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Technology Stocks : EXPE: Expedia, Inc.
EXPE 93.59+1.7%3:59 PM EDT

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To: 10K a day who wrote (3)12/23/2002 12:09:15 PM
From: Sir Auric Goldfinger  Read Replies (2) of 18
??? The IRS is not the SEC: "NYTimes: Experts Contend Travel Sites May Skimp on Hotel Taxes

The leading travel Web sites may be underpaying millions of dollars in state and local hotel-occupancy taxes, according to tax experts and local officials.

These taxes relate to the fastest-growing and most profitable segment of online travel: the sale of discounted hotel rooms through special negotiated rates. The Web sites charge travelers in advance for the rooms and an additional amount to cover fees and taxes. The sites then pay the hotels a negotiated wholesale rate for the rooms. But the Web companies typically pay occupancy taxes only on that lower wholesale rate, rather than on the actual price paid by the traveler — the rate by which most hotel rooms are taxed.

Tax officials in a number of state and local governments — including Texas, Florida and San Francisco — are now examining these arrangements and preparing to demand that taxes be collected on the full amount paid for the rooms by the customers who book them using Web sites.

As a result, TravelWeb, a reservations Web site owned by five of the largest hotel chains, is preparing to pay the higher taxes that the other sites have avoided.

The issue is coming to the attention of local governments because special-rate hotel bookings are growing at an annual pace of nearly 100 percent, according to PhoCusWright, a travel consulting firm.

PhoCusWright estimates that such sales will total $2.3 billion in 2002. Nearly three-quarters of those sales were by two companies: Expedia and, which are controlled by Barry Diller's USA Interactive.

Executives from both of those companies say they are doing nothing wrong and are simply following industry norms that precede the Internet. Priceline, Travelocity (owned by Sabre Holdings), Hotwire (owned by the Texas Pacific Group) and (owned by Cendant) largely follow the same practices.

Robert Diener, the president of, said that package tour operators and other travel wholesalers were not new and that those companies typically did not pay occupancy taxes on their fees and markups. "Occupancy taxes apply to hotels," he said. "They don't apply to us because we aren't a hotel."

But Susan Leal, the treasurer of San Francisco, says the law in that city reads differently.

"The tax is due on what the occupant paid," she said. Ms. Leal said her office had notified its auditors to look for cases where the full tax had not been paid in a review of hotels that sold rooms to Internet sites.

The tax debate does not arise when a traveler pays for the room and the full taxes due while checking out of the hotel. If a travel agent made the booking, the hotel later typically sends a commission, generally 10 percent, to the agent.

The Internet sites are using a different, and much more lucrative, model. They agree to buy rooms from hotels at a deeply discounted wholesale rate. They then resell those rooms to travelers at a markup that is typically 20 to 35 percent above the Web site's cost but still well below prevailing retail rates. A traveler must pay for a room in advance, along with a service fee that generally exceeds the taxes due.

For example, was recently selling rooms at Campton Place, a hotel in San Francisco's Union Square, for $219.95 a night. The site will not say how much it pays for the room, but a typical industry markup of 25 percent would mean a wholesale rate of $164.96 a night.

When sends this amount to the hotel after a traveler's stay, it will include an additional $23.09 so the hotel can pay the 14 percent city occupancy tax, based on the $164.96 wholesale rate. But the city would contend that it was owed $30.79 in taxes, based on 14 percent of the full $219.95. charges travelers $33.05 a night "including tax recovery charges and our service fees" at Campton Place — an amount equal to 15 percent of the room total. Hotels .com does not break down how much of that amount is for taxes and how much is for other fees.

Mr. Diener said the total cost to travelers was fully disclosed before the booking was complete and that typically the total was substantially lower than other rates for the same hotels. The exact calculation of the charge for taxes and fees is a trade secret that travelers do not need to know, he said.

But that does not make it a proper practice, in the view of Ed Perkins, a syndicated travel columnist and longtime consumer advocate. "It's a scam that the travel industry has used in one form or another for a long time," Mr. Perkins said. Government regulators, he said, have periodically cracked down on travel companies that lured customers with low prices and then tacked on charges, called port fees or service charges, that were no more than additional profit.

"Consumers have a right to know how much of the extra charge is collected on behalf of public taxing agencies and how much of it is a fee to the site," he said.

Other sites have had similar charges, and undisclosed formulas, for taxes and fees. In several interviews in the last two weeks, Expedia defended its practice of adding a combined charge for "tax charges and service fees" to hotel bookings. But late Friday, after it was asked for a reaction to Mr. Perkins's comments, Expedia said it would modify its site to specify the tax charge and the fee.

On Saturday, a booking for Campton Place, which Expedia listed at $300 a night, cost a total of $348. The Web site said that included a service fee of $16.50 and taxes of $31.50. That implies that Expedia expects to pay the 14 percent tax on a wholesale cost of $225.

Erik Blachford, the president of Expedia's North American operations, said that since the site recently added a $5 fee to book air tickets, it saw no reason not to make its fees for hotel rooms more explicit. But Expedia will not change its practice of paying taxes only on the wholesale room rate because local authorities have not raised the issue.

"We haven't heard from any of the states," he said.

Richard Pomp, a professor at the University of Connecticut and a leading expert on sales taxes, said local governments were looking for new ways to collect more taxes to lower their rising budget deficits. In general, he said, they have justification for collecting occupancy taxes from the travel sites. Those sales, he argued, are no different than for other merchandise, for which tax is based on the retail, not the wholesale, price.

"If a dot-com sells you a room, one would think the occupancy tax is based on what the end user pays," he said. "The cities could be losing millions of dollars at exactly the wrong time."

The hotel industry, which routinely tries to fend off increases in local occupancy taxes, is bracing for additional collection efforts by tax authorities.

"When you look at how many localities will be scraping around for cash next year, this is an area of genuine concern for us," said John Gay, the vice president for governmental affairs at the American Hotel and Lodging Association. He said such moves would create quite a burden for hotels if they were forced to collect the taxes on the prices charged by the travel Web sites.

"It is outside of our control what happens to those rooms and what prices they are sold at," he said.

Conversely, the travel sites would be forced to keep track of tax practices in hundreds of different local jurisdictions. And not every government is entitled to tax the Web sites' markups.

For example, Charles E. Chinnock, executive director of the Nevada Department of Taxation, said his state's taxes were due only on the gross receipts to the hotel, so the markup by Web sites or other travel agents would not be taxable.

Elsewhere, the issue has come up most commonly when package tours buy hotels at wholesale rates. Often only the hotel's receipts have been taxed. But some governments have tried to collect taxes on the full sales price.

In Florida, "tax is due on the full price paid for hotel accommodations by the consumer of those services," said David Bruns, a spokesman for the state's Department of Revenue. He said the department had not reviewed the specifics of the Internet company deals, but it has taxed the markup on other companies that have bought and resold hotel rooms.

If authorities force the online travel companies to begin paying higher taxes, or even back taxes, the financial hit could affect the stocks of high-flying companies like Hotels .com, whose shares are up 45 percent over the last year, and Expedia, whose stock price is up 91 percent.

The concern over tax liability is so high that TravelWeb, the Web site set up by five of the largest hotel chains, has decided to assume that it will have to pay local taxes on the difference between the wholesale rate and the price paid by travelers. As the states have not started collecting these taxes yet, the company is putting aside an amount it expects to pay in a reserve.

"The states are all looking for money, so it looks like this will happen," said Joseph E. Humphry, the chief executive of TravelWeb. "We don't want to be hit for back taxes, so we will be ready."
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