As Digital Liberty’s Katie McAuliffe has explained, the internet is the new frontier for higher taxes. Although federal legislation to impose a national internet tax scheme on states and businesses failed to pass in the 112th Congress, many states took notice of the potential for new revenue. Some states are even going as far as imposing their own internet tax schemes.

Tennessee, Indiana, Texas, Pennsylvania, Virginia, New Mexico, Connecticut, Oregon, Utah, and Massachusetts are among the “give me more” legislatures looking to grow state coffers. The focus for these states is online hotel booking agents.

As Katie points out,

Hotels offer a room rate to travel agents, which already has the hotel occupancy tax included in the room rate.  They charge the buyer a service fee for locating the room, which is separate from the room rate.  It is a fee for the service of finding the room and this fee is taxed under income tax laws because it goes to the travel agents income.

The Online Travel Agent or Store Front Travel Agent’s facilitation of locating a room is a service and not the same as the room provide by the hotel where the traveler will be staying.  Attempting to expand the hotel occupancy tax would treat the service provider in the same way as a hotel for tax purposes, obscuring the difference between a hotel room and a service. 

Even more, such efforts are illegal. The 1998 Internet Freedom Act prohibits taxes applied only to internet based businesses and not their counterparts.

When laws of this nature have come before the courts, 90% of the time they are struck down because a service charge is different from the rate charged for the room and therefore not subject to occupancy tax.  Occupancy taxes are already paid for in full on the amount received by a hotel when a traveler purchases a room from a travel agent.

What’s the big deal, you ask? Katie’s got the answer to that as well:

People booking for large groups, an office retreat, a school trip, or a large family’s vacation, would feel the burdens of this tax increase.  They may choose a different state to visit or shorten their stay.  The overall cost would increase for a large group by perhaps hundreds of dollars.

This is another faulty attempt by revenue hungry and budgeting shy officials to tax innovative businesses.  The likelihood of this tax backfiring and causing a state to lose money in tourism and travel agent business is high; much higher than the revenue that could be gleaned from this taxation attempt.

This innovative tax scheme has been proposed by both Republican-run states and Democrat ones. Perhaps instead of considering new (illegal in many cases) taxes, legislatures should look within their own budgets to cut back in the same manner that millions of Americans have over the last 4 years.

What are your thoughts? Should tourists bear the burden of state legislatures unwilling to cut back on spending, even though millions of Americans have done just that in the past 4 years?

Posted by Paul Blair on Monday, February 4, 2013 11:47 AM EST

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