COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES
FINANCE COMMITTEE JOINT WITH THE TOURISM AND RECREATIONAL DEVELOPMENT COMMITTEE PUBLIC HEARING
STATE CAPITOL HARRISBURG, PA
RYAN OFFICE BUILDING ROOM 2 05
TUESDAY, MAY 1, 2 018 9:17 A.M.
PRESENTATION ON HOUSE BILL 1511 COLLECTION OF HOTEL OCCUPANCY TAX FROM ONLINE TRAVEL COMPANIES
FINANCE COMMITTEE MEMBERS PRESENT: HONORABLE BERNIE O'NEILL, MAJORITY CHAIRMAN HONORABLE STEPHEN BLOOM HONORABLE MIKE CORR HONORABLE GEORGE DUNBAR HONORABLE KEITH GREINER HONORABLE DUANE MILNE HONORABLE MICHAEL PEIFER HONORABLE ERIC ROE HONORABLE THOMAS SANKEY HONORABLE JAKE WHEATLEY, DEMOCRATIC CHAIRMAN HONORABLE MARY JO DALEY HONORABLE MICHAEL DRISCOLL HONORABLE JORDAN A. HARRIS HONORABLE SID M. KAVULICH HONORABLE STEPHEN KINSEY HONORABLE CHRISTOPHER RABB HONORABLE MARK ROZZI 2
TOURISM AND RECREATIONAL DEVELOPMENT COMMITTEE MEMBERS PRESENT: HONORABLE DAVID MILLARD, MAJORITY CHAIRMAN HONORABLE KAREN BOBACK HONORABLE ALEXANDER TESLA CHARLTON HONORABLE RUSS DIAMOND HONORABLE MARCIA HAHN HONORABLE PARKE WENTLING HONORABLE MARK LONGIETTI, DEMOCRATIC CHAIRWOMAN HONORABLE TIM BRIGGS HONORABLE SID M. KAVULICH HONORABLE MAUREEN MADDEN HONORABLE ROBERT MATZIE
Pennsylvania House of Representatives Commonwealth of Pennsylvania 3
ALSO PRESENT: REPRESENTATIVE MARGUERITE QUINN
TOURISM AND RECREATIONAL DEVELOPMENT COMMITTEE STAFF PRESENT: ALLEN TAYLOR MAJORITY EXECUTIVE DIRECTOR MORGAN DUX MAJORITY COMMUNICATIONS SPECIALIST DENISE MURRAY MAJORITY ADMINISTRATIVE ASSISTANT
DANIELLE BOWERS DEMOCRATIC EXECUTIVE DIRECTOR 4 D D E E 1—1 1—1 N X
TESTIFIERS
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NAME PAGE
REPRESENTATIVE MARGUERITE QUINN PRIME SPONSOR OF HOUSE BILL 1511...... 8
DAN HASSELL SECRETARY, PENNSYLVANIA DEPARTMENT OF REVENUE...... 12
FRITZ SMITH VICE PRESIDENT, RESEARCH AND INDUSTRY RELATIONS, VISIT PHILADELPHIA...... 18
CRAIG DAVIS PRESIDENT & CEO, VISIT PITTSBURGH...... 22
STEPHEN SHUR PRESIDENT, THE TRAVEL TECHNOLOGY ASSOCIATION...... 39
JOSEPH MONTANO GOVERNMENT AFFAIRS MANAGER, EXPEDIA, INC...... 47
MATT ENGLISH GENERAL MANAGER, HOLIDAY INN HERSHEY/HARRISBURG...... 72
SUBMITTED WRITTEN TESTIMONY
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(See submitted written testimony and handouts online.) 5
1 P R O C E E D I N G S
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3 FINANCE MAJORITY CHAIRMAN O ’NEILL: — and House
4 Tourism Committee together. I just want to let you all
5 know that we are being taped by the chief clerk’s office
6 and PCN, and therefore, for wiretap purposes, I must inform
7 you of that. But I also ask that everybody please make
8 sure you silence -- including myself -- all your electronic
9 devices.
