by Bruce Myint | January 01, 2004
Tax authorities are scrutinizing online travel agencies like Expedia and 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 issues. 
   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 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.