Hawaii Loses: State Judge Rules in Favor of Expedia and Other Online Travel Companies

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According to Travel Hawaii LLC, a Hawaii State judge ruled yesterday that Online Travel Companies (OTC's) do not owe over $400 million in back transient accommodations taxes, as contended by the Hawaii Department of Taxation. But the OTC's may still be liable for nearly $200 million in back general excise taxes.

Waikiki & Diamond Head

Despite prevailing in this part of the case, the Online Travel Companies may still be held liable for around $200 million in back Hawaii general excise taxes

According to Travel Hawaii LLC, a Hawaii State judge ruled yesterday against the Hawaii Department of Taxation and in favor of Expedia, Hotels.com, Orbitz, Travelocity and other Online Travel Companies (OTC's) in a tax case that could have cost the OTC's hundreds of millions of dollars. The tax in question is the "transient accommodations tax" which is a 9.25% tax levied on hotel room stays.

According to court documents, the State of Hawaii contended that the OTC's had paid the tax on the net amount they paid to Hawaii hotels for rooms, but not on the profit, or commission, they made by selling the rooms. The OTC's, in turn, contended that the State's own tax law stipulated that the tax is only due on the net amount, and that the Tax Department had formally examined the situation 4 times in the past 10 years and concluded each time that the OTC's were off the hook.

Judge Gary Won Bae Chang agreed with the OTC's point of view.

"This means that the OTC's had correctly interpreted the State's transient accommodations tax law," said John Lindelow, owner of Travel Hawaii LLC, who attended yesterday's hearing. "However, I think that the OTC's could be ruled liable for the general excise tax, which clearly they should have been paying all along." The same judge will rule on the general excise tax (GET) portion of the case, probably in December.

The GET is a 4-4.5 percent tax on most retail transactions. "State tax law and regulations are explicit that travel agencies must pay GET on the commissions they earn," said Lindelow, "and the OTC's have never paid a dime."

Travel Hawaii LLC is a registered Hawaii travel agency and operates Travel-Hawaii.com, an online travel site specializing in Hawaii. "Our company has always paid the 4.5% GET on our profits, while the OTC's have never paid it, putting the OTC's at a distinct competitive advantage against local companies such as ours who have always played by the rules," said Lindelow.

Note: Tax Appeal Court of the State of Hawaii Case Number TA 11-1-0020 and Consolidated Cases

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