FLORIDA tax controversy UPDATE - ONLINE TRAVEL COMPANIES SETTLE WITH PALM BEACH COUNTY
In early December 2011, I blogged about controversy involving Online Travel Companies (OTC's) such as Expedia, Travelocity, and Orbitz. Whether you actually recall the blog or are reading this for the first time, the crux of the issue is whether sales tax, bed tax, and/or other occupancy type taxes are due on the OTC's reduced purchase price for the rental of hotel rooms or if the tax base is the increased price charged to the end-user.
Specifically, the controversy is centered around that county's ability to charge the Tourist Development Tax, under section 125.0104, Florida Statutes. The tax is due on the consideration paid for room occupancy within the county and a particular county may charge an additional amount it its discretion. The issue under this statute is whether the consideration is the total amount paid by the customer or if the consideration is the discounted amount charged to the OTC and passed through to the customer.
Sticking with the example I used back in December, suppose a customer books a room directly from a hotel for $100. At a typical 13% tax rate for various local taxes the customer pays $113. The hotel receives its $100 and the state collects $13 on the transaction.
Using the same example, an OTC purchases the same room from the hotel for $80. At a 13% rate, it pays tax of $10.40, for a total cost of $90.40. The OTC then charges the customer the same $113 (at a 25% mark-up) which includes a reimbursement for the $10.40 in tax and a $22.60 profit. On the same $113 transaction the state and local government collects $10.40 instead of the $13.
Further, as mentioned in my December blog, there have been over 80 cases over the past few years and approximately $400 million dollars at issue on this issue. On January 30, 2012 Palm Beach County settled with more than a dozen OTC's for a reported $1.9 million. According to the Palm Beach Post and Palm Beach County Tax Collector, Anne Gannon, the county recovered the majority, if not all, of what it believed it was entitled to. This marks another unfavorable ruling for OTC taxpayers and until legislation is passed it is difficult to advise client's within the industry as to what amount the OTC should be collecting tax on.
The rift is complicated by the battle that legislators on a national level have struggled with over the past decade in attempting to balance the traditional physical brick and mortar businesses with the ever evolving online marketplace. There also remains a strong divide in the Florida Legislator as to what computation should apply. Until the correct methodology is determined by legislation both the OTC's, the professional community advising the OTC's, and the Department of Revenue alike, are all left in the dark in an another ambiguous and uncertain area of state and local taxation.
UPDATE - Early this afternoon (February 21, 2012), I obtained a copy of the Settlement Agreement [downloadable at the end of this article], which shows the specifics of the settlement dated mid-November 2011. Specifically, Palm Beach County settled with the following companies:
(1) Hotwire, Expedia, Hotels.com, and Travelnow.com (the "Expedia Group") for $1.345 million,
(2) Orbitz Trip Network, Internetwork Publishing Corp, and Orbitz (the "Orbitz Group") for $152,146,
(3) Priceline.com, Travelweb, and Lowestfare.com (the "Priceline Group) for $259,617, and
(4) Treavelocity and Site59.com (the "Travelocity Group") for $210,000.
The Agreement also prohibits the County from asserting any claims against the groups of defendants for two years following the settlement date and the defendant group is not required to collect or charge TDT or related taxes for a two year period. Further the County agrees that this settlement will not be used as nexus evidence against the defendants.
While the County was able to obtain questionable tax amounts to the tune of $1.9 million, the settlement was not as one-sided as Palm Beach County made it seem. Pursuant to the terms of the Agreement, the County cannot collect the valuable TDT taxes against these large defendants for two years, which can result in significant amounts of forgone revenue. It is also unclear as to the amount of tax that was at issue in this case, but it was likely an amount far in excess of the $1.9 million.
EXCLUSIVE ---- Gannon v Hotels.com Settlement Agreement
Palm Beach Post Article http://www.palmbeachpost.com/news/travel-websites-settle-suit-by-palm-beach-county-2136758.html
Press Release Jan. 30, 2012