Md. Senate Approves Hotel Tax Loophole Legislation

OCEAN CITY — In an issue near and dear to the resort area with its thousands of hotel and motel rooms, the state Senate this week passed legislation that would close a loophole that allows online booking companies to remit less sales tax to the state than their traditional counterparts.

Senate Bill 190 would clarify the definition of “taxable price” for the sales and use tax as it applies to third party vendors, such as Orbitz, Expedia or Priceline, which buy blocks of hotel rooms at a wholesale price and sell them to consumers at or near the regular retail price. Online travel agents (OTAs) buy blocks of hotel accommodations in areas like Ocean City, for example, at lower wholesale rates and then sell them to consumers at higher rates.

It’s in 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 low allows the OTAs and brick and mortar travel agencies to remit to the state the sales and use tax only on the discounted rate and not the entire rate charged to the consumer.

In simpler terms scaled down for the sake of math, if an OTA hotelier charges $100 for a hotel room, the sales tax remitted to the state is six percent, or $6. However, an OTA might buy the same room for $80 and then sell it to the consumer at the same $100, but only remit to the state six percent on the $80 for which it booked the room, or around $4.80.

Senate Bill 190, which the passed the full Senate by a vote of 32-15 this week, would close that loophole and force the OTAs to remit the entire sales and use tax to the state. In the long run, the bill does not lower the cost of a hotel room for the consumer, but only forces the OTAs to pay the same tax rate to the state as the regular hoteliers.

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For the OTAs, the bill is seen as a new tax that will only hurt the travel industry across Maryland including Ocean City.

“By levying a new sales tax on more than 1,100 local travel agents and the online travel companies that help local destinations market themselves to global consumers, Senate Bill 190 makes Maryland hotels more expensive, hurts local small businesses and makes the state less competitive,” said Travel Technology Association President Steve Shur.

However, the lodging industry, including the Ocean City Chamber of Commerce, the Ocean City Hotel-Motel-Restaurant Association and others, believe the bill levels the playing field and generate more sales and use tax for the state from hotel bookings without any added expense for the consumer.

“This action in the Senate is good news for the state of Maryland and good news for hotel guests in Maryland who booked their rooms using an online travel company,” said Maryland Hotel and Lodging Association President and CEO David Reel. “It is good news for the state as enactment of this bill will generate more state sales tax revenue without a new tax of an increase in an existing tax rate.”

Reel said the legislation, if approved, would benefit consumers because they have paid the sales and use tax on the entire cost of the room, but see the OTAs turn around and remit less tax to the state.

“It is also good news for all the guests of Maryland hotels who booked their rooms using an online travel company and have paid the full amount of tales tax on that room, but have ended up with only a part of their sales tax payment being remitted to the state by the online travel companies,” said Reel.

However, 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.”

“Masked as a bill to close a loophole, this travel service tax would do nothing more than burden an industry that brings valuable jobs and commerce into the state,” said Shur. “Courts across the nation have looked at the issue of whether online travel companies collect and remit the proper amount in taxes. In every court decision, courts found in favor of the online travel companies.”

Despite a widespread assumption that online travel company room rates are lower than the rates secured directly from a hotel, the fact is, after booking a room, the online travel websites collect the same amount of money from consumers as the hotels do, but shortchange the state by remitting less sales and use tax. Senate Bill, 190, approved by the Senate this week and sent over to the House, would level the playing field, according to Reel.

“This legislation represents a common-sense solution to a simple problem without raising taxes or increasing the rate of a current tax,” he said.  “The tax code shouldn’t pick winners and losers, and it certainly shouldn’t disadvantage the hotels that are driving economic growth and job creation in Maryland.”