10 I think w e ’re going to begin first by asking the
11 Members to introduce themselves. And if you would,
12 Members, tell them which Committee you sit on, or if you
13 sit on both, I would appreciate it.
14 I’ll start with myself. I ’m Representative
15 Bernie O ’Neill from the 29th District, which is the center
16 of Bucks County, and I ’m the Majority Chairman of the House
17 Finance Committee.
18 FINANCE DEMOCRATIC CHAIRMAN WHEATLEY: Good
19 morning. I ’m State Representative Jake Wheatley. I
20 represent the City of Pittsburgh, Allegheny County, and I ’m
21 the Minority Chairman of Finance Committee.
22 TOURISM MAJORITY CHAIRMAN MILLARD: Good morning.
23 I’m Representative David Millard, Chairman of the House
24 Tourism and Recreational Development Committee.
25 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Good 6
1 morning. Mark Longietti. I represent the 7th District in
2 Mercer County, and I'm the Minority Chair of the Tourism
3 and Recreational Development Committee.
4 REPRESENTATIVE BLOOM: Steve Bloom. I represent
5 the 199th District in Cumberland County, and I'm a member
6 of the Finance Committee.
7 REPRESENTATIVE ROE: Good morning. Eric Roe. I
8 represent the 158th Legislative District, West Chester in
9 Chester County, Pennsylvania.
10 REPRESENTATIVE SANKEY: Tommy Sankey, 73rd
11 District, Clearfield County, loyal to Chairman O'Neill in
12 the Finance Committee.
13 FINANCE MAJORITY CHAIRMAN O ’NEILL: That he is.
14 REPRESENTATIVE WENTLING: Parke Wentling, State
15 Representative of the 17th Legislative District. I
16 represent parts of Erie, Crawford, Mercer, and Lawrence
17 Counties, and I am on the Tourism Committee. Thank you.
18 REPRESENTATIVE HAHN: Hi. I’m Representative
19 Marcia Hahn, 138th, Northampton County, and I am on
20 Tourism.
21 REPRESENTATIVE CHARLTON: Good morning. Alex
22 Charlton, 165th District, from scenic Delaware County,
23 Tourism Committee.
24 REPRESENTATIVE MADDEN: Good morning.
25 Representative Maureen Madden, Monroe County, the Poconos, 7
1 Tourism.
2 REPRESENTATIVE ROZZI: Representative Mark Rozzi,
3 Berks County.
4 REPRESENTATIVE DRISCOLL: Mike Driscoll,
5 northeast Philly.
6 REPRESENTATIVE KAVULICH: Sid Kavulich, 114th
7 District, Lackawanna County, Member of both Committees.
8 REPRESENTATIVE BRIGGS: Tim Briggs from
9 Montgomery County on the Tourism Committee.
10 REPRESENTATIVE PEIFER: Good morning. Mike
11 Peifer, 139th House District, Pike and Wayne Counties, and
12 I am loyal to the Finance Committee.
13 REPRESENTATIVE CORR: Good morning. I ’m Michael
14 Corr. I represent the 150th District in Montgomery County,
15 and I serve on the Finance Committee.
16 REPRESENTATIVE BOBACK: Good morning. Karen
17 Boback, Wyoming, Lackawanna, and Luzerne Counties, and I ’m
18 on Tourism.
19 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you. I
20 find it funny that my two biggest problem children are the
21 ones who said they’re the most loyal so -- only kidding.
22 Today, w e ’re here to discuss House Bill 1511 by
23 Representative Marguerite Quinn, also from Bucks County.
24 House Bill 1511 amends the Sales and Use Tax article of the
25 Tax Code, and with that, I ’ll turn it over to 8
1 Representative Quinn.
2 REPRESENTATIVE QUINN: Thank you very much,
3 Chairman O ’Neill, Chairman Millard, Chairman Wheatley, and
4 Chairman Longietti. I appreciate your coming together,
5 coming together to marry the interests of the Finance and
6 the Tourism Committee because that’s exactly what this bill
7 does.
8 I’m going to invite you all in this room -- and
9 excuse my back to those behind me -- to take a trip back to
10 1971 with me. Whoa, fasten your seat belts. Jimmy Carter
11 was still the Governor of Georgia, the movie The Graduate
12 was playing in the box offices, the National Highway
13 Traffic Safety Control put out its first standards, no laws
14 yet for car seats, and I was in first grade.
