Online hotel brokers could be next in state’s tax crosshairs

State government began this summer trying to force online retailers to collect tax on sales to Connecticut consumers.

Next up could be the Internet travel brokers who refer business to Connecticut’s hotels and bed-and-breakfasts. And the stakes are high, given that the state’s occupancy tax just jumped by one-quarter, from 12 to 15 percent.

The state’s chief tax official, Department of Revenue Services Commissioner Kevin B. Sullivan, raised the issue during a recent meeting of agency heads with Gov. Dannel P. Malloy.

And Rep. Elissa T. Wright, D-Groton, a veteran member of the Finance, Revenue and Bonding Committee, said Wednesday she believes the General Assembly needs to work next session to develop a more consistent tax policy when it comes to Internet commerce.

“I think you have to look at it from the point of what the consumer pays for the room,” Wright said, arguing that both true lodging cost involves not just the payment received by a hotel or bed-and-breakfast, but also the service fee charged by Expedia, Travelocity, Priceline or some other online broker. “Every sale has a wholesale component and a retail mark-up. If you start exempting some portion, you could go down a very slippery slope.”

But the industry group representing these and other online brokers argues this analogy is unfair and inaccurate.

“Travel intermediaries provide a valuable service, but they are not hotels,” said Arthur Sackler, executive director of the Washington, D.C.-based Interactive Travel Services Association. “Our companies don’t own or operate hotels. This is a separate service.”

And it is a valuable service, both Sackler and hotel industry officials said, providing marketing — in many cases — for smaller hotels, resorts and other lodgings that don’t have the resources or big-name recognition to market themselves.

Sackler said an attempt to tax the service not only would likely lead to a federal court challenge, but would ultimately dump more costs on consumers and stymie a key segment of Connecticut’s economy at the worst possible time.

Shawn McBurney, vice president of government affairs for the American Hotel and Lodging Association, said about 10 percent of its members’ business, on average, comes from these referral services. And though detailed analyses haven’t been done, he said he believes the percentage is much higher for smaller lodgings with modest marketing budgets.

Hotels that contract with these brokers receive a portion of the funds consumers pay online, McBurney added. This represents the hotel’s share, plus the occupancy tax — applied to that share.

For example, if a one-night hotel stay sold through an online service for $200, the hotel might agree to accept $150, and also would receive another $22.50 to cover its occupancy tax — on that $150 price.

That would leave $27.50 for the online broker to keep.

But Wright and Sullivan contend that since the consumer is paying $200 for the hypothetical hotel room, the state should collect occupancy tax on the full amount, including the $27.50 kept by the online broker in this example.

Wright said the proposal she will support in the 2012 General Assembly session is patterned after measures undertaken in New York to collect taxes on online travel brokers.

New York City passed a local measure in 2009 that both increased its hotel occupancy tax to 5.875 percent, and requires online brokers to collect and remit and levy back to the city. Expedia and Priceline challenged that ordinance, but lost before the New York Supreme Court.

And last year the legislature in Albany closed another loophole, requiring online travel brokers to collect and remit sales tax. This means a broker helping to arrange a hotel stay in New York City must charge the city’s occupancy tax, a 4.5 percent municipal sales tax, and a 4 percent state sales levy.

New York State Department of Taxation and Finance spokesman Ed Walsh said the state statute hasn’t been subjected to a court challenge.

And though Expedia’s web site warns purchasers of its service that it generally doesn’t collect occupancy or sales taxes, it acknowledges this policy doesn’t apply in New York.

“It’s really the same concern that motivated the Legislature and governor to act on the remote sellers,” Sullivan said, referring to the so-called “Amazon’s Law,” enacted this past spring to pursue sales tax tied to online transactions. “The price is discounted and the state is bearing an impact.”

State lawmakers and Malloy agreed this past spring not only to increase the occupancy tax from 12 to 15 percent, but to share 1/15th of the revenue from that tax with cash-strapped cities and towns. According to nonpartisan legislative analysts, this is expected to provide the state with an extra $11.1 million this year, with another $5.6 million distributed among Connecticut’s 169 municipalities.

Wright said she believes broadening the occupancy tax to cover brokerage services could raise more than $10 million additional, but a detailed fiscal analysis hasn’t been completed to date.

The sales tax measure was designed to close a loophole opened by a 1992 U.S. Supreme Court decision and the subsequent growth in online commerce. It requires any online retailer, including those based out of state, to collect the 6 percent sales tax on transactions involving Connecticut customers, provided it generates more than $2,000 in sales through affiliated companies here.

Amazon and many other online retailers had generated significant sales in Connecticut by working through thousands of smaller affiliates who received commissions for using their websites to refer customers to the online giants.

Since the Amazon law was enacted, though Amazon, Overstock and other large retailers have severed those affiliate agreements to avoid having to collect the sales tax.

Both McBurney’s group, which represents more than 10,000 hotels, resorts and other lodging businesses nationwide, as well as the 400-member Connecticut Lodging Association, don’t oppose efforts to collect sales tax on the earnings received by online travel brokers — with one big caveat.

McBurney and CLA Executive Director Ginny Kozlowski said it’s essential that Connecticut pursue the online brokers directly to collect tax on the online service fee. Any effort to force hotels to pay the full tax up front, and then recoup their losses from the online brokers, is a contractual nightmare they don’t need.

But Sackler said extending the occupancy tax to his clients would cause plenty of problems for hotels, consumers and ultimately the tourism industry.

“It is a policy choice that boggles the mind,” he said, “that during a severe and continuing recession, one of the few engines of economic growth would be dampened.”

Sackler predicted that online companies immediately would pass that 15 percent tax on their earnings to consumers by raising prices, a move that only would reduce consumption in general.