Editorials

Ruling on online bookings benefits local governments

January 29, 2011 12:01 AM

The state Supreme Court's decision on what taxes are owed by online booking companies is good news for Hilton Head Island and other local governments.

The ruling clearly establishes that the total amount charged a person booking short-term lodging is the amount on which taxes are owed. For Hilton Head and other communities that means more money for key services.

The decision stemmed from a state Department of Revenue audit of Travelscape's activities between July 1, 2001, and June 30, 2006. The department determined that the online booking company owed nearly $6.4 million in taxes and penalties. The company appealed that decision to the state Administrative Law Court, which upheld the department's determination. The company then appealed the lower court's decision to the Supreme Court.

Travelscape had argued that the rate it paid to a hotel was the amount that taxes should be applied to. The difference between that rate and the amount the customer paid for the room was a service charge not subject to the tax.

But the court said no. The tax applies to gross proceeds and the definition of gross proceeds does not allow for subtracting the cost of "materials, labor or service."

"Because the cost of services is specifically included in the definition of gross proceeds of sales," the court's ruling states, "we find the fees retained by Travelscape for its services are taxable as gross proceeds."

The court also rejected Travelscape's arguments that it didn't "furnish" rooms because it doesn't own or operate the hotels and that its activities fell outside the state's boundaries and so weren't subject to state taxes. The court said that the law applies to entities "engaged in the business of" furnishing accommodations here, and that's what Travelscape does.

The potential impact of this decision can be seen in the number of hotel contracts this company had in place in South Carolina during the audit period -- more than 350.

In 2009, Hilton Head Island joined state and local governments across the country in pursuing tax revenues due on accommodations booked through online sites.

The money collected helps pay for key public safety services, such as police and fire protection, needed for the large numbers of visitors who travel here. On Hilton Head, it also pays for beach renourishment.

The state's 2 percent accommodations tax pays for critical industry marketing programs and provides money for local nonprofit tourism and arts groups.

Given the similarity between the statutes governing the state accommodations tax and local accommodations taxes, the ruling should reach to local taxes. That would be good news for other municipalities and Beaufort County.

This ruling is fair and should benefit communities and taxpayers across South Carolina.

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