Have you ever booked a hotel room in Ohio online through a business like Expedia or Priceline? You may be surprised to learn that online travel companies like these get to pay less in taxes to state and local governments for your room booking than the hotel itself would if you had booked directly.

Out-of-date state laws governing the state sales tax and local lodging taxes, which don’t account for the recent development of online travel companies, allow them to keep a few extra dollars for themselves with every hotel booking they make. This needs to change—and the issue is getting deserved attention in Columbus.

Michael Mazerov of the Center on Budget and Policy Priorities explains why online companies typically don’t pay as much in taxes for a room rental as hotels do. When a hotel sells a room, it collects state sales and local lodging taxes based on the final price—what the buyer actually paid for the room. Expedia and the like, in contrast, pay taxes on only part of the final price. They pay a hotel a discounted rate when booking a room and charge a marked-up price to the buyer. However, these companies typically only pay taxes on the discounted rate they give to hotels, not the final price the buyer pays.

Travel sites are hardly the first businesses to market and book hotel rooms—traditional travel agents, as well as hotels themselves, have done so for decades. But both travel agents and hotels collect taxes on the final price of a room; they can’t deduct their commissions or advertising expenses from the amount subject to taxes. Only travel sites are able to retain a few dollars in pure profit for each booking they make that a hotel would be required to pay in taxes.

Requiring online companies to pay taxes on the full retail price of a room makes sense for Ohio. Since online booking is a growing share of the market, addressing the preferential treatment these companies receive is necessary to prevent Ohio hotel taxes’ effectiveness from further diminishing. According to the Legislative Service Commission, doing so could increase annual collections from state sales and local lodging taxes by several millions of dollars.

This sales tax loophole provides additional profits to travel sites alone, without providing savings to consumers: as Jim Provance noted in the Toledo Blade, the final price of a room purchased through an intermediary “typically matches what the consumer would have paid if he dealt directly with the hotel itself.” Because most local hotel markets are highly competitive, Mazerov explains, ending the tax advantage would, in most cases, not increase costs for consumers; it would only end windfall benefits for the web sites.

During the recent state budget negotiations, the Senate added a provision to address this problem; however, it wasn’t included in the final budget. Members of the House and Senate introduced good bills to address this issue earlier this year. State legislators should pass a proposal that would update tax laws to account for all types of hotel bookings.

-- Andrew Slivka

Andrew is a Policy Matters intern.

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