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OTA's Such as Expedia and Orbitz at Center of Tax Fight Between
Florida's Hotels and Theme Parks

By Jason Garcia, The Orlando Sentinel, Fla.McClatchy-Tribune Regional News

Feb. 07, 2011--Some of the biggest players within Florida's $60 billion-a-year tourism industry are at odds in a battle over how online-travel companies such as Expedia Inc. and Orbitz Worldwide Inc. should be taxed.

One on side are hotel heavyweights such as Marriott International and Hilton Hotels & Resorts, which are out to eliminate what they contend is a competitive advantage the online companies have in selling hotel rooms.

Aligned with the Internet companies are theme-park giants Walt Disney World and Universal Orlando, motivated at least in part by concerns that requiring Expedia, Orbitz and others to absorb higher taxes could jeopardize a tax advantage the resorts themselves now have when selling vacation packages.

The dispute threatens to derail the online-travel industry's years-long bid to persuade the Florida Legislature to shield it from extra taxes and, in doing so, defuse lawsuits brought by local governments across the state, including Orange County, that accuse the Internet companies of ducking out on millions of dollars a year in hotel taxes.

"This one's going to be a real tough one," said Carol Dover, president and chief executive officer of the Florida Restaurant & Lodging Association, whose 10,000 members include hotels, theme parks and online-travel companies. Association leaders voted during a conference call last week to remain neutral in the fight.

The wrangling revolves around how Internet sites that sell hotel rooms should be taxed.

The way the system generally works now, online-travel companies sign contracts with hotels in which the hotels make limited numbers of rooms available at discounted, wholesale rates. The Internet companies then sell those rooms online to travelers at a higher, retail price. The Internet companies collect the larger amount from the travelers, pay the hotels the prearranged wholesale rate, and pocket the difference.

They pay sales and hotel taxes only on that lower rate.

The online-travel industry says the difference between the wholesale price and retail price amounts to a "service fee" -- they are helping travelers find and compare hotel rooms and facilitating the reservations process -- and so it shouldn't be subject to a tax. But local governments across the country, including those from the Panhandle to the Keys in Florida, contend that the companies are supposed to be paying tax on the total amount consumers are paying to rent the rooms.

A lot of money is at stake in Florida: State economists have calculated that paying taxes on the wholesale rate saves the Internet businesses -- and costs Florida's counties -- more than $20 million a year in hotel taxes alone.

The online-travel companies have been lobbying Florida lawmakers for several years to pass a law declaring their markup off limits to taxes. Legislation nearly passed in 2010 and has been filed again this year; it gets its first hearing Tuesday before the state Senate's Community Affairs Committee.

But this year the online-travel companies have run into a new obstacle: the hotel industry. In a letter to Florida Gov. Rick Scott sent late last month, the American Hotel & Lodging Association said permitting Internet businesses to pay taxes only on the wholesale rate would create "two different types of tax treatment for identical transactions... and [give] out-of-state OTCs a tax advantage over Florida hotels."

What's more, the hotel group said its members fear that, if local governments are forever prohibited from collecting taxes on the full rate charged to consumers, they may attempt to make up the difference from hotels themselves, perhaps by raising the overall tax rate or making hoteliers responsible for tracking down the full price paid by the consumer.

"There are any number of things that they could try to extract out of hotels to make up what they perceive is the difference," said Shawn McBurney, a lobbyist for the Washington-based hotel association, which has also been battling the online-travel companies in front of Congress to stop a national law on the issue.

In addition to the association, more than a half-dozen major hotel companies signed the letter to Scott. Among them: Marriott, Hilton, Starwood Hotels & Resorts Worldwide, InterContinental Hotels Group, Choice Hotels International, and Best Western.

The hotels, particularly the well-known international chains, have another incentive, as well: Forcing the third-party Internet sites to pay higher taxes could make their rates less attractive and ultimately drive consumers to book rooms through a hotel's own website.

Critics also accuse the hotel companies of opposing the Florida legislation to gain leverage with the online-travel companies in negotiations on future contracts for hotel rooms.

"It's all about trying to make the hotels have the upper hand in this whole negotiating bit," said state Rep. Jimmy Patronis, a Republican from Panama City who in the past has sponsored legislation to help the online-travel companies.

But while the hotels have emerged as vocal opponents of the measure, the online-travel industry has lined up its own big-name allies: Walt Disney World and Universal Orlando.

The parks, like the online-travel industry, argue that taxing the Internet companies on the full rate would drive up the cost of vacations to Florida.

But they also worry that taxing hotel rooms sold through third-party websites at the final, higher consumer rate could set a potentially dangerous precedent threatening a tax advantage in state law for their vacation packages.

Under current Florida law, when a traveler provider like a theme park sells hotel rooms, park tickets, food and other items to a travel agency that then assembles them into packages for sale to travelers, taxes are due only on the individual component prices, rather than the higher, final package price.

That allows Disney and Universal to pay lower taxes because they sell those components to their own vacation-sales subsidiaries -- Walt Disney Travel Co. and Universal Parks & Resorts Vacations -- which then peddle the combined packages to consumers. Such tax-free internal markups are allowed as long as the prices a travel provider charges its in-house travel agency for hotel rooms, tickets and such aren't any lower than what it charges unrelated travel agencies that want to sell packages.

"We support efforts that keep Florida competitive in the vacation marketplace," Disney World spokesman Bryan Malenius said, though he also downplayed Disney's involvement in the legislation. "While this is an important issue to our state and to our business, this is not one of our legislative priorities."

Universal declined to discuss the issue.

The hotel industry's opposition is likely the biggest obstacle facing the online-travel industry's bid this year for a tax shield.

The legislation (SB 376, HB 493) has the backing of leadership in the Florida Senate, where Senate President Mike Haridopolos, R-Merritt Island, sponsored it several years ago and his expected successor as president, Sen. Don Gaetz, R-Niceville, is carrying it this year.

Meanwhile, House Speaker Dean Cannon, R-Winter Park, voted for the legislation last year.

It's unclear where Scott stands on the matter, though the newly elected Republican governor campaigned on an anti-tax, anti-regulation message. Scott's communications director, Brian Burgess, did not respond to a request for comment on the issue.


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Copyright (c) 2011, The Orlando Sentinel, Fla.

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