BY MALIA ZIMMERMAN – Travel Technology Association, a trade organization that represents the nation’s top online travel companies including Amadeus, Expedia, Hotels.com, Hotwire, Priceline, Orbitz Worldwide, Travelocity, Travelport and Vegas.com, will fight a court ruling that orders them to pay millions of dollars in back state taxes for $2.7 billion in Hawaii hotel room sales.
Tax Appeal Court Judge Gary W.B. Chang said Friday the companies owe $150 million in back General Excise Taxes (GET) for the years 2000 to 2011, and will likely be responsible for another $20 million in 2012. The online companies will be required to pay the GET on future sales of Hawaii hotel rooms.
Hawaii, which is among the overall highest taxed states in the nation, has no sales tax, and is the only state with a GET imposed at every level of transaction on goods and services, including medical services, food, prescription drugs – essentially almost all economic activity. The GET is 4.712 percent on Oahu and 4 percent in the state’s three other counties, including Maui, Hawaii Island and Kauai.
The Hawaii state attorney general argued the online travel companies “collected sufficient money to cover the GET and transient accommodation taxes from consumers purchasing Hawaii hotel rooms, but never filed any returns or paid any taxes to the State of Hawaii.”
Chang agreed with part of the argument, ruling the GET is a “privilege tax imposed on businesses for the privilege of doing business in the State of Hawaii.”
The judge disagreed that the online travel companies should be responsible for the state’s 9.7 percent Transient Accommodation Tax, charged on every hotel room.
The companies’ trade organization – Travel Technology Association, or Travel Tech – argued the ruling will hurt businesses and consumers.
“This ruling will significantly increase costs for all tour operators, travel agents, Online Travel Companies, and other travel intermediaries that facilitate travel to Hawaii. Because demand for travel to Hawaii is acutely sensitive to price changes, this change in tax treatment will harm consumers and significantly reduce demand for Hawaii vacations,” Travel Tech said. “Travel Tech members intend to challenge this ruling as well as work cooperatively with tourism leaders and lawmakers to minimize the ruling’s damage to the Hawaii tourism economy.”
However, Gov. Neil Abercrombie, who asked his attorney general to pursue the case as one of his “top priorities”, said the ruling is “significant” for Hawaii.
“I asked the Attorney General and the Tax Director to aggressively and relentlessly go after these taxes that were due and owing. The court’s ruling shows that we were right to pursue this,” Abercrombie said.
Abercrombie, a Democrat, has been critical of his predecessor, Gov. Linda Lingle, a Republican, who opted not to pursue the case against the online companies.
Attorney General David Louie said the ruling is fair to the state as well as local hotel owners.
“Hawaii hotels are good corporate citizens, paying their fair share of taxes to support the state’s infrastructure, such as roads, schools, personnel and other costs, and the Online Travel Companies need to also play by the rules and pay their fair share. We look forward to reaching a final resolution and collecting these monies for the people of Hawaii,” Louie said.
Lowell Kalapa, president of the Tax Foundation of Hawaii, agrees with the court’s ruling on the GET.
“The court – Hawaii’s GET is not a retail sales tax, it is a privilege tax, for the privilege of doing business in Hawaii.”
Judge Chang, after a lot of thought and walking through the case, recognized what we have been saying all along (about the GET),” Kalapa said. “While these businesses are not located in the state, the product is consumed in the state.”
Kalapa said the ruling sets a precedent. “What Orbits and other online travel companies can get away with in other states, they cannot get away with it here.”
The attorney general said the state government may appeal the court’s adverse ruling on the transient accommodations tax.
The parties will meet in the Tax Appeal Court on March 8, 2013 to determine penalties. Any additional outstanding issues will be resolved in trial beginning on April 15, 2013.