Online agencies try legislative end run

August 24, 2011 

Earlier this year, South Carolina's tourism industry celebrated the state Supreme Court decision in Travelscape v. the S.C. Department of Revenue.

The court affirmed an Administrative Law Court decision that Travelscape, an online travel agent owned by Expedia, had failed to remit required sales tax on the gross proceeds it received from providing hotel reservations in South Carolina.

The industry grew even more excited later in the spring as 14 online travel agencies settled out of court with Horry County and the cities of Charleston, Mount Pleasant, Hilton Head Island and North Myrtle Beach for similarly under-reporting their sales taxes.

Now those same companies are attempting to convince our legislature to pass a law that would effectively overturn the court decision and allow these companies to have a special tax advantage over traditional hotels and every retail business in South Carolina.

South Carolina cannot afford to give these online companies a special law that allows them to keep revenue that rightfully belongs to our state and our communities. Enough is enough.

Not surprisingly, in the middle of this historic economic crisis, we have experienced a steep decline in tax receipts. What is surprising is this: In addition to the serious economic downturn, there's another reason our state and local governments have been falling short of revenue: Online travel agencies have been playing by their own rules when it comes to remitting taxes.

Even though customers pay the same or more if they book hotel rooms through online travel agencies, courts have found that some of these agencies have been paying to state and local governments only part of the taxes they collect from consumers. Those companies charge their customers "taxes and fees" based on the advertised retail price of a hotel room on their websites. However, they then choose to remit taxes based on their wholesale cost (the amount they remit to the hotel for the room). The travel companies keep the difference.

A Georgia Superior Court judge recently released a special master's report, held under seal for almost two years, which found that online travel agencies masterminded a strategy to withhold documents in a lawsuit seeking unpaid hotel occupancy taxes. The report said documents were withheld "in order to thwart legitimate discovery," as part of "a conscious and deliberate effort to avoid the payment of (Expedia's) full measure of occupancy taxes, in violation of state and local law."

According to media reports, attorneys for the suing municipalities think the internal Expedia documents amount to a "smoking gun," essentially proving what they have argued for years: that the companies knew all along they owed the relevant hotel occupancy or sales taxes but instead of paying devised an aggressive and organized lobbying and litigation strategy to thwart any efforts to collect them.

Why? Because to do so would have cost the companies a significant portion of their profits every year.

With so much at stake, the online travel agencies have convinced state Rep. Tracey Edge, R-North Myrtle Beach, to introduce H 4337, a bill that would overturn the state and local government's court victories and allow the online travel agencies to pay their sales and accommodations on their wholesale cost instead of the retail price consumers pay for a hotel room.

Any company in the retail business would love to be able to pay their sales tax on their wholesale cost instead of their retail sales.

Our association opposes this bill. In addition to the tourism businesses opposing this extremely unfair legislation, our state's municipal and county governments, along with tourism marketing organizations will be working with state legislators to protect our state and local governments' tax system.

We need to make sure our state remains an attractive destination, visited by millions of people annually from around the world. That means everyone, including online travel agencies, should follow the law and pay their fair share.

Tom Sponseller is president of the South Carolina Hospitality Association.

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