Hawaii Judge: Online Travel Companies Don't Owe Unpaid Taxes

Online travel companies that book hotel rooms in Hawaii have not shortchanged the state millions in tax remittances, a state judge ruled Monday (October 22).

Hawaii alleged the online companies owed some $700 million in unpaid taxes dating back to 1999, a significant amount of money for a state with a biennial budget of about $22 billion.

But in enacting the state's hotel occupancy tax, the legislature did not intend to include online travel companies, such as Expedia, Orbitz and Priceline, or travel agents, Circuit Judge Gary Won Bae Chang ruled, according to the Honolulu Star Advertiser.

That ruling continues a losing trend for governments seeking judicial remedy for what they see as a growing problem: As more travelers book hotel rooms online rather than directly through hotels, governments gain fewer tax dollars.

That's because online travel companies collect taxes on rooms' normal rates, but they base remittances on discounted rates they negotiate, pocketing the rest as a service fee.

In 2010, the total difference in those rates amounted to $2.7 billion in the U.S., according to a study by the Economic Research Organization at the University of Hawaii.

Seeking that lost revenue, state and local governments have filed some 70 lawsuits in 25 states and the District, the Tax Foundation found in a May report. The governments have argued that hotel occupancy rates or other tax schemes should apply to online companies.

Governments have won only in Illinois, South Carolina, Texas and the District of Columbia, according to the report. Online travel companies have prevailed in 19 of states, including Hawaii, saying they are exempt from occupancy statutes because they neither own nor operate the hotels. Cases are pending in four states.

Despite the ruling, Hawaii isn't finished in court with online travel companies. As the Star Advertiser notes, the state is also seeking millions from the companies in alleged unpaid excise taxes. Those arguments will begin next month.

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