Internet Travel Intermediary Attacked Over Tax Practices

by Mike Godfrey, Tax-News.com, New York

25 December 2002

Expedia.com, an Internet travel and hotel booking company, and other similar companies are being threatened with attacks by the tax authorities of a number of US states including New York, Texas, Florida and San Francisco for underpaying taxes on transactions they broker between customers and travel or hotel companies.

According to the tax authorities, Expedia and other leading travel sites charge the customer the headline price for a travel package or booking, including the sales or occupancy taxes due, but then remit to the hotel or other merchant only the wholesale rate agreed between them, providing profit margin, but including only the tax due on the wholesale price, pocketing the remainder.

Expedia Inc said on Monday in a filing with the Securities and Exchange Commission that it remits the taxes it collects back to the hotels, which in turn pay the tax authorities. The company said the amount of taxes that it collects is determined by hotels, in terms of what the hotels owe in state or local jurisdictions in sales, occupancy or other taxes. Expedia said in the filing that it believes its tax-collection practices for hotels are consistent with the tax laws of most or all jurisdictions.

If the affair ever reaches a court, it will raise extremely difficult questions of agency and jurisdiction. If an Internet company with a headquarters in (say) California brokers a transaction between a New York hotel and a client in Texas, the possibilities for confusion are endless, especially since with the laws in their current state some parts of such a transaction would not be taxable at all on the Internet.

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