Disintermediation disconnect

Few would argue that the internet has brought more rather than less transparency for consumers in virtually any sphere of commerce. Most hotels and their guests have certainly reaped the many benefits that accrue from greater visibility and concomitant critical review from user-generated content and access to consumers across the globe. As a distribution channel, it is certainly unrivaled in scope and size. That model, however, has been under attack, not from competitors of emerging technology, but by the tax man in jurisdictions around the country, And the astonishing depth and endurance of the recession seems only to have sharpened their resolve to go after the resellers.

In some ways, resellers arguably represent a disconnect in the distribution process that in many, though not all, instances extract from owners and operators and fail to pass on the benefits in a material to the consumer. They do so by carving up inventory as they seek to be a one-stop platform for travel while failing to fully disclose to the consumer the transaction costs stemming from their intermediation. That is unlike in most other instances of brokerage, which is essentially what the resellers do, where brokerage fees are fairly transparently divulged. Their rapid growth has only enhanced their seemingly unassailable position. That has been helped along, partly by the fact that, unlike travel agents who are paid a percentage of the gross room charge to a consumer, resellers' revenue model depends on "fees" that have heretofore not been subject to hotel occupancy taxes. All that is about to change, at least, temporarily till the courts fully resolve the validity or not of the occupancy tax on resellers' revenue.

Among the first jurisdictions to post a "win" over the intermediaries in San Francisco where The San Francisco Chronicle reports that "Expedia Inc. and Hotwire Inc. wired
over approximately $35 million they had previously refused to pay the
city in hotel occupancy taxes. The payment came in the wake of a
California appeals court decision rejecting their petition against a
Los Angeles Superior Court ruling that the disputed taxes are subject
to the pay first rule." But as the Chronicle notes "Expedia and Hotwire claim they are not subject to San Francisco's hotel
occupancy tax and (they) have sued the city to get off their back."

A fast diminishing tax base has spurred New York City to follow suit and the city's Mayor signed a law that goes into effect on September 1st 2009 whose "provisions of the law are not limited to online travel companies" and goes on to state that "all payments made to travel intermediaries as a condition
of occupancy, including booking fees, will be subject to tax." Quite naturally an assortment of affected individuals and companies have protested the taxes loudly (to no avail thus far) and "predicted last week that the measure would discourage travel sellers
from booking rooms in the city and thus exacerbate the deep slump the
Big Apple is seeing in its hospitality sector."

The US Tour Operator Association's representative has called the law "impossible to administer" and "unenforceable". While the last part has to be decided by the courts it is, nevertheless, unclear that the law is as retrograde as it is being painted to be. The comparison with travel agents' commission is not entirely tenable given that occupancy tax is paid by the hostelry on the gross amount. Whether it leads to increased rates to consumers or not remains to be seen. But a corollary could be a break up of the oligopoly of the approximately four large companies that rules travel websites.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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