Discount Travel Websites Under Fire
Authorities investigate if third-party sites are paying fair share of taxes
Tax authorities are scrutinizing online travel
agencies like Expedia and Hotels.com to see if the sites are
underpaying their share of hotel taxes. The investigations could
have an impact on budget-conscious travelers, a group increasingly
reliant on the low-cost Internet model.
The idea that rock-bottom Internet rates could increase comes as
online bookings are projected to rise, according to Sherman,
Conn.-based PhocusWright. The Internet travel research firm
predicts that by 2005, online bookings will increase by 15 percent
for transient travel and 11 percent for meetings/groups.
At press time, officials in Boston, Chicago, Milwaukee and San
Francisco were investigating online agencies that paid taxes based
on the wholesale rates charged by hotels. Under dispute is whether
the agencies should have paid taxes on the rates they charged
customers as much as 30 percent higher.
In San Francisco, where revenues from occupancy taxes have
dropped nearly one-third since June 2001, the matter was under
review with city attorneys at press time.
“Many jurisdictions are in trouble with revenues. It would
surprise me if they don’t act,” said John Hutar, vice president and
general manager of the Hotel Nikko San Francisco.
Higher web rates could mean fewer out-of-the-block bookings,
since steeper prices would tarnish their appeal, said Mary Power,
president of the McLean, Va.-based Convention Industry Council.
Hotels are taking the issue seriously. This past October, the
Washington, D.C.-based American Hotel and Lodging Association urged
members to review contracts with Internet agencies and clarify tax
While the tax agencies investigate, New York City-based
InteractiveCorp, which owns Expedia and Hotels.
com, has reserved roughly $10 million in the event it is required
to pay more hotel taxes, according to a statement by the firm. A
spokesperson with Chicago-based Orbitz would not speculate on
whether a change would increase prices.
The forecast from Dallas-based TravelWeb.com was more grim. “If
it is determined that taxes should be charged to Internet rates
rather than wholesale rates, then the customer would have to pay,”
said Fred Bean, vice president of hotel sales and relations.
According to Max Starkov, chief strategist at New York
City-based Hospitality eBusiness Strategies, hoteliers now realize
online merchants have done “more harm than good” for their business
by charging markups of 30 to 45 percent.
As a result, hotels are negotiating lower markups, typically
about 18 percent. “And with an 18 percent markup, you can’t hide a
13 percent hotel tax,” said Starkov.