Electronic Commerce

The Front Line of the E-Commerce Tax Battle, Part 1

(E-Commerce Times) - On the front line of the e-commerce tax are online travel companies, or OTCs, such as Expedia (Nasdaq: EXPE) , Hotels.com, Priceline (Nasdaq: PCLN) Travelocity and Orbitz (NYSE: OWW) . The issue is whether the OTCs should be collecting hotel room occupancy taxes on the difference in the price between what the OTC pays the hotel operator and the amount that customer pays to the OTC. For example, assume that an OTC in a jurisdiction with a 10 percent hotel room tax pays a hotel US$100 for a room night and then charges its customer $150. The OTC pays $10 in room taxes — but must the OTC collect a 10 percent room tax on the $50 markup? Increasingly, local tax authorities are saying that the additional tax must be paid.

The stakes are huge. On May 1, the San Francisco Tax Collector determined that Expedia owed $32 million in hotel room taxes, penalties and interest to the city. Expedia has filed a lawsuit to appeal this ruling, but this is just what a single city says it is owed by a single OTC in back taxes — albeit a city that is one of the top tourist destinations in the United States.

Still, it represents just a tiny fraction of the number of hotel rooms in the country — about three-quarters of one percent. At last count, there were 42 active lawsuits in which tax authorities assert that the OTCs owe what could ultimately amount to several hundreds of millions of dollars in back taxes, penalties and interest. In addition to these potential tax liabilities, a requirement that OTCs collect hotel room taxes in the future would increase their customers’ out-of-pocket costs and possibly impact the earnings of the OTCs.

Read full story

© 2009 Business News Today.