Occupancy Tax Rulings Favor OTAs - Analyst Blog

While the number of legal proceedings against online travel companies/agents (OTCs/OTAs) continues to increase, there are some positive trends in recent rulings. The wins in Texas and California courts are big positives for OTAs, such as Expedia ( EXPE ), Priceline.com ( PCLN ), Orbitz Worldwide ( OWW ) and Travelocity. Particularly Expedia, since the company is being held liable for the bulk of the back taxes.

The OTA mouthpiece Interactive Travel Services Association (ITSA) has been talking about "the correct interpretation of law" by the courts in the above-mentioned states, trying to arouse sentiments by playing the "unproductive litigation" card that was "wasting taxpayer resources."

This rhetoric aside, it appears reasonable that the OTAs should receive compensation for the information and services they provide and on which they pay taxes. The fact that they neither operate the hotels, nor fix room rents, nor function as managing agents of the hotels makes it fairly obvious that imposition of transient occupancy taxes on them is unjustified.

The real reason that several cities are peeved is the fact that selling through OTAs lowers the sale value from a retail rate to a wholesale rate, which in turn lowers the amount of occupancy taxes. Given the fact that everyone is running on tight budgets, this seems like a lot of money to leave on the table.

Since existing laws did not provide for this situation, local governments in some cities, such as South San Francisco and Los Angeles amended and expanded key definitions, such as "rent" and "operator." Of course, this is not helping matters any, since it is effectively changing definitions by state and city. OTAs too, are doing their bit. They have vague charges referred to as tax recovery and other fees, which are getting people excited against them. All these practices, actions and counter-actions are needlessly complicating matters for both hotel operators and their online partners.

What is needed is a centralized approach that could seamlessly apply to all states, but it is unlikely that this will happen any time soon, or if at all. In the absence of such a solution, all parties involved are trying to make the most of the situation.

While OTAs have lost in some cities, they continue to appeal those cases. However, while in the past, it looked like they were going to lose the war; it is increasingly looking like they are winning more battles.

While occupancy tax matters are likely to remain in flux in the foreseeable future, OTAs continue to see their revenues grow, as the U.S. ups spending on both business and leisure travel and international markets, particularly in Asia gather steam.

As a result, the Zacks Rank for the entire segment, including big players like Expedia, Priceline, Orbitz, as well as smaller ones like Ctrip.com International ( CTRP ), eLong Inc ( LONG ) and MakeMyTrip Ltd ( MMYT ) is #3, indicating a Hold recommendation in the short term.

CTRIP.COM INTL ( CTRP ): Free Stock Analysis Report

EXPEDIA INC ( EXPE ): Free Stock Analysis Report

ELONG INC-ADR ( LONG ): Free Stock Analysis Report

MAKEMYTRIP LTD ( MMYT ): Free Stock Analysis Report

ORBITZ WORLDWID ( OWW ): Free Stock Analysis Report

PRICELINE.COM (PCLN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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