States Try to Squeeze Taxes Out of Online Travel Sites

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For years, Expedia, Orbitz and the like have avoided paying most state sales taxes because their businesses aren’t physically located in those states. But now legislatures and courts are cracking down on online retailers. Will that mean higher costs for travelers?

Online retailers have started running into problems in a number of states in the last few months as courts and state legislatures try to squeeze sales taxes out of them. So far, only five states (Connecticut, Illinois, New York, North Carolina and Rhode Island) require Internet retailers to collect sales tax. But according to Forbes, 12 other states are considering it.

Some sales taxes are paid when a traveler books through an online travel site, but not as much tax is collected as when travelers book directly through a hotel. When you use a travel site, a service charge is taken out of the total amount paid, and taxes are generally assessed on the rate the hotel gets from that travel site, not on the total amount. So states have been largely missing out on a small percentage of those taxes thanks those service fees and middlemen.

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It’s part of the larger problem that has alluded state governments for years, virtually since online retailing began. How exactly do you tax a company that sells something in your state but isn’t physically there? is the best example, and it’s currently fighting a law passed last month in California, now in effect, that requires online retailers to collect sales tax just like normal retailers would.

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But if more and more states do require online sites to collect taxes, will that trickle down to users who book hotel rooms and flights on sites like Priceline, Orbitz and others?

It’s likely that online travel sites will either have to accept that they’ll earn less on each booking or they’ll have to raise rates to pass along those added tax costs to customers. But if their rates go up, more travelers might turn to booking directly with hotels and airlines again (which, anecdotally at least, often treat their customers better because it’s often considered a sign of loyalty).

In any case, this fight is likely to take a while to play out, which means that you probably won’t see an increase in booking fees (if at all) for a while.

Updated: This post has been revised to further explain the sales taxes assessed to online retailers.