Backed By Marriott But Abhorred By OTAs, Maryland Tax Bill Elicits TMCs' Concern

A proposed hotel tax bill winding through Maryland's state legislature revives a well-worn debate that has played out in courtrooms and state and local governments across the nation: Should occupancy taxes—or sales taxes, in this case—be applied to what a consumer pays an intermediary to book a hotel room or instead to the discounted rate remitted to the supplier, excluding markups or fees?

Bethesda, Md.-based Marriott International, with support from other major hotel companies, champions the former interpretation, framing the bill as one that would enrich its home state by closing a loophole. The debate has exposed Marriott's deep concerns over the consolidating online travel agency sector's growing leverage with hotel companies.

In opposition, online and other travel agencies—backed by the American Society of Travel Agents, the Business Travel Coalition and the Travel Technology Association—say the proposal represents a new tax that would impact not just OTAs, which are the stated target of actions in this and other locales, but also a wide range of travel sellers.

The bill last week passed the Maryland Senate and after a state House vote could find itself on the desk of the state's new governor—who could find himself in a bind.

The bill would apply the state's 6 percent sales tax to any hotel intermediary's "accommodation fee," broadly defined in the bill's text as "a fee charged by an accommodations intermediary to a buyer of an accommodation for facilitating the sale or use of the accommodation."

ASTA interprets that language to mean that "under the bill, any fees travel agents charge their customer for Maryland hotel bookings above the cost of the room itself would be subject to Maryland's 6 percent sales tax," according to written testimony.

Proponents in Maryland's general assembly, along with Marriott, say the bill is aimed at OTAs like Expedia, Priceline and Orbitz. If that's the intent, the broad "accommodations intermediary," which opponents say also would include TMCs, meeting planners and retail agents, does not make that clear.

"This definition makes no distinction between online and offline, if such a distinction could even be made in our ever-changing industry," bill opponent Jay Ellenby, who is CEO of Maryland-based TMC Safe Harbors Travel Group, submitted in written testimony. Ellenby continued, "So far as I can tell, this definition captures my company and plenty of others like it who charge our clients a service for Maryland hotel bookings or travel packages with a hotel component."

The impact on OTAs is clear, considering hotel rate markups are fundamental to the business model. In general, OTAs negotiate a reduced, noncommissionable rate with a hotel and mark it up to online bookers. Thanks to parity agreements, OTA hotel rates typically are the same as those sold directly by the likes of Marriott, and any revenue retained by the OTA is not explicitly spelled out to consumers.

That is one reason Marriott is lobbying for the bill.

Chris Dane, president of TMC network Hickory Global Partners, called the bill "taxation without representation" and likened it to local rental car taxes across the country that target the travel sector.

Even so, Dane said corporate TMCs and managed-travel clients tend not to play in the "merchant model" favored by OTAs, primarily negotiating net rates or commissionable rates.

As relief to those in corporate travel management, hotel commissions, which are paid after the booking, are explicitly carved out from the Maryland bill.

"As long as the brick-and-mortar travel agency is being paid by hotels by a commission, they are absolutely exempted explicitly in the text of this bill," testified Marriott International government affairs director Thomas Maloney. "Our position is that the brick-and-mortar travel agents should not be affected unless they're somehow lumping in their fee into the retail price, in which case current law and certainly the bill would apply and force them to remit."

Yet, Hickory and Safe Harbors executives suggested to The Beat that the bill's language is broad enough to potentially impact TMC revenue. Sure, they acknowledge, commissions are safe, but what does Maryland consider an "accommodations fee?"

On the contrary, Partnership Travel Consulting founder Andy Menkes didn't see too much at stake for corporate TMCs.

Among the various revenue models deployed with corporate clients, it's safe to say the "management fee" structure, in which payment to TMCs is calculated annually and not tied to transactions, would shirk the definition of "accommodation fee," Menkes said.

Even so, most corporate clients pay TMCs a transaction fee. That fee typically is tied to each passenger name record, not to an "accommodation," said Menkes.

"In a PNR, which includes air, hotel and possibly car, there is invariably not a separate fee for the hotel component," Menkes said. "It's a PNR fee, based on the ticket issued." Indeed, one PNR could include multiple flight segments and multiple hotels.

Still, if the bill were to pass, "I could easily reposition fees here and there, and a large TMC could reposition fees," said Safe Harbors' Ellenby. "But we don't really know what the mechanism is around how this is going to be collected and what it's going to be collected on. We could come up with a lot of different methods on whether it would be applicable, but there's no detail in the legislation."

That concern plays into another ASTA criticism: "new administrative burdens on traditional travel agents." Agencies, both in and out of Maryland, "would have to register with the state comptroller and be subject to detailed accounting and recordkeeping measures for each and every transaction involving a Maryland hotel room," according to written testimony submitted by ASTA.

