RD384 - Study on the Feasibility of Implementing Senate Bill 452 (2010)

  • Published: 2010
  • Author: Department of Taxation
  • Enabling Authority: Letter from House of Delegates Committee on Finance, dated March 2, 2010.

Executive Summary:
During the 2010 Virginia General Assembly session, several bills were introduced that sought to clarify the taxability of certain fees imposed by online travel companies (“OTC’s”). Generally, OTC’s contract with hotels and other accommodation providers for the right to broker or facilitate the reservation of hotel rooms online at a discount rate. Hotels and other accommodations providers make a number of rooms available at a discounted rate, which the OTC can make available to its customers for reservation online. While the OTC collects sales or occupancy taxes on the wholesale room rate that the accommodations provider charges the OTC, as well as any charges associated with the rental of the room and any taxes associated with those charges, the OTC does not charge or collect tax on the separate charge for providing the online reservation, despite that this charge is embedded in the total amount the guest is charged for the room. Because most state sales tax statutes and local occupancy tax ordinances were drafted prior to the advent of the Internet, they do not address the taxability of this wholesale to retail differential.

In 2006, the Tax Commissioner issued Public Document (“PD”) 06-139, which concluded that the differential is not subject to the Retail Sales and Use Tax, based upon the definition of “retail sale,” in Va. Code § 58.1-602, the language in the Retail Sales and Use Tax imposition statute, and the language interpreting these statutes, set forth in Title 23 of the Virginia Administrative Code, § 10-210-730. Because the statute defines retail sale as “the sale or charges for any room or rooms…by any hotel, motel…or any other place in which rooms, lodging, space or accommodations are regularly furnished to transients for a consideration,” the Tax Commissioner concluded that accommodations charges must be imposed by the entity that is providing the accommodations in order to be subject to the Retail Sales and Use tax. As OTC’s do not own or operate the facilities in which the accommodations are being provided, the Tax Commissioner determined that OTC’s are not required to collect and remit the applicable sales taxes.

In 2010, Senate Bill 452 and House Bills 791 and 893 were introduced in the Virginia General Assembly to change the policy established in PD 06-139. The bills would have mandated that OTC’s separately state and collect the Retail Sales and Use Tax and the applicable transient occupancy taxes on the differential retained by OTC’s. Senate Bill 452 passed the Senate unanimously before the full Finance Committee of the House voted to hold the bill over until the next year’s legislative session and directed the Virginia Department of Taxation to study the implications of enacting the legislation.

States and localities have differed in their approaches to determining whether the wholesale to retail differential retained by OTC’s are subject to state sales and local occupancy taxes. Many localities have sought clarification through litigation, and the decisions in the court cases have turned on a host of factors, including the language of the statute or ordinance, 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. As of the completion of this study, few of these cases have reached final adjudication. Generally, where the statute or ordinance’s language requires that the charge be imposed by the operators or owners of the accommodations, the courts have often dismissed the local government’s suit seeking to impose the local sales or occupancy tax on the mark-up fee, concluding that OTC’s are not operators or owners of the accommodations.

Some states and localities have made determinations as to the taxability of these charges administratively. As with the courts, they have looked to the language in the statute or ordinance or the structure of the transactions to determine the taxability of the fees. Often, when state or local officials have interpreted the differential as being subject to sales and occupancy taxes, OTC’s have appealed these decisions in court.

During the 2010 legislative session, several states sought to enact legislation to provide clarification as to whether the differential is subject to state or local tax. To date, New York and North Carolina are the only states that have enacted legislation taxing the OTC’s mark-up fees. New York’s legislation took effect on September 1, 2010, while OTC’s will be required to begin collecting the tax in North Carolina beginning January 1, 2011. Bills introduced in 2010 in the state of Florida and Minnesota ultimately failed. A bill introduced and passed during Missouri’s 2010 legislative session is one of the few bills that declares that these amounts are not subject to state sales or local transient occupancy taxes.

With only two states having enacted laws imposing the tax on the differential as of the release of this study, there is little guidance as to how to structure provisions to tax this amount, so as to properly address the possible issues that have been identified as potential impediments to the enactment of legislation, or that may decrease the potential revenue of imposing the Retail Sales and Use Tax and local transient occupancy taxes on the mark-up amount retained by OTC’s.

Virginia stands to gain an additional $4.61 million in Fiscal Year 2012, $4.76 million in Fiscal Year 2013, and $4.91 million in Fiscal Year 2014 in Retail Sales and Use Tax and local transient occupancy tax revenues from the passage of this bill. Critics of Senate Bill 452 have identified several factors that could potentially decrease this estimate. For example, some OTC’s have raised the issue of nexus as a barrier to taxing these fees, arguing that out-of-state OTC’s that do not have nexus with Virginia would be exempted from the requirement to charge or collect the tax, which, they argue, could decrease the likelihood of additional revenue in Virginia. In the few court cases in which OTC’s have raised the issue of nexus, this argument has not prevailed. Further, OTC’s are currently seeking federal legislation that would prevent states and localities from imposing their sales, use, or occupancy taxes on the OTCs’ reservation fees. Any such legislation, if enacted, would preempt a Virginia statute authorizing the imposition of these taxes.

States and localities must give additional consideration to the impact legislation will have on their current taxing structures. Some OTC’s contend that they are providing services; thus, they argue that taxing the fees for these services as a component part of the accommodations is a departure from Retail Sales and Use Tax conventions in those states in which services are not taxed. This study addresses Virginia’s current treatment of unrelated services bundled with the provision of accommodations. As these transactions are included in the taxable base, and thus, subject to tax in Virginia, imposing the tax on the mark-up fee would not significantly depart from Virginia’s Retail Sales and Use Tax conventions in this regard.

State and local governments must also give consideration to the impact such legislation would have on the taxing jurisdiction, travel intermediaries, and accommodations providers. The online travel industry contends that a bill of this nature would most heavily impact online travel intermediaries, as they would be subject to additional administrative burdens in filing taxes for each local jurisdiction. In addition, if the bill is drafted to require the OTC to separately state the tax for each individual charge, OTC’s may be forced to reveal their confidential negotiated discount rates at which the accommodations providers make their rooms available. This could potentially discourage travelers from using OTC’s and could prove detrimental to the merchant model under which many OTC’s currently operate.

These considerations must be balanced against the local objectives for future legislation. Transparency in Virginia’s taxing systems, equity among consumers renting accommodations, and predictability and stability of local revenues are among the chief goals localities have expressed for future legislation. Many of these goals are in direct conflict with the concerns that OTC’s have expressed with Senate Bill 452 and similar legislation that would explicitly impose the tax on the differential amount that the OTC retains.