophole in the current law allows the OTAs and other travel agents to remit the sales and use tax only on the discounted rate and not the entire rate charged to the consumer. Senate Bill 190 would close that loophole and force OTAs to remit the entire sales tax amount to the state.

In simpler terms scaled down for the sake of math, if an Ocean City hotelier charges $100 for a hotel room, the sales tax remitted to the state would be $6, or 6 percent. In that example, the hotelier would collect the $100 for the room and remit $6 to the state for the sales and use tax. However, an OTA might buy the same room at the wholesale rate of $80 and charge the consumer the full $100 plus the $6 sales and use tax.

The OTA would then remit to the state 6 percent of the $80 wholesale rate, or $4.80, and pocket the remaining $1.20 in sales tax along with the $20 less it paid for the room at the wholesale rate. In either example, the consumer would still pay the $106, but in the latter example, the OTA would pay much less in sales and use tax to the state. Senate Bill 190 would close that loophole and hold the OTAs and travel agencies liable for the full sales and use tax on the retail hotel room rate.

Of course, in the above example, the $100 a night rate is fictitious and the difference of $1.20 in sales in use tax seems minor, but hotel rooms in Ocean City and across the state sell for much higher rates. Extrapolated across thousands of rooms rented each and every day at much higher rates than the $100 used in the example, the lost revenue for the state could be significant.

The OTAs and travel agencies are calling Senate Bill 190 a new tax on hotel rooms and characterizing the legislation as another way for the state government to get into the pockets of consumers and small businesses in Maryland. For example, Travel Tech, whose members include Priceline, Expedia and Orbitz, among others, called the legislation “a stunning move with wide-ranging implications on Maryland’s travel and tourism economy.”

“The most recent election was a clear signal to Annapolis that business-as-usual wouldn’t fly,” said Travel Tech President Steve Shur this week. “Marylanders want a government that promotes a thriving and innovative business climate that makes life better for all. Sadly, these State Senators didn’t get the message and sticking to the antiquated and false idea that we can tax ourselves to economic growth and prosperity.”

Not so fast, said state and local hotel and lodging officials, who said this week the bill merely closes a loophole that allows the OTAs to pay less sales and use tax than their member hotels and motels and does not represent any increase in the cost of a room to the consumer.

Ocean City Hotel-Motel-Restaurant Association Director Susan Jones aid at first glance it appears to level the playing field between the association’s members and the OTAs that book the same rooms.

“I have only just read it, but at a quick glance, it looks like the state needs to clarify the law on this,” she said. “They should pay the same tax rate on rooms that our hotels do. It’s just not a level playing field.”

Maryland Hotel and Lodging Association President and CEO David Reel agreed with Jones the proposed legislation simply closes a loophole that allows the OTAs to pay less sales tax.

“When a guest pays at checkout, they pay the sales tax on the retail rate,” he said. “The OTAs collect the full sales tax rate, but remit only the portion on the wholesale rate they paid for the room. It’s a remittance issue more than a tax issue. They’re taking advantage of a loophole and it’s costing the government money. It’s just not right and it’s not fair to the operators who are remitting the full sales tax amount on rooms.”

Reel called the OTAs’ bluff on the notion the proposed bill would amount to an increase on room rates that would be borne by the consumer and ultimately hurt tourism and travel in Maryland.

“It’s very disingenuous for them to say this sales tax is hurting tourism,” he said. “That’s a pretty sweeping statement. It will, in fact, increase the amounts of sales tax remitted to the state, which, in turn, provides additional revenue for high return on investment state programs like tourism promotion.”