SAN ANTONIO, Texas—Online travel agencies lost a major case in Texas earlier this month and, after poring over the judge’s findings, at least one hotel distribution consultant says the ruling will set a precedent in how municipalities collect tax on hotel rooms sold through online merchant models.
The heavy-hitting OTAs lost a class-action lawsuit by 173 cities in Texas as defendants in The City of San Antonio v. Hotels.com, which was initially filed in May 2006 and is one of the longest-running cases against OTAs. The ruling on 1 July declared OTAs must collect taxes on the full retail rate they charge consumers as opposed to the wholesale rate they get from hotels, including margins and service fees.
“Because the (OTAs) are not occupants, they never have the right to occupancy, and the wholesale rate they pay for the right to sell a hotel room is not consideration paid for the right to occupancy, there is absolutely no reason for hotel occupancy taxes to be imposed on wholesale rates paid by the (OTA) to the hotel,” the judge’s ruling states.
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Robert Cole founder RockCheetah |
The ruling is being compared with the enactment of a law in New York City in September 2009 that levied a tax on the service fees collected by online agencies and forced them to provide customers with a breakdown of the hotel taxes on their bill.
“With New York changing its law, and that change being held up by the New York state Supreme Court, and now 173 cities in Texas, those are two really, really strong cases of precedence,” said Robert Cole, founder of RockCheetah and former director of hotel distribution with The Sabre Group. “It’s going to be a downhill run, and it’s going to get a lot easier to prevail in these things.”
Along with his ruling, United States District Judge Orlando Garcia in Texas issued 300 factual findings, many of which describe testimony and depositions and bring to light how popular OTAs created and evolved their negotiation processes and tax calculations.
(Read the Findings of Fact and Conclusions of Law.)Four days later, the OTAs responded by filing an advisory motion asking the testimony remain confidential.
Cole said he thinks that request is somewhat “disingenuous.”
“The OTAs are in the middle of hundreds of these litigations. They just want to make it more difficult to get a hold of this stuff,” he said. “It’s just fundamental math. It does have some embarrassing stuff—it does say they used to calculate tax this way and now they do it another way—but that’s just math. I just don’t think they want it out there.”
The issue
In the case of collecting taxes on merchant-model sales, the issue at hand really is between OTAs and municipalities. Hotel owners and brands initially stayed out of it, but then two things happened:
1) Hotels and OTAs began agreeing upon rate parity in their negotiated contracts because neither wanted the other undercutting their lowest price. Hotels want that price to be on a tax-inclusive basis. But there really is no way for OTAs to calculate the total amount of a hotel room without using the local municipality’s tax rate and collecting tax on the retail rate, Cole said.
2) Hoteliers began realizing that as municipalities face shrinking revenues, they will look for ways to substitute for lost tax revenue. Travel and tourism are easy targets—even considered “low-hanging fruit,” Cole said. So hoteliers began collectively lobbying against the OTAs to show cities that when they do the math “it looks like they are getting cheated out of something they are owed,” Cole said.
Going forward
In the Texas case alone, OTAs will be forced to pay back taxes to the municipalities as well as tax on the retail rates moving forward. The ruling estimates a total of more than US$20 million will be paid to Texas cities by the collection of agencies named in the suit. Together with New York, and depending on how the remaining lawsuits play out, OTAs will have significantly larger overheads.
Cole estimates OTAs in the near future will begin evolving their business plans to tweak the merchant model or move away from it all together.
“If you look at airline bookings, the OTAs do a lot of air transactions that they don’t get paid on. They have to do a lot of work—ticketing and scheduling changes. That’s ugly stuff, and they don’t get paid for that. What they do get paid is segment fees from the (global distribution systems), so they want to keep that GDS partnership in place,” he said.
Looking at the margins OTAs make on selling hotel rooms, there is a high degree of profit for a relatively lower level of effort, Cole said. But, even though margins are high, no company wants their existing profits squeezed.
“Hotels fund a huge part of their profit, so they’re not going to stop selling hotels,” Cole said. “Some may go to a more commissionable model where it’s a little bit cleaner, but generally they don’t get major discounts on those. They’ll tweak their business models.
“The way this all got painted out doesn’t bode particularly well for OTAs as a profitability perspective,” he continued. “Almost any way you paint it, it’s a squeeze on the OTA profit model.”