While a long-running debate about Maryland’s competitiveness as a place to do business has returned to fever pitch lately, fueled in part by themes from the November elections, the state remains fertile ground for the hospitality industry. Nearly 700 hotel properties sustain close to 24,000 jobs in the state. The Washington area is a center of hospitality management, with Montgomery County serving as home to a number of global hotel brand and ownership companies with a deep talent pool.
The Maryland General Assembly recently passed a bill that would solidify the state’s reputation as an ideal location for the hospitality industry to invest and expand. Senate Bill 190, sponsored by Sen. Richard S. Madaleno Jr. (D-Montgomery), is a clarification measure that would ensure all entities involved in the business of booking hotel rooms — particularly online retailers — pay an appropriate amount in sales tax to the state. The bill is now on the desk of Gov. Larry Hogan (R). This is an excellent opportunity for the governor to affirm Maryland’s leadership in this sector.
Those arguing the loudest against this bill include online travel companies, such as Expedia and Travelocity, which attempt to portray it as potentially violating a “no new taxes” pledge. There is nothing “new” about the tax in question; a long-standing sales tax that has historically been calculated based on the total price paid by consumers to book a hotel room now needs to be enforced equally when it comes to online players.
Enactment of this bill is necessary for the state’s sales tax code to reflect the realities of the modern travel marketplace. Today, a consumer can book a hotel room through telephone reservations, a travel agent, a hotel Web site or an online travel company. The room rates customers see often are the same through any of these channels, including online, for the same room type at the same hotel on the same night. The online travel companies simply are alternative booking options.
Despite this, online travel companies turn over less in sales tax to Maryland in a transaction that is largely indistinguishable to the consumer from direct booking. This is because the section of Maryland’s sales tax code applicable to hotel stays, written well before the advent of the Internet, fails to explicitly capture the role and payment of the online middleman in a booking transaction.
To get paid, online travel companies retain a cut of the retail room rate consumers pay, turning over to hotels a reduced amount that is akin to a “wholesale” rate. Online travel companies base their sales tax remittance on the wholesale portion of their charges, excluding their cut from the taxable price. Hotels conform to Maryland law and remit sales tax based on the entire retail rate consumers pay for a room.
This translates to the state receiving 15 to 25 percent less in sales tax from online travel company sales, even though the consumer pays the same total either way. This adds up to at least $4 million in annual lost tax revenue for Maryland, a sum that grows every year.
Some jurisdictions have acted on this issue, including New York, the District and North and South Carolina. Still, this windfall aggregates to nearly $500 million annually nationwide and provides online travel companies with an unwarranted competitive advantage. They make none of the tangible investments in physical infrastructure, supplies and employees that the brick-and-mortar hotel industry does. Ambiguity in Maryland’s sales tax code permits the online travel companies to capitalize, even while being sued by the comptroller and multiple local jurisdictions seeking payment.
S.B. 190 would end this subsidy for the online travel companies. It would help hotel chains of all sizes compete for customers and bookings on an equal footing with online competitors by ensuring tax parity. It would bolster resources for investments in infrastructure, education, public safety and other services needed to fuel the state’s economic growth. And it would bring needed certainty to the tax code by making clear that online travel companies must remit tax on the entire retail price they charge consumers.
Large majorities in the Maryland General Assembly have recognized S.B. 190 is sound tax policy, as has the National Conference of State Legislatures and the Multistate Tax Commission. Hogan should as well. This would signal the state’s support for its hotel industry and provide the parity needed to maintain our competitiveness.
The writer is president and chief executive of the Maryland Hotel and Lodging Association.
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