15 I think we can all agree that a lot’s changed
16 since then and that technology has changed significantly,
17 changed the way we live and changed the way we spend money.
18 But what is yet to catch up with how we change our lives
19 and spend is the 1971 Pennsylvania Tax Reform Code. It’s
20 stuck in time in some regard, stuck in time when I was in
21 first grade. I invite you all to consider where you were
22 in 1971 if you even were. I ’m looking around the room.
23 Basically, I believe that the Tax Reform Code of
24 1971 is blind to some changes in the world, yet the travel
25 industry, like many others, have fully evolved. Think back 9
1 to the ’70s and ’80s where we used words like Kleenex or
2 Xerox generically. We now use words like Expedia, Google,
3 and Uber generically, and we just accept that, yet we
4 haven’t changed some of the things embedded in our law.
5 I believe it’s time that we update this tax code
6 so it reflects the realities of today and stays in line
7 with the original intent of the Tax Code.
8 As legislators, we make difficult decisions
9 regarding the tax burdens we impose on our constituents.
10 We are tired or I ’m tired of sometimes looking for new
11 revenue when really if we just look at what’s in front of
12 us and update it to the way we live today, the way we
13 spend, and the way technology’s evolved, I think that we
14 would not have to be out there looking for something brand
15 new. And I believe that this bill does just that. It
16 takes today’s technology, which is not just new to 19,
17 whatever w e ’re in, 2018, it takes technology and research
18 and the evolution of the travel agency and it would put it
19 into 2018.
20 The intent of House Bill 1511 is to ensure parity
21 and transparency in the booking of online hotel rooms and
22 the remittance of our State’s existing sales tax. You’re
23 going to hear talk and rhetoric about, you know, House Bill
24 1511 is going to result in a new tax and is going to
25 increase the cost of tourism, but if you really look at 10
1 some of the graphs that I believe will be presented to you
2 today, you’re going to see that’s just not the case.
3 Simply put, this bill is going to close a
4 loophole that exists in today’s law. The statute was
5 written, as I explained, well before online travel services
6 and transactions became commonplace. Think of it; how many
7 of you have not ever booked through an online service? I ’m
8 talking about booking hotel rooms or, you know, cars, or
9 airline, whatever. W e ’re just looking to modernize the
10 Pennsylvania Tax Code to reflect the travel purchase
11 environment of today.
12 Nearly 50 Pennsylvania-based tourism industry
13 stakeholders support this bill. I ’ve shared these letters
14 with the Chairman and hopefully you’ve seen them or they’re
15 in your packet today. New York, South Carolina, North
16 Carolina, Georgia, Hawaii, Minnesota, Oregon, Wyoming,
17 Rhode Island, Montana, and recently Maryland have changed
18 their laws to require online travel companies to actually
19 remit the full tax on the retail fare, not the wholesale
20 fare that’s charged.
21 I totally understand why there are those in the
22 industry who oppose this. There’s a lot of money at stake
23 there for them. I ’d like to bring that money back to where
24 it was originally intended to be, back to the coffers of
25 Pennsylvania, to the tourism coffers, and stay again, as I 11
1 said, in line with the original intent of the 1971 tax
2 bill.
3 Other presenters are going to walk you through
4 the details of this bill, and I invite you to keep an open
5 mind and to make sure that you switch your gears from 1971
6 up to 2018 as you view this legislation and hear the
7 testimony.
8 Thank you, Mr. Chairman. Thank you, colleagues.
9 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you,
10 Representative Quinn.
11 For the record, the Chairman was a senior in high
12 school in 1971, showing my -- oh, can’t you tell.
13 REPRESENTATIVE QUINN: I didn’t ask anyone to
14 tell. I just said -
15 FINANCE MAJORITY CHAIRMAN O ’NEILL: I just -
16 okay.
