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Question Raised Over Who is Responsible for the Transient Accommodations Tax

posted in: Weekly Commentary 0
By Lowell L. Kalapa

A measure thrown into the hopper would, according to a local union, close a “loophole” in the transient accommodations tax (TAT) law that has caused the state to lose millions of dollars in hotel room taxes.
Basically, what the bill will do is to make tour packagers and travel agencies “operators” under the TAT law. Since the incidence of the TAT is on the operator of a hotel property, the TAT could be applied to tour packagers and travel agencies if the amendment were adopted. The argument is that tour packagers and travel agencies purchase rooms in bulk from the hotel and “resell” the rooms when they package them together with other tourism related services. The proponents of the bill seem to argue that what the tour packagers and travel agencies do is to mark up the room and resell it to the visitor.
Proponents liken the transaction to someone who buys a product or goods at a discount because it is a large or bulk purchase and then turns around and resells the product for a higher price to the final consumer. Seemingly that logic appears to work until one realizes that the margin between what the tour packagers and travel agencies pay for the room and what they charge the visitor is really a service charge for having put the room together with other visitor related services.
For example, the tour package more than likely will include air transportation which is also purchased at a discount because the tour packagers and travel agencies are buying blocks of seats from the airline. Throw in a lei greeting at the airport and the bus transportation to the hotel and even a luau or two – this is what is offered to the visitor. In fact, how many times have you seen such a bargain tour that if priced out separately would come to more than what the tour packagers and travel agencies are asking for the package.
Now, the proponents seem to indicate that if tour packagers and travel agencies are buying the rooms at discount when they might have paid the regular rack rate, than perhaps that is what the tour packagers and travel agencies are getting for the rooms when they are resold to the visitor. Thus, they argue, the TAT should be paid on that amount – the rack rate or regular rate – by the tour packagers and travel agencies. This is how they come up with the amount of money that the state is missing out on by not hitting up the tour packagers and travel agencies.
Unfortunately, that is not what is happening as Hawaii travelers can attest to in their travels. We certainly wonder how the local travel agents can get us to Las Vegas for such ridiculously low fares which include not only the air transportation but also hotels, transfers and sometimes a fancy show. Well, it is just that, they are getting good deals on all the components of the package and even if they add a little on top of what they paid for all the services, they still make money.
Despite taking such a small fee, the tour packagers and travel agencies still make something off the package. They are not charging the rack rate for the hotel rooms. What they are charging the visitors is a service charge for having run around and made all those deals. Thus, the difference between the cost of the services they secured and what they end up charging the visitor is a commission for their services.
If that tour packager or travel agency is in the state, they will pay 4% general excise tax on the commission portion of that sale. If the tour packager or travel agency is outside the state, it is probably impossible to capture the 4% from that travel agency. And this is what is so critical about the proposed measure to try and collect the TAT from the tour packager or travel agent. For those tour packagers or travel agencies located outside the state, it is almost impossible for the department of taxation to go after those people to collect the tax.
If that is the case, then the imposition of the TAT becomes discriminatory, collecting only from tour packagers and travel agencies in the state while not collecting from those located outside the state because the state has no jurisdiction over those businesses. If that does happen, then it would be wise for tour packagers in the state to move out of the state as a way to avoid having to pay the tax.
Thus, well intended as the legislation may be, the impact that this proposal may have goes far beyond trying to collect the tax from tour packagers and travel agencies. In the long run, it might be well that tour packagers and travel agencies not be located in the state. And there goes all those jobs.

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