Quantcast
4S Ranch Allied Gardens Alpine Baja Balboa Park Bankers Hill Barrio Logan Bay Ho Bay Park Black Mountain Ranch Blossom Valley Bonita Bonsall Borrego Springs Boulevard Campo Cardiff-by-the-Sea Carlsbad Carmel Mountain Carmel Valley Chollas View Chula Vista City College City Heights Clairemont College Area Coronado CSU San Marcos Cuyamaca College Del Cerro Del Mar Descanso Downtown San Diego Eastlake East Village El Cajon Emerald Hills Encanto Encinitas Escondido Fallbrook Fletcher Hills Golden Hill Grant Hill Grantville Grossmont College Guatay Harbor Island Hillcrest Imperial Beach Imperial Valley Jacumba Jamacha-Lomita Jamul Julian Kearny Mesa Kensington La Jolla Lakeside La Mesa Lemon Grove Leucadia Liberty Station Lincoln Acres Lincoln Park Linda Vista Little Italy Logan Heights Mesa College Midway District MiraCosta College Miramar Miramar College Mira Mesa Mission Beach Mission Hills Mission Valley Mountain View Mount Hope Mount Laguna National City Nestor Normal Heights North Park Oak Park Ocean Beach Oceanside Old Town Otay Mesa Pacific Beach Pala Palomar College Palomar Mountain Paradise Hills Pauma Valley Pine Valley Point Loma Point Loma Nazarene Potrero Poway Rainbow Ramona Rancho Bernardo Rancho Penasquitos Rancho San Diego Rancho Santa Fe Rolando San Carlos San Marcos San Onofre Santa Ysabel Santee San Ysidro Scripps Ranch SDSU Serra Mesa Shelltown Shelter Island Sherman Heights Skyline Solana Beach Sorrento Valley Southcrest South Park Southwestern College Spring Valley Stockton Talmadge Temecula Tierrasanta Tijuana UCSD University City University Heights USD Valencia Park Valley Center Vista Warner Springs

Expedia, Hotwire, and Priceline cost the city millions in taxes

Hotel taxes lost due to city’s internet ineptitude

Approximately $3 million is lost each year - Image by Andy Boyd
Approximately $3 million is lost each year

In December 2016, the California Supreme Court ended a 13-year legal fight waged by San Diego to collect tens of millions of dollars in hotel occupancy taxes from online travel companies such as Expedia, Hotwire, and Priceline.

photo

Most hotel occupancy statutes were written decades before online travel companies existed.

In the ruling, the state’s highest court found that San Diego’s municipal code requires hotel operators, not online travel firms, to collect transit occupancy taxes from guests, meaning the online travel companies are only responsible to charge hotel taxes on the wholesale amount they purchase the rooms for and not the amount that they charge for the rooms.

Gaps in municipal codes exist due to the fact that most transient occupancy statutes were written decades before the creation of the internet, well before online travel companies existed. By failing to update the codes, municipalities such as San Diego have had to play catch-up with newly emerging technologies. In doing so, online travel firms were placed into a “merchant” role — in other words, selling discounted hotel rooms instead of acting as agents for those hotels. Online travel firms and the hotels reached an agreement that the online companies were only responsible to pay taxes on the discounted amount they purchased the hotel rooms for and not the retail amount.

Under the current set-up, San Diego and other cities throughout the country haven’t collected millions in tax revenues they would have received had visitors purchased rooms directly from hotels. In 2010, San Diego staffers estimated that approximately $3 million was lost per year, an estimate that has likely increased in recent years to reflect higher room rates and the rising popularity of online travel firms. In an effort to recoup what San Diego’s financial staff estimated to be $21 million in back-taxes from the years 2000 to 2008, San Diego’s elected officials opted to fight the arrangement in court.

