Fight over TN hotel tax loophole hits mailboxes

8:13 PM, Mar 6, 2013   |    comments
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If you want to book a hotel room in Knoxville online, you can go directly to the hotel's website or visit third-party online travel companies like 

"What happens right now if a guest goes online and they go through a third party, most likely they'll pay the same room rate they would pay at our hotel," said Renie Carroll, general manager of the Country Inn and Suites at Cedar Bluff.

Whether you go to the hotel or to Expedia, you will end up with the same room, the same continental breakfast, and generally pay the same total price.  The difference is the online travel company does not have to pay local governments the same amount of hotel tax.

"It is really cheating Knox County, Knoxville as a city, and the state of Tennessee because they're not getting those funds," said Carroll.  "That is money the local governments use to improve our cities and promote tourism."

Online travel companies (OTCs) pay less tax because the current law taxes them for the amount they spend to buy discounted rooms at a wholesale price.  It does not tax OTCs for the retail amount they turn around and actually charge customers.  Brick and mortar hotels are taxed for the actual retail price charged to customers.

"This is an old tax law that was in place before the internet and OTCs ever existed," said Greg Adkins, CEO of the Tennessee Hospitality Association.  "The online companies do not have to pay as much tax, but they are not passing along the savings to customers.  They generally pocket the cash.  We think the field should be leveled so that two companies that provide the same products are taxed the same amount."

Adkins said online companies also need to provide more transparency in their itemized bills.  Currently OTCs will have one line and amount listed for "taxes and fees" without showing they pay less taxes and charge larger for-profit fees than hotels.

Senator Doug Overbey of Maryville is sponsoring a bill that would close the loophole and charge online companies for the retail price of hotel rooms they rent.  The online travel companies are putting up a public fight to the proposal by mailing filers directly to the people who elect Overbey.

"This group in Washington D.C. [Americans for Tax Reform] has sent more than 50,000 of these fliers to Blount County.  It is funny because they use a lot of the statistics that we compiled about the impact of tourism, but it calls Overbey's proposal a 'tax hike.'  It says 'Overbey's tax hike will increase the cost of using websites and smart phone apps that we rely on for the best travel deals.'  That is absolutely false," said Adkins.

Adkins said forcing OTCs to pay the same taxes will not cause Expedia to charge customers higher rates.  It may result in some wrangling over the purchase price for discounted rooms as OTCs attempt to maintain current profit levels.  But customers will still pay the same price.

"We all have price matching," said Carroll.  "If you find a cheaper price online, we will usually match it.  The same goes for the online companies.  If we offer a cheaper price, they drop their prices for customers."

While the online travel companies claim the tax changes would hurt tourism, Adkins said he believes the opposite will occur.  Closing the loophole will generate an estimated $1.5 million dollars of hotel tax revenue for Tennessee each year.

"In places like Sevier County and Knoxville, you are talking about several hundred thousand dollars of hotel tax revenue every year.  That is money that is typically used by governments to promote tourism and attract people to the area," said Adkins.  "In other states where this [tax law change] has passed, in New York and South Carolina, we have not seen any difference.  Customers did not pay more, Expedia still made $500 million, and it was a level playing field.  It creates a level playing field for brick-and-mortar hotels, and that's what's fair."

The industrial infighting over hotel taxes may seem contentious, but Adkins and Carroll insist this is only one issue where they disagree.

"I love third party websites.  They give us a lot more business.  They help people find us.  It is a business partnership that works for both of us," said Carroll.

The bill proposed by Overbey is still in committee and has not advanced as of yet.  Adkins said it will be several weeks before he expects any movement.  Adkins also said it is difficult to predict whether the legislation will be approved this year, but he gives it at least a 50-50 chance.

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