Online hotel tax bill dies: Opponents claim closing tax loophole would have hurt Tennessee tourism

Online hotel tax bill dies: Opponents claim closing tax loophole would have hurt Tennessee tourism

March 31st, 2013 by Shelly Bradbury in Business Around the Region

The Tennessee State Capitol in downtown Nashville.

The Tennessee State Capitol in downtown Nashville.

Photo by The Tennessean /Times Free Press.

State legislators voted last week to kill a proposed change to state law that would have collected more taxes from online travel companies like Expedia or Priceline.

The bill's supporters claim it would have closed a years-old loophole that essentially allows online travel companies to pay less in taxes than brick-and-mortar hotels. But opponents call the proposal a new tax increase that would have hurt Tennessee's tourism industry.

The vote came after an aggressive campaign by Americans for Tax Reform, an anti-tax group headed by Grover Norquist in Washington, D.C., that urges lawmakers to "oppose all tax increases as a matter of principal," according to its website. The group sent out 25,000 pieces of direct mail to the sponsors' districts.

Under current state law, the online travel companies are only required to pay the state's hotel/motel tax on the wholesale price they pay the hotel. But brick-and-mortar hotels are required to pay the tax on the price they charge the consumer.

So if an online travel company buys a room from a hotel for $50, then resells that room to the consumer for $75, the company pays taxes only on the $50. But if the hotel sells that room to the consumer directly, the hotel must pay taxes on the $75.

The bill would have forced online travel companies to pay taxes on the room price charged to the consumer. It was killed in the Senate State and Local Government Committee by a 7-1 margin, with one member abstaining, on March 19. Only Committee Chairman Ken Yager voted in favor of the change.

State Sen. Doug Overbey, R-Maryville, who co-sponsored the bill with Rep. Art Swann, R-Maryville, said he thinks the opposition was persuasive, but flat wrong.

"I think the online travel companies did a very good job of confusing the issue, and unfortunately they were able to persuade a majority of the Senate State and Local Government Committee that this was a new tax, which is just absolutely incorrect," he said. "The occupancy tax has been on the books since somewhere in the 1970s, and the online travel companies have been able to exploit a loophole, to the detriment of local governments and the hotels located in Tennessee."

The mailer from Americans for Tax Reform claimed that the bill would cause the consumer to spend more.

"Tennessee families looking to visit Dollywood or any number of attractions in the state will pay more if they book online or through a travel agent," the flier reads.

But the bill would not have increased the price consumers pay for hotel rooms, only what the intermediary companies pay in taxes, said Swann.

Still, Americans for Tax Reform spokesman John Kartch said it's common sense -- if the costs go up for online travel companies, costs go up for consumers.

"Do you really think they'd just eat the cost?" he said in an email.

Robin Reck, director of communications at The Travel Technology Association, a group of online travel companies, applauded the decision to kill the bill.

"It was a bill that didn't have legs to stand on," she said.

She said the bill would have hurt tourism in Tennessee and harmed both online travel companies and brick-and-mortar travel companies by increasing their costs.

The online travel companies spent a lot of money lobbying against the bill, Tennessee Hospitality Association President and CEO Greg Adkins said.

"What that tells me is how much money we're actually losing in Tennessee because they're not paying their fair share of taxes," he said. "Statewide, it's millions of dollars worth of tourism promotion dollars that are going to private companies outside the state of Tennessee instead of our cities and counties, which is unfortunate."

Charging the online travel companies the same tax rate that brick-and-mortar hotels pay would have increased tax revenues statewide by $1.5 million, according to the bill's fiscal note. Overbey said he was disappointed by the methods the online travel companies used to oppose the bill.

"I think it's regrettable that people are engaging in Washington-style politics to influence decision making in Tennessee," he said.

He added that he may bring the bill back to the floor next year.

"I still believe the bill is the right thing to do," he said, "and over the summer and fall I'll have further conversations with my colleagues and try to do a better job of showing them how we're simply closing a loophole and bringing our law up to date."

Contact staff writer Shelly Bradbury at or 423-757-6525.