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The Honolulu Advertiser
Posted on: Wednesday, April 16, 2003

Hotel markup eludes tax

By Sean Hao
Advertiser Staff Writer

In the world of booking hotel rooms and the state taxes paid on them, not everything is equal.

Take as an example a person who books a $150-a-night Waikiki hotel room through a tour operator, agent or Web site. Another walks in off the street and rents a room.

Even if each visitor pays the same price for a room, the amount the state collects in transient accommodations taxes — or hotel room taxes — can differ by about $3 a day.

That may sound like peanuts but multiplied by the number of rooms booked in the Islands, it could add up to $29 million or more annually in tax revenues, according to estimates by the state Department of Taxation. And as visitors turn increasingly to Internet bargains in booking hotel rooms, the lost revenue could turn out to be even more significant.

The reason the state may be losing out on these revenues can be traced to the difference between wholesale and retail room prices. Wholesalers — including Web sites Expedia.com, Hotels.com and Priceline.com — and traditional booking outlets such as travel agents and tour operators purchase rooms in bulk at a discount and pay the hotel room tax based on the lower prices.

Walk-in customers or visitors who rent rooms directly from a hotel pay taxes on the full retail rates. The difference in taxes could be $3.26 a night on a $150 room sold at a 30 percent discount to a wholesaler.

So far state officials have not changed a provision in Hawai'i law freeing wholesalers from the 7.25 percent tax on the full price for a room. Even with the state struggling to cover budget shortfalls, imposing taxes on the retail price has not been seriously discussed this legislative session.

The room taxes, which amounted to $158 million in fiscal 2002, help cover the cost of providing government services to visitors. This includes paying off the debt on the Hawai'i Convention Center and the state's tourism marketing costs. Portions of room taxes are also go to the counties.

Beneficiaries of the tax such as hotels and, to a lesser extent, wholesalers are opposed to collecting taxes on the retail price of rooms. Their concern is that higher prices will result if wholesalers are made to pay and pass on the additional taxes and record-keeping costs. Costlier hotel rooms, they fear, will turn away tourists.

"That could adversely affect our business," said Murray Towill, president of the Hawai'i Hotel Association. Wholesalers in particular "will be less motivated to market Hawai'i as a destination," he said.

Brian Ek, a spokesman for Priceline.com, said the Web site's policy is to pay local tourism taxes based on the wholesale price paid for rooms and not on the markup that hotel guests pay.

"Our understanding is the markup is not taxable," he said.

Exactly how much money the state is losing can be debated, but the Tax Department calculated in 2001 that $29 million in additional taxes would be generated by requiring wholesalers to pay taxes on full room prices.

Nearly 46 percent of visitors last year purchased their hotel rooms through wholesalers, according to the Department of Business, Economic Development and Tourism. Ninety percent of Japanese visitors booked their rooms through wholesalers.

But the more important trend is happening online. Last year, an estimated 26 million U.S. households booked their leisure travel online, generating $22.6 billion in revenues, according to Forrester Research. By 2007 online travel booking sales are expected to surge to $49.7 billion.

Wholesale room rentals and their effect on state revenues emerged as an issue in 2001 when the International Longshore and Warehouse Union Local 142 asked lawmakers to make wholesalers pay hotel taxes on full room prices.

The ILWU, which represents hotel workers on the Neighbor Islands, raised the issue during labor negotiations to put pressure on the Royal Lahaina Resort on Maui. The union ultimately got its contract and the bill was defeated.

Eusebio Lapenia Jr., president of ILWU Local 142, said the issue is still one that lawmakers should address. The union estimated the state loses $45 million a year because of lower taxes paid on wholesale room rates.

"Everybody is looking for more money," Lapenia said. "I would think the state would want to look into this."

Rep. Jerry Chang, D-2nd (Hilo), who was a co-sponsor of the bill, said increased use of the Internet may force lawmakers to revisit the issue next session.

Loss of tax revenue is "something that we have to control, if we can find some way to do it," said Chang, who heads the House Committee on Tourism and Culture.

Hawai'i isn't the only state wrestling with this issue. Louisiana and Florida have grappled with the discrepancy between taxes on wholesale and retail room rates.

Dave Bruns, a spokesman for the Florida Department of Revenues, maintains that his state is due taxes based on retail prices paid for rooms, regardless of whether they are bought from a hotel or a wholesaler.

"It's not a new issue," he said, noting that Florida also is pursuing tourism taxes from traditional wholesalers such as tour operators. But with the growth of the Internet, "it's the same issue under a different guise."