Tuesday, February 8, 2011

Online tax short fall battle concerns Disney and Universal

Online travel companies have run into a debacle this year against the American Hotel & Lodging Association that allege unfair retail tax practices.

Special interest groups continue to lobby Florida Lawmakers to pass legislation that would shelter online retail vacation packages from taxes.

Economics 101 teaches that the word wholesale is defined as the sale of a goods or services to another agency where retail is the direct sale of the same to the customer.

Online companies like Expedia Inc. and Orbitz Worldwide Inc. sell vacation packages at a discount, that in turn, generates a revenue called a "service fee".

Big brands including Starwood Hotels & Resorts Worldwide, Marriott, Hilton, Best Western, and others charge that online companies such as Expedia Inc. do not pay taxes on this "service fee".

Across the table in support of Expedia Inc. stand big brand heavyweights like Walt Disney Co. and Universal Orlando. They believe online companies keep Florida competitive in the Orlando vacation market, and should be sheltered from the tax.

Taxing online sales, could drive business directly to the hotel's own website thereby jeopardizing third party online vacation retailers like Orbitz Worldwide Inc.

Clearly this is not in the best interest of Disney and Universal who wholesale their brand products to online OTC subsidiaries such as Universal Parks & Resorts Vacations and Walt Disney Travel Co.

Generally, online companies sign contracts to purchase blocks of rooms at a discount price, or wholesale rate. Later, online vacation companies like Expedia Inc., sell the package at a higher retail price. The profit would be the difference between the wholesale and retail price to the customer, but local governments through-out Florida contend that the difference should be taxed.

At odds with the current law is the American Hotel & Lodging Association that alleges that OTC's are given advantage over the local hotel market in Florida. Current law states that the component prices, including hotel rooms, park tickets, food and other commodities will be taxed and not the package price sold by travel agencies.

At this point, the new Governor Rick Scott has not made any comment regarding this issue.

With tax cuts of some 5 billion being proposed by Tallahassee, there is a real risk that government could attempt to make hotelier's pay the difference or raise the overall tax rate per room.

The best decision would be any effort that supports competitive vacation packages in the marketplace.

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