Suppose you were to find a great back-to-school sale on jeans for your kids -- $20, reduced from $25 -- but the taxman demands you pay the sales tax on $25.
Or how about this: Hard times forces your company to reduce your salary from $50,000 to $40,000, but the tax collector demands income tax on the whole $50K.
What is 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.
Fairview Heights is 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. Hence, 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 a hotel and often receive a better deal because the company can market a hotel to a much larger audience.
A consumer is charged the negotiated rate for the room as well as some amount the 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 remitting the occupancy tax. So, the full amount of the tax is paid on the actual, not hypothetical, amount.
The notion proffered by some cities that they are losing money is ludicrous. In reality, these 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. These online travel companies increase business for hotels and, in turn, increase revenue to fill tax coffers.
Yet Fairview Heights tax authorities are demanding more. They want the companies to pay the occupancy tax on their profits.
The legal maneuver is clearly an attempt to intimidate companies into paying more taxes than they are required to under the Fairview Heights tax code. In fact, the code states, "There is hereby levied a tax ... for the privilege and use of renting a hotel or motel room within the City of Fairview Heights," and "It shall be the duty of the owner of every hotel or motel to secure the tax. ..."
This sort of discrimination sound familiar? It should. States and local taxing jurisdictions started trying to tax the Internet from the very moment that the World Wide Web emerged as a commercial opportunity. Even now these same officials are masterminding a scheme to create a new taxing authority sitting 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.
Perhaps 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 of court.
That's the right move, but we should add as a warning to all of the 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.