Bill Debate Exposes Marriott's OTA Anxiety

Opposition to the Maryland bill by OTAs and other agencies is not surprising, considering the revenue at stake and the potential burdens. But why is Marriott working overtime to ensure its home state boosts tax revenue?

Marriott's Maloney said the company wants "tax parity" with OTAs. "We do not have a financial impact, per se, as a result of this bill," he said during a February hearing. "What we're seeking is parity."

And why? The hotel company essentially wants to deny OTAs revenue that empowers them to compete with the hotel company for online bookings. Tension between OTAs and hotels is nothing new, though, and Marriott's comments expose its heightened level of wariness amid OTA consolidation.

Marriott would prefer "this money not be kept by the [online travel companies] to pad their profit margins to increase their marketing budgets and their ability to outcompete us in the booking space," Maloney‎ said during a March 11 hearing.

Further, Maloney said Marriott supported "transparency for consumers of these transactions," noting that the OTA cut of hotel room rates is not disclosed to bookers.

So, why not just deny content to OTAs? "We have to meet customers where they want to book," said Maloney. "To their credit, the online travel companies control a segment of the booking market where consumers turn to them first. It's not feasible for us to not come to them. But if you're going to be in the booking game, we'd like you to pay taxes in the same way we have to."

He said Marriott is up against a powerhouse in trying to encourage online hotel shoppers to come direct, he said. "Expedia spent $2.8 billion last year on its marketing budget—that far exceeds what Marriott has, candidly, and their power is only growing," said Maloney, referring to recent and pending OTA consolidation.

"Expedia in particular has been on a bit of buying spree lately," he said, citing its recent acquisition of Travelocity and its proposed purchase of Orbitz. "We're increasingly concerned there's a consolidation and monopolization within their industry that increases their leverage vis-à-vis hotels when comes time to renegotiate contacts."

Maryland's New Governor In A Bind

Should the bill hit his desk, Maryland Gov. Larry Hogan could find himself in a bind. The new governor in November 2014 won the election on an anti-tax-hike and pro-business platform, and opponents of the bill have been keen to position the bill as little more than a new tax.

Hogan's fellow Republicans, at least in the state Senate, largely voted against the bill but were outnumbered by the almost unanimous Democrats.

Complicating matters, bill backer Marriott has threatened to move its headquarters from the state, and that came after Hogan, according to a Washington Post article, "made waves on the campaign trail about the fact that his state is no longer home to many Fortune 500 companies."

Seeking signatories for a letter to Hogan, the Business Travel Coalition emphasized the "new tax" angle. "The risk for the industry and managed-travel programs is that other states might also introduce legislation in pursuit of this same kind of new travel tax and revenue stream as we have seen countless times with local taxes that go, for example, to building sports complexes," wrote BTC chairman Kevin Mitchell in a note to travel professionals. "We need to defeat this bill in Maryland."

In the draft letter, dated March 31, BTC argued that any new costs to intermediaries ultimately would be passed to consumers and that the bill would curtail Maryland travel demand and make travel purchasers reconsider conducting events there.

The letter also highlighted new burdens for agencies, especially small ones. "It would do harm to Maryland's 1,100 travel agencies, most of which are small businesses endeavoring to scratch out a living for themselves and their employees. Smaller agencies simply do not have the infrastructure to handle these kinds of requirements, and many would not be able to compete with larger agencies that do. So, the playing field would get tilted in favor of the largest agencies."

Far from a small agency, American Express Global Business Travel, which declined to discuss its views on the bill, is a key signatory to the BTC letter. Others included Safe Harbors, Hess Travel, Tower Travel Management and World Travel Inc.

Marriott insisted the bill does not pose a new tax but closes a loophole to bring Maryland its rightful revenue. Brian Quinn of Maryland-based government affairs law firm Venable testified on behalf of Marriott about regulations already on the books in the state. "The comptroller, the expert state tax collector, says this is not a new sales tax," he noted. "It's always been the law in the state of Maryland since the sales tax was enacted that it applies to the final retail purchase price paid by the consumer. So, if you lump your commissions and fees into that final retail rate, then you owe the tax today."

Other major hotel companies, including Hilton Worldwide, InterContinental Hotels Group and Starwood Hotels and Resorts Worldwide, join Marriott in support of the bill, Marriott testified.

Maloney in testimony named New York, North Carolina, South Carolina, Georgia, Minnesota and Oregon among states that have enacted a comparable tax stance, along with the District of Columbia.

Yet, according to Travel Tech, an association that represents OTAs and other intermediaries, "While many states have considered sales taxes on services, most have rejected these proposals."

Meanwhile, the outcomes of dozens of court battles pitting state and local entities against OTAs on tax obligations have generally favored the intermediaries, based on analysis from Travel Tech, though it counted a few "partial wins" as well as some "losses."