But as deputy city attorneys worked in conjunction with outside legal counsel to fight the online travel companies in court, Katheryn Rhodes, a local civil engineer and advocate for the homeless, prodded the city to alter course by changing the city’s municipal code to include online travel firms. Doing so, Rhodes suggested, would have ended a long legal fight and also compelled online travel companies to pay the full share of hotel occupancy taxes. Rhodes says that the extra hotel tax revenues, were the new law written correctly, could be directed to the city’s general fund to help pay for services and important city issues such as solving, or at least addressing, homelessness in San Diego.

Beginning in 2014, Rhodes has been asking San Diego’s city councilmembers to place a measure on the ballot, a required step when dealing with any tax measure. But the council stayed the course.

In 2016, she once again asked the council to place a measure on the ballot in order to address the long-running dispute over online travel companies and hotel occupancy taxes. Council again chose to ignore her proposal.

“Free cash is being lost,” says Rhodes. “This is very low-hanging fruit, and San Diego is losing general fund revenues that could solve our homeless problem due to misinformation from outside attorneys looking for large payouts, lack of financial analysis from city staff, and failed leadership from San Diego’s elected officials.”

Amending the code to include online travel firms is not a new idea. However, only one city in San Diego County has taken the initiative to the voters. In 2012, the City of Santee approved an amendment to the Transient Occupancy Tax statute, which designates online travel companies as a hotel operator.

“Our [transient occupancy tax] ordinance applies the tax to the full amount of rent charged to the transient, and defines rent as the total consideration charged to the transient, including service charges and online booking fees without any deduction there from whatsoever,” says Santee finance director Tim McDermott. “The ordinance also defines the operator to specifically include [online travel companies], thus requiring either the [online travel firm] or the proprietor of the hotel to remit [the hotel tax] based on the full amount that the guest pays and not the discounted amount.”

Larger cities throughout the country have followed Santee’s lead. In 2014, 76 percent of voters in Palo Alto approved increasing their transient occupancy tax and to include “online brokers” as registered agents required to pay the full share of taxes.

In 2015, the City of Chicago amended their hotel-tax ordinance to include online travel firms. The decision to do so occurred two years after a Cook County judge awarded the city $29 million in back-taxes from the online travel companies, a decision that strayed from courts in other parts of the country.

Namara Mercer, executive director for the San Diego Hotel Motel Association, says her group is ready and willing to work with the city on any future amendment or change to the municipal code to include online travel firms. She says a proposal is working its way through city departments. A city spokesperson did not respond to a request for comment.

“This isn’t a new issue,” Mercer said during a March 10 phone interview. “Cities throughout California, San Diego included, have failed to keep up with the new technology and trends, whether that’s home-sharing websites [such as Airbnb] or online travel agencies. The city is aware that we want to work with them to get this done or, at the least, be part of the discussion.“

However some experts say amending the city’s hotel tax ordinance could be more difficult than Rhodes and others think.

Joseph Henchman, vice president of the Washington DC-based Tax Foundation and former Oceanside resident, believes amending the ordinance could possibly invite expensive legal challenges and that applying decades-old ordinances to include new technology doesn’t work. Also, passing such an ordinance would require a two-thirds voter approval.

“The cities argue that these statutes are elastic enough or forward-thinking enough to apply to online travel companies even though they wouldn’t exist for several decades, when current statutes were writen and weren’t remotely contemplated by the drafters or included in the text.”

Henchman likens it to trying to tax secretaries or travel agents who used to book travel for their bosses. Furthermore, targeting one specific group in an attempt to generate additional revenues is troublesome.

“Explicitly passing a tax on facilitating travel transactions to their [city] will make it sound like they don’t want people visiting. It’s one thing to make a big faceless out-of-state company like Expedia pay a tax, but the law would have to be written more broadly than just them or else it would violate constitutional restrictions on only taxing out-of-state companies but not taxing in-state companies.”

Rhodes plans to continue her efforts. “Hopefully someone in a leadership position will finally act so that no more revenues are lost to out-of-state online travel agencies and instead can go to helping San Diego residents.”

