NYC to OTAs: We Want Our Tax on Retail, Not Net

Just before the July 4th Holiday, Mayor Bloomberg signed Resolution 1012 which will, in theory, force the online travel agencies to collect New York City's occupancy tax on the full amount paid by consumers rather than the net amount that actually is remitted to the hotels.

The full text with changes underlined tax law is here.

 [more]With this law, the City has redefined the definition of the consideration paid for occupancy to include "any service fee and/or booking fees that are a condition of occupancy" in order to include OTA's margins.

They have also added a new term known as a "room remarketer" which, according to NYC, is "Any person, excluding the operator, having any right, access, ability or authority, through an internet transaction or any other means whatsoever, to offer, reserve, book, arrange for, remarket, distribute, broker, resell, or facilitate the transfer of rooms the occupancy of which is subject to tax under this chapter." At least the Online Travel Agencies are finally getting credit for what they do - marketing rooms.

And best of all is a new term known as "additional rent" which is the "excess of rent received from an occupant by a room remarketer over the net rent" In the OTA lexicon, this would be known as margin.

What is most interesting about this law is that the OTAs will be responsible for remitting their portion of the occupancy tax directly to the city. In the past, the OTAs have sent the tax on the net rate to the hotel which has then paid the city. Under the new law, the OTAs will be forced to directly remit the tax on the "additional rent" to the city.

The OTAs, spurred on by Orbitz, have already largely given up the practice of adding additional fees in with the taxes during the check-out process. However, this change will either force the OTAs to become non-competitive with hotel brand websites and pass along the additional taxes to the consumers or further erode the industry's margins.

A very simple example:
Rate on $100
Net Rate to OTA from hotel: $80
Tax rate: 10%

Today, OTA sells this room for $100 and remits $88 to cover the room and tax and earns $12.
In the new world, will probably still sell this room for $100 to remain competitive with the hotel's own websites. However, the OTA will now be forced to pay the 10% on both margin and net rate. In our simpleton example, this OTA will now remit $90 and earn $10. Good for the City, not so good for the OTAs.

This new law takes effect on September 1st, 2009.

These insights are excerpted with permission from Tom Botts' Hudson Crossing blog.