17 REPRESENTATIVE QUINN: — be reflective.
18 FINANCE MAJORITY CHAIRMAN O ’NEILL: Before we go
19 on, I just want to let everybody know that w e ’ve been
20 joined -- and if I miss anybody, let me know -- by
21 Representative Kinsey, Representative Harris,
22 Representative Matzie, Representative Dunbar,
23 Representative Daley, and Representative Rabb. Did I miss
24 anybody?
25 REPRESENTATIVE QUINN: Do you want me to start 12
1 over?
2 FINANCE MAJORITY CHAIRMAN O ’NEILL: No, that’s
3 okay. Thank you.
4 Due to constraints, I would ask that all the
5 testifiers are now going to begin to testify for us, to
6 keep their testimony as short as possible so Members can
7 ask questions and so forth and we can keep it in our time
8 frame.
9 So our first testifier this morning is our dear
10 friend from the Department of Revenue, the Honorable Dan
11 Hassell. Dan, it’s all yours.
12 SECRETARY HASSELL: Thank you, Mr. Chairman. And
13 for the record, I was in junior high school.
14 Following up on Representative Quinn’s testimony,
15 I want to talk a little bit about the details of the bill.
16 So I thank you for the opportunity to testify here today.
17 I appreciate the opportunity to work with you on this
18 language.
19 As you know, the bill amends the Tax Reform Code
20 to create a funding mechanism for tourism promotion. The
21 bill requires intermediaries to collect and remit the
22 Commonwealth’s 6 percent hotel occupancy tax when
23 facilitating the booking of an occupancy with a hotel.
24 Monies collected from intermediaries will be deposited in
25 the Tourism Promotion Restricted Account to be distributed, 13
1 upon appropriation, by the Pennsylvania Department of
2 Community and Economic Development for the purpose of
3 promoting tourism.
4 I would like to briefly provide you with some
5 background information on current law. The 6 percent hotel
6 occupancy tax is imposed at the same rate as the State
7 sales and use tax, but they are distinct. It applies to
8 room rentals of less than 30 days by the same person. The
9 City of Philadelphia, as well as Allegheny County, is
10 authorized to impose an additional l percent on hotel
11 rentals for local purposes on the State base.
12 The business model of online travel company is to
13 set a price that the hotel and OTC agree on so that the
14 OTCs have access to the hotel rooms. Essentially, the
15 online travel company may simply be taking over the
16 marketing function for the hotel, providing a forum in
17 which customers can shop and compare different
18 opportunities and make the transaction.
19 The OTCs typically charge a markup or a service
20 fee to the consumer of the room. Under current law, the
21 hotel occupancy taxes collected on the amount received by
22 the hotel from the consumer, not the total amount that the
23 consumer may pay, and that’s because, in current law, the
24 taxes imposed are on the operator of a hotel, and the
25 online travel companies are not hotel operators. So, 14
1 therefore, the hotel occupancy tax is not currently
2 collected on the markup or the service fee that is retained
3 by the online travel company.
4 There’s an example in the testimony, simplified
5 somewhat, showing a room that’s for sale for $100, and if
6 the hotel directly sells the room rental, they’ll receive
7 the $100 plus the $6 in tax, whereas if the customer is
8 working through the online company, the hotel may receive
9 $80, the online company could retain $20, the tax that’s
10 collected by the Commonwealth is reduced from $6 to $4.80.
11 And the difference of $1.20 is also retained by the online
12 travel company.
13 As we understand it, the intent of House Bill
14 1511 is to impose tax on the travel company’s markup. That
15 amount of revenue is then deposited in the Tourism
16 Promotion Fund. The Department of Revenue estimates that
17 taxing the service fee or the markup would generate
18 approximately $20 million a year for the Tourism Promotion
19 Fund. I would like to emphasize that we would like the
20 opportunity to work with the Committee and the sponsor.
21 There may be some ways to sharpen the language a little bit
22 to make sure that only the new revenue is dedicated to the
23 Tourism Fund. There’s significant revenue that comes in
24 now from these kinds of transactions from the part that’s
25 collected by the hotel directly, and we don’t want to 15
1 impact that part of our revenue because that’s current
2 General Fund dollars. But if we can isolate the new
3 revenue that’s imposed on the online travel company
4 accurately, then there won’t be a General Fund impact. And
5 w e ’d be happy to work with you to make sure that that
6 occurs.