Here's something you might be interested in.
Submit a free classified
or view all

Previous article

Vista squeezes pot clinics with 4375 percent fee rise

While Oceanside ponders the storefronts
Next Article

If sci-fi glam really makes a comeback, UNI will rule them all

Big changes for little band may put them at the head of the class of 2020
Approximately $3 million is lost each year - Image by Andy Boyd
Approximately $3 million is lost each year

In December 2016, the California Supreme Court ended a 13-year legal fight waged by San Diego to collect tens of millions of dollars in hotel occupancy taxes from online travel companies such as Expedia, Hotwire, and Priceline.

photo

Most hotel occupancy statutes were written decades before online travel companies existed.

In the ruling, the state’s highest court found that San Diego’s municipal code requires hotel operators, not online travel firms, to collect transit occupancy taxes from guests, meaning the online travel companies are only responsible to charge hotel taxes on the wholesale amount they purchase the rooms for and not the amount that they charge for the rooms.

Gaps in municipal codes exist due to the fact that most transient occupancy statutes were written decades before the creation of the internet, well before online travel companies existed. By failing to update the codes, municipalities such as San Diego have had to play catch-up with newly emerging technologies. In doing so, online travel firms were placed into a “merchant” role — in other words, selling discounted hotel rooms instead of acting as agents for those hotels. Online travel firms and the hotels reached an agreement that the online companies were only responsible to pay taxes on the discounted amount they purchased the hotel rooms for and not the retail amount.

Under the current set-up, San Diego and other cities throughout the country haven’t collected millions in tax revenues they would have received had visitors purchased rooms directly from hotels. In 2010, San Diego staffers estimated that approximately $3 million was lost per year, an estimate that has likely increased in recent years to reflect higher room rates and the rising popularity of online travel firms. In an effort to recoup what San Diego’s financial staff estimated to be $21 million in back-taxes from the years 2000 to 2008, San Diego’s elected officials opted to fight the arrangement in court.

But as deputy city attorneys worked in conjunction with outside legal counsel to fight the online travel companies in court, Katheryn Rhodes, a local civil engineer and advocate for the homeless, prodded the city to alter course by changing the city’s municipal code to include online travel firms. Doing so, Rhodes suggested, would have ended a long legal fight and also compelled online travel companies to pay the full share of hotel occupancy taxes. Rhodes says that the extra hotel tax revenues, were the new law written correctly, could be directed to the city’s general fund to help pay for services and important city issues such as solving, or at least addressing, homelessness in San Diego.

Beginning in 2014, Rhodes has been asking San Diego’s city councilmembers to place a measure on the ballot, a required step when dealing with any tax measure. But the council stayed the course.

In 2016, she once again asked the council to place a measure on the ballot in order to address the long-running dispute over online travel companies and hotel occupancy taxes. Council again chose to ignore her proposal.

“Free cash is being lost,” says Rhodes. “This is very low-hanging fruit, and San Diego is losing general fund revenues that could solve our homeless problem due to misinformation from outside attorneys looking for large payouts, lack of financial analysis from city staff, and failed leadership from San Diego’s elected officials.”

Amending the code to include online travel firms is not a new idea. However, only one city in San Diego County has taken the initiative to the voters. In 2012, the City of Santee approved an amendment to the Transient Occupancy Tax statute, which designates online travel companies as a hotel operator.

“Our [transient occupancy tax] ordinance applies the tax to the full amount of rent charged to the transient, and defines rent as the total consideration charged to the transient, including service charges and online booking fees without any deduction there from whatsoever,” says Santee finance director Tim McDermott. “The ordinance also defines the operator to specifically include [online travel companies], thus requiring either the [online travel firm] or the proprietor of the hotel to remit [the hotel tax] based on the full amount that the guest pays and not the discounted amount.”

Larger cities throughout the country have followed Santee’s lead. In 2014, 76 percent of voters in Palo Alto approved increasing their transient occupancy tax and to include “online brokers” as registered agents required to pay the full share of taxes.

In 2015, the City of Chicago amended their hotel-tax ordinance to include online travel firms. The decision to do so occurred two years after a Cook County judge awarded the city $29 million in back-taxes from the online travel companies, a decision that strayed from courts in other parts of the country.

