Virginia’s at it Again – Double Taxation on Hotel Rooms

On January 25th the Virginia Senate passed another taxes without borders scheme.  As if hoping for the passage of internet sales tax wasn’t enough, now they are targeting travel agents and people purchasing hotel rooms, both are most likely out of state and therefore have no recourse.

SB 767 the Retail Sales and Transient Occupancy Taxes; Taxes on Room Rentals Based upon Charges for Use, would apply the occupancy tax to online travel agents and store front travel agents.  The bill is tailored to directly affect online travel agents, but store front travel agents will be hit as well because the 1998 Internet Freedom Act banned taxes that applied only to internet based businesses and not their “physical” counterparts.

This Bill passed in the Senate with Republican support from Senators Wagner, Norment, Hanger, Blevins, Stosch, and Stuart.  However not a single Americans for Tax Reform Pledge signer defected. Senators Black, Garret, Martin, Newman, Obershain, Ruff, Stanley, Smith and Hotlzman Vogel stood strong in the fight against increased taxes and unmanaged budgets.

The Bill will come up in the Virginia House soon.  As of now there is not a bill number, but be sure I will keep the updates coming.

Hotels offer a room rate to travel agents, which already has the hotel occupancy tax included in the room rate.  They charge the buyer a service fee for locating the room, which is separate form the room rate.  It is a fee for the service of finding the room and this fee is taxed under income tax laws because it goes to the travel agents income.

The Online Travel Agent or Store Front Travel Agent’s facilitation of locating a room is a service and not the same as the room provide by the hotel where the traveler will be staying.  Attempting to expand the hotel occupancy tax would treat the service provider in the same way as a hotel for tax purposes, obscuring the difference between a hotel room and a service. 

When laws of this nature have come before the courts, 90% of the time they are struck down because a service charge is different from the rate charged for the room and therefore not subject to occupancy tax.  Occupancy taxes are already paid for in full on the amount received by a hotel when a traveler purchases a room from a travel agent.

Virginia wants to expand its hotel occupancy tax to the service fee.  This is clearly an attempt to tax people outside their borders and an attempt at double taxation – occupancy tax and income tax.  The margin that travel agents receive is so minimal that while a single consumer may not see their rate increase dramatically the travel agent service, if taxed in this manner by all states, could be effectively driven out of business.  Which, in the end, would limit consumer choice.

People booking for large groups, and office retreat, a school trip, or a large family’s vacation, would feel the burdens of this tax increase.  They may choose a different state to visit or shorten their stay.  The overall cost would increase for a large group by perhaps hundreds of dollars.

This is another faulty attempt by revenue hungry and budgeting shy officials to tax innovative businesses.  The likelihood of this tax backfiring and causing a state to loose money in tourism and travel agent business is high; much higher than the revenue that could be gleaned from this taxation attempt.