Tax changes for online hotel booking create level playing field

It was little noticed, but Minnesota did score a small victory this legislative session: The state budget created a level playing field between similar businesses, and it updated our tax system to catch up with modern technology.

Online booking agencies such as Priceline were collecting less sales taxes to book Minnesota hotel rooms than traditional travel agents or even the hotels themselves. The system created a competitive advantage for online companies and revenue losses for state and local governments.

Governor Dayton proposed closing the loophole in his budget. The proposal resurfaced as part of budget negotiations and was included in the final tax bill. It will raise $9 million in FY 2012-13.

Here’s how the online booking system works, and what the change means: Hotels contract with online travel companies to market some of their rooms. The online agencies get a discount room rate, then sell them to customers at higher prices. The problem is that the online agencies were only collecting sales tax on the wholesale room rate, not the higher retail rate that customers paid, as hotels and traditional travel agents do. With the change in Minnesota’s tax law, online travel companies will collect the sales tax on the retail price.

On any individual transaction, the difference between the taxes on wholesale and retail room rates is small. But it adds up. Online agencies account for an estimated 14 percent of room receipts in 2011, according to the Center on Budget and Policy Priorities. It reports that the difference costs state and local governments roughly $275 million to $400 million a year nationally. It recommends states update their tax laws to keep up with technology, arguing that:

At a time when sharply reduced revenues are forcing states and localities to cut health care for the poor, lay off teachers, close fire stations, and increase tuition at state universities and community colleges, all of which are reducing economic growth, it is counterproductive to permit [online travel companies] to exploit a tax loophole that pads their profits at the public’s expense.

Minnesota’s new law leaves some questions unanswered. Some Minnesota local governments have their own local lodging taxes. In cases where the Minnesota Department of Revenue collects the lodging tax for the local unit of government, the new law will apply. If the tax is collected locally, the new law may or may not apply, depending on the ordinance’s wording.

Treating online travel agencies and other similar companies equally is part of the larger national debate over a level playing field in e-commerce. On a larger scale, this debate asks whether it fair for online retailers to sell taxable products without collecting sales tax while Main Street businesses selling the same product have to collect the sales tax.

At the national level, the proposed Main Street Fairness Act would make it easier for states to require remote sellers to collect sales taxes on Internet and catalog purchases, putting them on a level playing field with their Main Street competitors. Governor Dayton’s budget also would have required “remote sellers who sell to Minnesota purchasers that are referred under an agreement by a business that has nexus (physical presence) in Minnesota to collect the sales and use tax on those purchases.” That proposal would have raised $11 million in FY 2012-13, but it was not part of the final budget deal.

Scott Russell

Scott Russell (scott@tcdailyplanet.net) wrote for the Southwest Journal and Skyway News (now the Downtown Journal) in Minneapolis from 1999-2005. He also wrote for The Capital Times, a Madison Wisc