Namara Mercer, executive director for the San Diego Hotel Motel Association, says her group is ready and willing to work with the city on any future amendment or change to the municipal code to include online travel firms. She says a proposal is working its way through city departments. A city spokesperson did not respond to a request for comment.

“This isn’t a new issue,” Mercer said during a March 10 phone interview. “Cities throughout California, San Diego included, have failed to keep up with the new technology and trends, whether that’s home-sharing websites [such as Airbnb] or online travel agencies. The city is aware that we want to work with them to get this done or, at the least, be part of the discussion.“

However some experts say amending the city’s hotel tax ordinance could be more difficult than Rhodes and others think.

Joseph Henchman, vice president of the Washington DC-based Tax Foundation and former Oceanside resident, believes amending the ordinance could possibly invite expensive legal challenges and that applying decades-old ordinances to include new technology doesn’t work. Also, passing such an ordinance would require a two-thirds voter approval.

“The cities argue that these statutes are elastic enough or forward-thinking enough to apply to online travel companies even though they wouldn’t exist for several decades, when current statutes were writen and weren’t remotely contemplated by the drafters or included in the text.”

Henchman likens it to trying to tax secretaries or travel agents who used to book travel for their bosses. Furthermore, targeting one specific group in an attempt to generate additional revenues is troublesome.

“Explicitly passing a tax on facilitating travel transactions to their [city] will make it sound like they don’t want people visiting. It’s one thing to make a big faceless out-of-state company like Expedia pay a tax, but the law would have to be written more broadly than just them or else it would violate constitutional restrictions on only taxing out-of-state companies but not taxing in-state companies.”

Rhodes plans to continue her efforts. “Hopefully someone in a leadership position will finally act so that no more revenues are lost to out-of-state online travel agencies and instead can go to helping San Diego residents.”

Sponsored
Here's something you might be interested in.
Submit a free classified
or view all
Previous article

Anne Bradstreet: the first writer in North America to be published

The first poet of importance in the American literary tradition
Next Article

Covid-19 casts a pall over San Diego political money

Barbara Bry's daughter lends $5000
Comments
6

That is what you get from your high price city workers. We give then high salaries and a gold plated retirement for poor work performances. It is the normal city hall screw up with nobody ever be held accountable for poor performance. The city should just declare BK and fire all the clowns and start over.

March 22, 2017

Wrong; this can all be laid at the feet of city councils for not seeing what was coming and changing the statutes, a thing that has to be voted on anyway.

March 23, 2017

Dustin, the way I read this is: EXPEDIA online buys a block of rooms from HOLIDAY INN for $30 a night and then sells them online for $100 a night. Holiday Inn is selling the rooms for $30 in the eyes of the City of San Diego Treasurer Tax Collector and that's the value they tax. With a hotel tax around 16.5% that means the city would collect $5 in tax instead of the $16 you would pay booking directly with Holiday Inn and this difference is what the people in the article think of as "free cash" being wasted. Problem is, any tax increase will need a public vote and 2/3 voter approval. So why is the Hotel Motel industry on board with this? Well, Holiday Inn is selling that room to Expedia not for $30 but actually $35 since Expedia is paying for the SD-TTC tax. If the tax gets passed upstream, Holiday Inn can now sell that for $35 and keep 100% for itself. Suddenly a 16.5% better deal for the hotel motel selling its spare rooms into the online secondary market.

March 23, 2017

There is not a proposed Tax Increase. Only a proposed Tax Diversion from out of state Online Travel Agencies (OTA) to the City's General Fund. The cost and TOT Tax paid by Visitors stay the same.

San Diego's TOT Rate is 10.5%, not 16.5%.

March 23, 2017

You are correct, TOT is 10.5% but often there are more city taxes. I just priced a Holiday Inn Airport Old Town at $100.88 directly from Holiday Inn online. The tax: $12.81. Which is more than 10.5%. Might be subject to a Tourism Marketing District surcharge of 2%.