7 So with that, I ’ll be happy to take any questions
8 you have.
9 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you,
10 Mr. Secretary.
11 Do any Members have questions?
12 Chairman Millard.
13 TOURISM MAJORITY CHAIRMAN MILLARD: Mr.
14 Secretary, you, with your graph here, show that you would
15 generate an additional $20 million, which would be
16 dedicated to the Tourism Promotion Fund. To your
17 knowledge, how much is in that fund right now?
18 SECRETARY HASSELL: I do not know.
19 TOURISM MAJORITY CHAIRMAN MILLARD: I beg your
20 pardon?
21 SECRETARY HASSELL: I do not know.
22 TOURISM MAJORITY CHAIRMAN MILLARD: Okay. And
23 the -- your testimony indicates it would be dedicated, so
24 it would not be used for other purposes or earmarks or
25 anything else. Is that the intent of the Department with 16
1 this?
2 SECRETARY HASSELL: That’s the way I understand
3 the language.
4 TOURISM MAJORITY CHAIRMAN MILLARD: Okay. Very
5 good. Thank you, Mr. Chairman.
6 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you,
7 Chairman.
8 Chairman Longietti?
9 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Are you
10 able to provide us some understanding of how the $20
11 million estimate was arrived at?
12 SECRETARY HASSELL: It is based on figures that
13 the Department has access to that are published
14 information. W e ’d be happy to give you a copy of the
15 fiscal analysis on this. In general, the total hotel
16 occupancy tax that’s currently collected by the
17 Commonwealth is in the neighborhood of $300 million. And
18 working with what we know and also published information
19 about the business of the third-party intermediaries, we
20 can derive this estimate. But I ’ll be happy to share that
21 information with you.
22 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Just a
23 follow-up to that. Is your sense -- I mean, my sense would
24 be this -- is this something that we see growing
25 significantly? It seems like people are more and more 17
1 using online booking services.
2 SECRETARY HASSELL: I think it’s very common now,
3 yes.
4 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Thank
5 you.
6 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you,
7 Chairman.
8 If you could get us, Chairman Millard and myself,
9 a copy of that analysis. Then, we can distribute it to the
10 other Chairmen and all the Members of the Committee.
11 SECRETARY HASSELL: I ’d be happy to.
12 FINANCE MAJORITY CHAIRMAN O ’NEILL: Great, thank
13 you.
14 Are there any more questions?
15 Seeing none, thank you, Secretary. I appreciate
16 it.
17 SECRETARY HASSELL: Thank you.
18 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you for
19 your time.
20 Our next panel of speakers before us is Mr. Fritz
21 Smith, who’s the Vice President of Research and Industry
22 Relations for Visit Philadelphia and Mr. Greg Davis, who’s
23 President and CEO of Visit Pittsburgh. So if those
24 gentlemen would like to come up. We need another chair.
25 Okay. If you could just move that chair over so you can 18
1 both use the mic.
2 MR. SMITH: I guess I ’ll have to stay here.
3 FINANCE MAJORITY CHAIRMAN O ’NEILL: That’s okay.
4 Well, there’s a mic right there, so you -
5 MR. SMITH: All right.
6 FINANCE MAJORITY CHAIRMAN O ’NEILL: Gentlemen,
7 before you begin, if you can introduce yourselves -
8 MR. SMITH: Yes.
9 FINANCE MAJORITY CHAIRMAN O ’NEILL: -- and then
10 you’re more than welcome -- either one of you can begin,
11 whoever would like to start first. Go ahead, Fritz. Yes.
12 MR. SMITH: I ’m Fritz Smith, Vice President of
13 Research and Industry Relations at Visit Philadelphia.
14 MR. DAVIS: I ’m Craig Davis. I ’m the President
15 and CEO of Visit Pittsburgh.
16 MR. SMITH: So I ’m going to dispense with most of
17 my remarks because I think the technical aspects of this
18 have been covered, but I ’ll just go over a couple things.
