The Online Hotel Booking Hustle
A lawsuit in Las Vegas takes aim at a pernicious sales tax loophole.
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Every time you book a hotel room through an online platform such as Expedia, Orbitz, Hotwire, or Travelocity, you are perhaps unwittingly participating in a sales tax scam that costs states and cities across the country a hefty chunk of revenue.
This is a long-running hustle on the part of online travel agencies, known as OTAs. But it’s back in the spotlight in, arguably, the hotel capital of the U.S., Las Vegas, because the Nevada Supreme Court recently allowed a lawsuit filed on behalf of taxpayers against the online travel agencies to proceed to trial.
The case highlights yet another of the myriad ways in which corporate power, consolidation, and shady sales tax policies collide to suck resources away from the public.
Here’s the issue: Online travel agencies negotiate with hotels for rooms at a particular rate, known as the “wholesale” rate. They then sell them to customers at a marked up “retail” rate. The difference between what you pay the online platform and what the platform pays the hotel is where the platform makes it money.
But when it comes time to remit the sales tax paid by customers to the various governments to which it’s due, the online travel agencies only send in the taxes applied to the wholesale rate, not the retail rate they charged customers. So even if you, the purchaser, paid $200 for a room and were charged your sales tax accordingly, the online travel platforms only submitted the applicable sales tax on the wholesale rate — say, $150 — that it paid to the hotel. (Usually, the platform sends the tax in to the hotel, which in turn remits it to the government.)
The online travel agencies allegedly just pocketed the rest — the sales tax applied to those $50 between $150 and $200, in my example — under the argument that customers aren’t really paying the listed price for a hotel room, but the wholesale price plus whatever the online agency charges for its services connecting them to the hotel.
That’s a cute little argument, but it’s also something no other retailer that purchases items wholesale would be able to get away with for long. (Imagine a grocer or clothing store trying to pull the same trick.) But OTAs have been getting away with it, depending on where you live, for years.
The plaintiffs in the Nevada case claim this hustle was a fraud on consumers that the online travel agencies knowingly perpetrated. They’re alleging a violation of Nevada’s False Claims Act, and say that the travel agencies owe hundreds of millions of dollars in back sales taxes to the state.
“There is no way the online travel companies did this mistakenly,” said Sig Rogich, a communications consultant who is one of the plaintiffs in the case. “They intentionally withheld this money that rightfully belongs to taxpayers in Nevada.”
Some locales, such as New York State, North Carolina, Georgia, New Mexico Pennsylvania, Maryland, Maine, Montana, and Washington, D.C., have successfully used either the legislative process or the courts to close the online booking loophole, clarifying that online travel agencies owe the full sales tax from the retail rate consumers pay. Those states and cities that have thus far foregone a fix are, like Las Vegas, leaving serious money on the table. (Check out this very helpful map from the Center on Budget and Policy Priorities to see the status in your state.)
This is not the only instance of big corporations taking advantage of sales taxes to line their own pockets, of course. For example, I’ve written about scams in both the retail and rental car industries that are based on the sales tax. And like in those cases, one of the issues at play in online travel booking is corporate consolidation, and the power and ability to collude that such consolidation conveys.
Though it may seem like there are many online travel platforms out there, there are actually just a few: I intentionally included the four different sites I put in the lede to this piece — Expedia, Orbitz, Hotwire, and Travelocity — because they are all part of one large conglomerate: Expedia Group.
In fact, most of the online travel booking sites you know of are owned by just three large corporations: Expedia Group, TripAdvisor, and Booking Holdings. Here’s a good chart of all this common ownership. Sites across the internet, purporting to provide customers with nearly endless consumer choice, are all the same players, just dressed up in different designs.
This consolidation makes it quite easy for multiple sites to engage in the same chicanery, because they’re either owned by the same parent, or at best are part of a small oligopoly that can easily copy and paste each other’s pernicious practices, leaving no opportunity for competition that would keep them honest.
This consolidated common ownership also allows online travel agencies to engage in a host of other anti-competitive tactics that ultimately raise prices for consumers.
But even that’s not the end of the story: Much of the consolidation that’s happened in the OTA industry stems from an even deeper failure on the part of antitrust enforcers. Executives at online travel agencies consolidated their industry in part due to a threat from both Google and the airlines, neither of which were adequately reined in when they should have been.
For example, Google purchased the main flight software company that allowed OTAs to present flights from multiple airlines on the same screen, allowing it to preference its own Google flights tool and make its competitors reliant on access to a Google-owned product. And airline consolidation meant competition for customers was less intense, because there were fewer options. So online travel agencies lost a lot of leverage vis a vis their competitors, and became dependent on a major tech firm to stay in business. They consolidated to try to address those power imbalances.
So consolidation begat consolidation, which eventually came around to bite the public in multiple ways, including the widespread application of a scheme to shortchange taxpayers.
Nevada-based lawmakers could and should, of course, just change the law like other jurisdictions have, in order to ensure that all proper sales taxes on hotel rooms are collected. But lawmakers and antitrust enforcers also need to recognize that allowing rampant consolidation can have negative effects across not just the industry in question, but others as well, affecting markets for products, labor, and even how and whether the taxpaying public receives the revenue it’s due.
UPDATE: I wrote last week about how landlords are using a centralized software provider called RealPage to engage in what looks a whole lot like price-fixing. The Washington, D.C. attorney general this week officially filed suit against RealPage and a slew of D.C. landlords making just that allegation: That they built a cartel aimed at gouging renters by preventing price competition. “At bottom, the rents RealPage generates are not recommendations. Rather than competing on price, Participating Landlords agree to and do impose the RealPage-generated rents nearly all of the time,” the complaint says. Here’s my organization’s statement on the case.
UPDATE II: I’ve written quite a bit about the ongoing battles between Disney, the city of Anaheim, and workers at Disneyland over wages, corporate subsidies, corruption, and the nexus between all three. The latest twist in the tale is a positive one: The California Supreme Court seems to have finally ended Disney’s long-running campaign against a 2018 voter-approved referendum requiring corporations that receive public funding to pay a $15 per hour minimum wage that rises with inflation. “Disney’s at the end of the road in terms of appeals,” said an attorney representing Disney workers.
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— Pat Garofalo