ONLINE HOTEL FORUMS SEATA 2017

What is an On-line Forum? Sometimes referred to as peer to peer, online or collaborative marketplace. Creates an On-line market place where suppliers connect with demand. Started with online classified companies like eBay and Craigslist. Online travel companies quickly followed. They do not buy and sell products. They connect sellers with buyers and charge a fee for the service. Started with Ebay and Craiglist

Connecting Suppliers with Demand The on-line market place requires a facilitator. Host Website Contracts with retailer/seller Can also receive and process payments Charges fees for services Facilitators like OTCs charge a mark up on room rates.

WHAT IS AN ONLINE HOTEL FORUM? It is an marketplace for hotel rooms that is located on the internet. These forums are commonly referred to as online travel companies or “OTCs”. According to the American Hotel and Lodging guide, these online hotel forums account for 13% to 15% of all online hotel bookings. In the Statista’s Digital Market Outlook, online hotel bookings alone was estimated to exceed $100 billion in 2016.

WHO ARE THESE GUYS? Expedia owns: Expedia.com Classic Vacations HomeAway Hotels.com Hotwire Group Orbitz StayZ Traveldoo Travelocity Trivago VRBO.com VacationRentals.com CheapTickets Egencia.com There are 2 major companies that offer online hotel forums. They are Expedia and Priceline. These are some of the companies that are owned by Expedia. Expedia also owns Lodging.com, Travelscape and Trip Network.

Priceline owns: Priceline.com Booking.com KAYAK OpenTable Rentalcars.com Agoda.com

TWO BUSINESS MODELS 1. Agency Model 2. Merchant Model There are 2 general business models that these online hotel forums follow. The agency model acts as a travel agent. It finds you the best matching hotel for your budget and preferences. You don’t pay them anything. You pay the hotel for the room stay. The hotel pays a commission to the online travel agency, usually around 10%. Priceline and Booking.com are examples of the agency type of online hotel forum. In the merchant model, the online hotel forum buys the room nights from the hotel for a negotiated wholesale rate. Then the online hotel business marks the price back up and resell to customers. Expedia and most of their companies use this type of business model. Expedia is able to negotiate low wholesale rates with hotel operators because it is able to bring them incremental business.

The “Merchant” Transaction OHF negotiates with hotel for block of rooms at a reduced price. OHF marks up the room and offers it for rent on its web site. The consumer books the room with the OHF and PAYS the OHF. The OHF remits the discounted cost of the room to the hotel. The consumer sees the OHF’s name on their credit card statement. These are the basic steps in the “Merchant” business model transaction. Questions for tax authorities is: Who is responsible for collecting and remitting sales tax on these transactions? Expedia has disputes with many tax jurisdictions over whether it should pay occupancy and sales tax on the wholesale rate it pays to the hotel or the retail rate that it charges customers.

ONLINE TRAVEL COMPANIES (OTCs)-- SEATA STATES UPDATE Majority of SEATA states are still pursuing and/or pondering the issue, whether through audit/compliance activity, litigation, legislation, or negotiation. Minority of SEATA states have resolved the sales and use tax issue with registration and reporting primarily through litigation. Legislation is also a possible way to resolve.

LITIGATION As of 2016, 34 states plus District of Columbia have litigated with OTCs, with 67% of courts siding with the OTCs. * Litigation Success in SEATA States South Carolina—Travelscape, LLC v. South Carolina Department of Revenue 391 S.C. 89, 705 S.W.2d 28 (2011) Kentucky—Department of Revenue v. Expedia, Inc. (Franklin Circuit Court, Division II, Civil Action No. 13-CI-00828, March 2016) *--Information from the Tax Foundation, February 2016, relating to hotel occupancy taxes.

Litigation Recap Travelscape SC Supreme Court decision Audited for period 7/01-6/06 Sales Tax and Accommodations Tax Court said OTCs were “engaged in business of furnishing accommodations to transients for consideration” in South Carolina Entered into contracts, sent employees to negotiate agreements, and booked reservations in exchange for consideration in SC

Litigation Recap Expedia Kentucky Circuit Court decision Sales Tax Court said “the OTC has received a consideration in exchange for the furnishing of the rental of a room”. Further, the court noted “to furnish a rental of a room in the context of this statute is to simply make it available for purchase by a traveler, which is precisely what the OTC has done” The court finds “the entire amount of the room reservation collected by the OTCs is subject to the sales tax”

Engaged in Business Does your State apply Economic Nexus? Gross Receipts test Exploitation of the market by purposely directing and promoting business towards the State. Enjoying the benefits and protections provided by the State. Does your State define: Facilitator On-line Market Place Marketplace provider Is software treated as tangible property? Many States added a presumption of nexus if Gross receipts greater than . . . . Use of courts, roads and AG’s office. Does the ownership and licensing of software create a connection?

Auditing Issues Get an understanding of their transactions from cradle to grave. Ex. OTC may not be collecting tax on service fee/markup. Review intercompany transactions. Ask about Content Distribution Networks. Geographically located data centers that speed up the internet transaction. Is software treated as tangible property? Understand how the company processes a sale from the time a customer enters their website to how a customer receives the property or service Activities engaged in by the affiliate in your State could create nexus Many contract with companies whose servers make up a network that enables the webpages of the retailer to load faster. Does the ownership and licensing of software create a connection?

SEATA STATES AND OTCs State administrator-Where do we go from here? Be persistent—”don’t give up”; see this issue through from cradle to grave Be proactive—whether by audit/compliance, litigation, legislation, negotiation, or a combination thereof, pursue every angle or approach available Be prepared—be vigilant, follow state trends and decisions, be current on legislative developments