19 One, House Bill 1511, as we understand it, would
20 compel online travel companies to pay the full retail rate
21 on the hotel occupancy tax on transactions booked for hotel
22 stays on their sites. Additionally, the bill would direct
23 funds collected from closing this loophole to the
24 Pennsylvania Tourism Office, which has been severely
25 underfunded during the last eight years, and would help to 19
1 recover the market share, economic impact, and jobs lost,
2 while other destinations such as New York State, Virginia,
3 Florida, California, Michigan, all the States whose ads we
4 see on television every morning, have capitalized on our
5 absence from the marketplace by boosting their promotional
6 efforts.
7 We believe that successful passage of H.B. 1511
8 would restore the legislative intent of the Tax Reform Code
9 of 1971, which requires the consumer to pay the full tax
10 rate. This is an enforcement clarification remittance
11 issue. There’s nothing new about the tax. And I ’m going
12 to demonstrate that with a few quick slides here if that’s
13 okay. And find my mouse.
14 FINANCE MAJORITY CHAIRMAN O ’NEILL: What are you
15 looking for?
16 MR. SMITH: I found the mouse on the ground. All
17 right. All right.
18 MR. DAVIS: Do you need some help? Yes. I was
19 the President of the AV club.
20 MR. SMITH: All right. So very quickly, what’s
21 an online travel agency? It’s a website that specializes
22 in the sale of travel products to consumers. Some agencies
23 sell a variety of travel products, including flights,
24 hotels, cars, rentals, cruises, et cetera. W e ’re talking
25 about hotel sales today. Some popular OTA brands are 20
1 Expedia and Priceline. They’ve got families of companies
2 under them, names you’d recognize, Expedia, booking.com,
3 hotels.com. In Philadelphia, Expedia and booking.com are
4 the major generators of room nights in our city. They
5 generate about 350,000 room nights in Philadelphia.
6 So this is the model w e ’re talking about, their
7 business model. So the customer on the left-hand side is
8 paying $100 to a hotel. Let’s say it’s a Marriott.
9 They’re paying 10 percent tax. This is a theoretical
10 example from another State. Let’s say it’s a 10 percent
11 tax, they pay $110. Marriott remits the local and State
12 occupancy tax to the appropriate taxing authorities.
13 I need to get it back. We have a millennial
14 here. Yes. All right.
15 So same transaction, customer books with Expedia.
16 It’s a $100 room, but Expedia has negotiated with Marriott
17 that they’re only going to remit $80 to them. They’re
18 remitting $80, plus $8 on tax. They made a $20 profit, but
19 they are also keeping the $2 that the customer has paid
20 thinking that he or she has paid the full rate, the full
21 tax. And they’re keeping that additional $2, that $2 in
22 addition to their $20 profit.
23 So here are two very quick examples from real
24 hotel transactions made a couple of months ago at the
25 Sonesta Hotel. The rate was $179, paid the full tax. 21
1 That’s a typical transaction, did it again on Expedia. To
2 the customer, it appears they have been charged on their
3 credit card the full amount. So the customer thinks I ’m
4 good. I ’ve paid the full tax to the city and State, but
5 again, Expedia is keeping it.
6 Here’s a current status of where this issue sits
7 right now all across the country. You see the blue States
8 with this loophole has been closed, recently done in
9 Maryland, so w e ’ve got to update that to have Maryland be
10 blue. And here are some recent lawsuits in cities across
11 the United States that have successfully closed this
12 loophole: Denver, Chicago, Washington, D.C. Washington,
13 D.C. did it retroactively.
14 Here’s why it is very important to us in
15 Philadelphia, because w e ’re competing against -- that is
16 our competitive set right there, New York, Baltimore,
17 Washington, D.C. We compete for leisure travelers, we
18 compete for business attraction, we compete for students,
19 we compete for sporting events, we compete for conventions,
20 we compete for leisure tourists, motor coach groups. And
21 those cities around us have closed the loophole. They’re
22 using that additional money to do more marketing to beat us
23 at our game.
