Major online travel agencies are seeking to reverse a federal court’s public disclosure of how they calculate their service fees when selling hotel rooms using the merchant model.
The OTAs for a decade have bundled their “taxes and fees” when consumers book hotel rooms on a merchant model basis because the OTAs sought to hide their margins out of competitive concerns. In so doing, consumers are kept in the dark about how much taxes they are paying and how much is allotted for service fees.
But in handing the OTAs a $20.6 million or more defeat in the City of San Antonio vs. Hotels.com class-action lawsuit, Judge Orlando Garcia made several revelations, which the OTAs may consider confidential.
In filing an advisory motion on July 5, four days after the judge’s ruling, the defendants cited one of the revelations that they deem should be confidential. “For example, the court disclosed the method and manner that Hotels.com calculated its service fee…” the OTAs stated.
As part of its ruling, the court, citing testimony, disclosed that:
- For around 11 years, “Hotels.com’s service fee was calculated by taking the markup or margin and multiplying it by the tax rate.”
- “For six years, Travelocity’s variable surcharge was calculated by taking the markup amount and multiplying it by the tax rate, resulting in the same amount that the Cities contend should have been paid in taxes…. In November 2008, the variable surcharge was dissolved and the fixed service fees went from 2.61 to 5.5%.”
- Expedia, too, used an adjustable service fee that equated to the amount the cities deemed they were owed on Expedia’s markup.
In their advisory motion, the online travel agencies alleged that the court erroneously disclosed confidential information that was part of a protective order and a pending motion to redact the transcript of the trial.
The defendants therefore asked the court to “temporarily” seal the judge’s July 1 ruling, which already has been made public.
The defendants asked the court to seal the ruling “immediately” because they realize it would be used in other court cases around the country and then they would have to file similar motions to block the revelations of what they consider to be confidential information in those courts.
In his July 1 ruling, the judge stated that the OTAs, when selling hotel rooms in Texas, should collect taxes on the retail rate and transparently disclose their taxes and fees. If they did so, then there would be no mystery concerning how they calculate the service fees they charge.
But, the OTAs plan to appeal the judge’s ruling about their hotel tax liabilities.
The court on July 1 also disclosed several items about OTA-hotel contracts that the OTAs assuredly didn’t want to see in the public domain.
Among them, the court revealed:
- The 2006 Expedia-Marriott contract and an Expedia agreement with InterContinental Hotels barred the hotels from advocating that the online travel agencies should collect tax on their markups.
- In the run-up to InterContinental Hotels’ withdrawal from Expedia in 2004, InterContinental Hotels pressed Expedia to transparently display taxes and fees. Expedia and sister company Hotels.com refused to do so, and the hotel group didn’t do business with the two for a couple of years.
- Although the OTAs claim the wholesale rates they get from hotels are confidential, OTA-hotel contracts, “with rare exception,” include “parity and most favored nation clauses and the various OTCs have the same wholesale or net rate with the hotels and/or hotel chains.”
- Expedia and Hotels.com collected taxes on the retail rate when selling hotels using the merchant model for a short period, ending in 2002.
The court also provided a possible glimpse into the online travel agency e-commerce world in the event that they are forced to pay taxes on their margins when selling rooms using the merchant model.
The judge noted that: “The OTCs (online travel companies) concede that they currently make enough revenue through their markup and service fee to charge taxes on the margin and still make a considerable profit.”
In the event that the OTAs had to pay taxes on their margins, they simply would pass on the additional taxes to the consumer, the judge quotes a Travelweb (Priceline) official as testifying.
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The reality of utilizing the merchant model for stand-alone hotel bookings under rate parity agreements with the hotel chains has always been that to accurately match the hotel’s tax-inclusive total rate, the markup must be adjusted by using the tax rate as a core factor in the calculation.
Unfortunately for the Online Travel Agencies / Online Travel Companies, mathematics is a fairly strict science.
Mathematics also dictate that under total price (tax-inclusive) parity terms, any tax liability paid by the OTA/OTC will not be passed on to the consumer as it would result in the intermediary charging a higher price compared with booking a hotel directly.
The OTA/OTC’s clearly understand that to maintain total price parity, they must to reduce their margins by an amount equal to the taxes assessed on their merchant margins.
The hotel companies (at least the mathematically enlightened ones) also understand that tax-inclusive rate parity terms are necessary to prohibit OTA/OTC’s from structurally undercutting hotels on the total retail price paid by the consumer.
Unfortunately for the OTA/OTC’s, the same hotel industry fragmentation that facilitated the significant margins being captured also led those same groups to believe that they could successfully prevail in hundreds of court cases raised by cash-starved cities that teach the basic arithmetic necessary to calculate margins & markups in their public middle schools.
Any jurisdiction having a hotel occupancy tax law that bases tax assessments on the retail price paid by the consumer should be expected to prevail unless they a) fear being tied up in litigation for years, b) have ineffective legal representation or c) don’t feel the potential tax revenue loss is worth contesting.
I would be most interested to hear the logic leading the two dramatically different Texas cities, Houston & Watauga, to opt-out of the class action suit. The number for Houston, the most populous city in the state, should have been significant.
If you have lots of time on your hands and a fascination with hotel merchant tax laws and calculations, read my blog post from December 2009 on the topic:
http://www.rockcheetah.com/blog/hotel/bathing-hotel-merchant-tax-quagmire/
Despite Columbus Georgia, New York City and now the State of Texas all siding with the cities, a tipping point may have been reached. Yes, the OTA/OTC’s will continue to fight – a couple percentage points on their hotel margins are huge numbers that they will defend fiercely.
The OTA/OTC’s may bark loudly, but the US cities will be the ones having the last bite out of the intermediary margins.
Robert: Great comment on the hotel tax situation, as usual.
I found especially insightful your comment that the OTAs would not pass the tax increases to the consumer because of rate parity concerns with the hotels.
Regarding Houston, it has its own tax case pending against the OTAs. Why it decided to go it alone, I’m not sure. From Priceline’s 10-K: City of Houston, Texas v. Hotels.com, LP., et al. (District Court of Harris County, Texas; filed Mar. 2007.
Interestingly there is a parallel issue for air. There is a corresponding hidden issues in airline fees and ancillary services. For revenue hungry municipal and state/federal authorities – the opportunity for capturing some is going to be overwhelming.
For airline fees, the airlines bundle fuel surcharges and fees together. The YQ and YR codes cover fuel surcharges and fees. Some airlines charge these as a bundle and hide the actual amount that they charge as pure fuel surcharge and pure fees.
Correspondingly the levels of final consumer pricing can vary even though the base fares are identical.
In the case of ancillaries the US IRS has determined that ancillaries are not ticket revenue. As such therefore not subject to federal rules and subsequently subject to taxes (or exempt status) – the states and local jurisdictions will (theoretically) be able to claim that these sales are subject to local taxes. So far no one is biting – but I would think someone must be looking at this.
But then again we know that not everyone sees the world through these rose coloured glasses!
Cheers