Will Pennsylvania’s New Hotel Tax Law Ensnare Some Travel Agents?

When travelers book a hotel in Pennsylvania, every merchant of record is now required to apply the state’s 6 percent tax rate to the total of what a guest pays, including any markups and service fees that might be earned by a business like a tour operator, travel agent, or online travel agent (OTA).

H.B. 1511, which is expected to net around $7.7 million in tax revenue this fiscal year, and $23.6 million in fiscal year 2019-2020, was signed Wednesday by Pennsylvania Governor Tom Wolf.

The law requires that the merchant of record recording the purchase ensure that taxes be applied to the full cost for the booking borne by the consumer, like the booking fee Airbnb charges on top of rental rates and any markup applied on a rate by an OTA.

The law applies to the sale of any hotel room in Pennsylvania regardless of where the sale occurred. Iowa, Maryland and Oregon all have similar laws on their books, with Iowa’s law being enacted this Spring.

Under Pennsylvania’s law, if a hotel contracts with an OTA to offer a $100 room rate to the public, but the actual cost to the OTA is $85, in the past “that fifteen-dollar markup that went to the OTA wasn’t subject to the 6 percent tax,” said Eben Peck, American Society of Travel Advisors (ASTA) executive vice president for advocacy. “Now it is.”

Because self-booking accommodation sites like Airbnb will now be more heavily taxed, the bill’s competitive impact on travel agents could be a mixed bag.

“Pennsylvania mostly is trying to catch the OTA markups with this bill,” said Peck, who acknowledged that the law is likely going to apply to very few advisors, because agents rarely act as merchants of record. Still, ASTA lobbied against the bill because it was concerned about any potential for agent risk, as well as the administrative burdens that might be placed on agents to comply.

“The rhetoric is ‘online this, online that,’ in the headline of the bill or the news stories covering the bill,” Peck said, “but the language of these bills is far from clear.”

Iowa’s law defines a “lodging facilitator” as someone who “facilitates the renting of lodging and collects…the sales price charged to the user.” Pennsylvania’s law says the tax on advisors is triggered only “if a booking agent, acting for a [hotel] operator, collects payment for rent.”

For back-end commissions paid by the hotel to an advisor, Iowa’s law states the tax does not apply to “any commission a lodging provider pays to a lodging facilitator…facilitating the rental of lodging.”

The Pennsylvania law doesn’t address these issues but states any amount charged by a ‘booking agent’ to a consumer in connection with a hotel transaction as newly taxable. ASTA believes this excludes back-end commissions, and is posting a members-only news item to its website.

“Part of our message when we lobbied against all of these bills was ‘If you pass this, you are going to create uncertainty,” Peck said.

A spokesman for the Pennsylvania Revenue Department said a notice clarifying the application of the tax will be published in the next few weeks. “We’re aiming to have it live online well before the end of the year,” the spokesman said.

Groups and tours likely the largest risk
The activities that create the greatest risk for traditional travel advisors are things like pre-purchasing hotel inventory for tour packages of some kind, like say a weekend to watch a Penn State football game.

The Pennsylvania law says nothing about situations where a hotel room is part of a package, while the Iowa law says “the portion of the total price that represents the sales price…may be determined…from the [facilitator’s] books and records that are kept in the regular course of business.”

“If an advisor is marketing a trip that includes hotel, air, car rental, spa, etc., and packages it all, marks it up $100, and the consumer pays them, not the hotel, how much of that package price is for the hotel, and how much is for everything else?” Peck said. “This could create an accounting burden for advisors.”

Typically, state’s will only go after large entities, like national tour operators, OTAs, and the like, if they suspect tax revenue is not being collected properly. ASTA has heard no reports of enforcement actions against any non-OTAs in Iowa, Maryland or Oregon, though the laws are relatively recent.

Peck is also concerned about other states and destinations enacting similar laws, especially in places where group and packaged tours are more common for agents to be the merchant of record. Travel Market Report reached out to the U.S. Tour Operators Association, but did not receive a reply by press time.

The Pennsylvania Restaurant and Lodging Association, which has been a big proponent of the law, has positioned it as closing a loophole for OTAs and shared economy services like AirBnb.  Some Pennsylvania legislators also have publicly stated that prior to the bill, consumers could be confused about the application of the state’s lodging tax, depending on what channel they booked through.

The revenue from the tax will be directed toward tourism promotion.