Suppose you were to find a great back-to school-sale on jeans for your kids — only $20, reduced from $25 — but the taxman demands you pay the sales tax on $25.
Or how about this: Hard times force your company to reduce your salary from $50,000 to $40,000, but the tax collector demands income tax on the whole $50K.
What's going on?
Thousands of Americans negotiate lower prices for hotel rooms by going to online hotel-booking companies such as Hotels.com and Travelocity.com. They pay for the room, along with the various state and city taxes for that negotiated price, and everyone is happy, right? Wrong.
Several Texas jurisdictions are considering taking a case to court to force those hotel-booking Internet companies to pay the occupancy tax on the "retail" room cost, rather than what people actually pay.
Occupancy taxes are payable by hotel operators and, like sales taxes, are a transactional tax. So, the tax is paid on the actual transaction, not on a perceived or governmentally determined value.
Online travel companies do not buy rooms or keep an inventory of rooms, and are in no way hotel operators. Instead, they negotiate rates with hotels and often receive better deals because they can essentially market a hotel to a much larger audience.
A consumer is charged the negotiated rate for the room as well as the amount the Internet company charges for providing the service. When a room is booked, the company pays the hotel for the room, plus tax, and the hotel is responsible for sending the occupancy tax to the correct tax jurisdiction. So, the full amount of the occupancy tax is paid on the actual, not hypothetical, amount paid for the room.
The notion offered by some cities that they are losing money is ludicrous. In reality, online brokers generate new tax revenues.
The American Hotel and Lodging Association reports an average of 40 percent of hotel rooms go empty each night. The online travel companies do their best to close that gap, increasing business for hotels and, in turn, increasing revenue for state tax coffers.
But Texas tax authorities are demanding more. They want the online companies to pay the occupancy tax on their profits. This is in addition to the regular corporate taxes the companies already pay.
The legal maneuver is clearly an attempt to intimidate companies into paying more taxes than they are required to under the Texas tax code. In fact, the Texas code specifically exempts services, even when provided by the hotel, that are not occupancy related.
Does this sort of discrimination sound familiar? It should. States and local taxing jurisdictions started trying to tax the Internet from the very moment the World Wide Web emerged as a commercial opportunity. Even now, the same officials are masterminding a scheme to create a new taxing authority positioned somewhere above state governments and somewhat below the federal government. This politically unaccountable organization would exist for one reason — to find new ways to reach deeper into the consumer's pocket and the business till.
Maybe it is no surprise that the tax collector would turn to the courts, in some cases urged on by self-interested trial lawyers suggesting class action suits. However, when the case was brought before one Philadelphia judge recently, he threw it out.
That's the right move, but we should add as a warning to all elected officials pushing these efforts: Ludicrous cases aren't the only things that can be "thrown out" when voters get fed up with never-ending schemes to tax them.