March 23, 2017

I really, really despise this notion that someone who follows the law and legally pays the minimum tax possible is seen to somehow be "cheating" and depriving government of much-needed funds.

March 23, 2017

Sign in to comment

Sign in

Art Reviews — W.S. Di Piero's eye on exhibits Ask a Hipster — Advice you didn't know you needed Best Buys — San Diego shopping Big Screen — Movie commentary Blurt — Music's inside track Booze News — San Diego spirits City Lights — News and politics Classical Music — Immortal beauty Classifieds — Free and easy Cover Stories — Front-page features Excerpts — Literary and spiritual excerpts Famous Former Neighbors — Next-door celebs Feast! — Food & drink reviews Feature Stories — Local news & stories From the Archives — Spotlight on the past Golden Dreams — Talk of the town Here's the Deal — Chad Deal's watering holes Just Announced — The scoop on shows Letters — Our inbox [email protected] — Local movie buffs share favorites Movie Reviews — Our critics' picks and pans Musician Interviews — Up close with local artists Neighborhood News from Stringers — Hyperlocal news News Ticker — News & politics Obermeyer — San Diego politics illustrated Of Note — Concert picks Out & About — What's Happening Overheard in San Diego — Eavesdropping illustrated Poetry — The old and the new Pour Over — Grab a cup Reader Travel — Travel section built by travelers Reading — The hunt for intellectuals Roam-O-Rama — SoCal's best hiking/biking trails San Diego Beer News — Inside San Diego suds SD on the QT — Almost factual news Set 'em Up Joe — Bartenders' drink recipes Sheep and Goats — Places of worship Special Issues — The best of Sports — Athletics without gush Street Style — San Diego streets have style Suit Up — Fashion tips for dudes Theater Reviews — Local productions Theater antireviews — Narrow your search Tin Fork — Silver spoon alternative Under the Radar — Matt Potter's undercover work Unforgettable — Long-ago San Diego Unreal Estate — San Diego's priciest pads Waterfront — All things ocean Your Week — Daily event picks
4S Ranch Allied Gardens Alpine Baja Balboa Park Bankers Hill Barrio Logan Bay Ho Bay Park Black Mountain Ranch Blossom Valley Bonita Bonsall Borrego Springs Boulevard Campo Cardiff-by-the-Sea Carlsbad Carmel Mountain Carmel Valley Chollas View Chula Vista City College City Heights Clairemont College Area Coronado CSU San Marcos Cuyamaca College Del Cerro Del Mar Descanso Downtown San Diego Eastlake East Village El Cajon Emerald Hills Encanto Encinitas Escondido Fallbrook Fletcher Hills Golden Hill Grant Hill Grantville Grossmont College Guatay Harbor Island Hillcrest Imperial Beach Imperial Valley Jacumba Jamacha-Lomita Jamul Julian Kearny Mesa Kensington La Jolla Lakeside La Mesa Lemon Grove Leucadia Liberty Station Lincoln Acres Lincoln Park Linda Vista Little Italy Logan Heights Mesa College Midway District MiraCosta College Miramar Miramar College Mira Mesa Mission Beach Mission Hills Mission Valley Mountain View Mount Hope Mount Laguna National City Nestor Normal Heights North Park Oak Park Ocean Beach Oceanside Old Town Otay Mesa Pacific Beach Pala Palomar College Palomar Mountain Paradise Hills Pauma Valley Pine Valley Point Loma Point Loma Nazarene Potrero Poway Rainbow Ramona Rancho Bernardo Rancho Penasquitos Rancho San Diego Rancho Santa Fe Rolando San Carlos San Marcos San Onofre Santa Ysabel Santee San Ysidro Scripps Ranch SDSU Serra Mesa Shelltown Shelter Island Sherman Heights Skyline Solana Beach Sorrento Valley Southcrest South Park Southwestern College Spring Valley Stockton Talmadge Temecula Tierrasanta Tijuana UCSD University City University Heights USD Valencia Park Valley Center Vista Warner Springs
Close