24 So to just show you where we are, you know,
25 Representative Quinn referenced the industry support that 22
1 has been shown. Almost all of our fellow destination
2 marketing organizations across the State support this, as
3 do organizations like Hilton, Marriott, Loews, Best
4 Western, as do the County Commissioners, Association of
5 Pennsylvania, as do many chambers across the Commonwealth.
6 So that’s it, and I ’ll turn it over to my colleague Craig.
7 MR. DAVIS: Thank you very much. Chairmen
8 Longietti, Millard, O ’Neill, and Wheatley, thank you very
9 much for allowing us to testify here.
10 Our premise today is that we believe that every
11 business should pay their fair share of taxes. If online
12 travel companies are charging the same amount of money as
13 Fritz had shown, the tax needs to be remitted in a very
14 similar way. That is only fair. The taxes are paid by the
15 traveler. And common sense would suggest that they are
16 willing to pay the full tax on every transactions, similar
17 to other States where OTCs are mandated to pay.
18 Now, Fritz did an amazing job of kind of setting
19 this up on a macro level. Our statewide tourism promotion
20 agency is grossly underfunded, and they do a wonderful job.
21 This would put money directly in their coffers to increase
22 tourism across the State, and that means more jobs and more
23 money and more taxes that are paid through our travelers.
24 Those of the best kinds of taxes because they are paid by
25 other people. 23
1 He did a great job of talking about this on a
2 macro level. I want to talk a little bit on the micro
3 level, and I ’m going to only use Visit Pittsburgh because
4 that is what I know. In Allegheny County, 1 percent is
5 also paid to the regional asset district tax, which is a
6 RAD tax. In funds collected through that, 1 percent
7 support our regional assets. Of course, I want to make
8 certain that you know that this would be additional money
9 for Visit Pittsburgh because these travelers will be paying
10 into the Tourism Fund and every one of our different
11 tourist promotion agencies across the State and would
12 therefore allow us to increase the amount of promotion that
13 we have in our particular areas and thereby bringing more
14 business from other States into Pennsylvania.
15 But if w e ’re going to use Allegheny County as an
16 example with the 1 percent regional assets that is not
17 being paid as a fair share to the OTAs, they support
18 police, fire, roads in Allegheny County. They support our
19 libraries, the Phipps Conservatory, Pittsburgh Zoo, the
20 Children’s Museum, Greater Pittsburgh Arts Council just to
21 name a few. There are many cultural activities in
22 Allegheny County that gets supported through the tax that
23 would otherwise be paid by these travelers.
24 These services that I just mentioned are vital to
25 our visitors, and it’s certainly critical to the mission of 24
1 Visit Pittsburgh. These funds are collected by other
2 States, I want to remind you, and will not create a brand-
3 new industry practice. This will simply level the playing
4 field for Pennsylvania while not affecting the customer’s
5 experience. And we just ask that the online travel
6 companies loophole be closed for the citizens that reside
7 in Pennsylvania. And these funds would be supported
8 directly for organizations that drive tourism to each area.
9 Thank you very much.
10 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you to
11 both of you. Before we move on, I just want to state that
12 we’ve been joined by Representative Milne from Chester
13 County.
14 REPRESENTATIVE QUINN: Mr. Chairman, may I have a
15 question?
16 FINANCE MAJORITY CHAIRMAN O ’NEILL: One second,
17 please.
18 Very quickly, I saw on your slideshow you had
19 Expedia brands versus baseline brands. Can you tell me
20 what the difference is there or whatever -
21 MR. SMITH: Priceline, well, those two companies
22 have really -- there’s a lot of consolidation going on in
23 that industry, and so those two parent companies have
24 bought up most of the existing brands in the business
25 today. 25
1 FINANCE MAJORITY CHAIRMAN O ’NEILL: Oh, I see.
2 MR. SMITH: So they’ve kept most of those
3 families of brands like booking.com still somewhat
4 independent in the customer’s eyes, but they’re all under
5 the umbrella of those organizations.
6 FINANCE MAJORITY CHAIRMAN O ’NEILL: Got you.
7 Okay. Thank you. Any of the Chairmen have questions?
8 Representative Quinn.
9 REPRESENTATIVE QUINN: Thank you. Gentlemen, as
10 I ’m sitting here listening to your testimony, I can’t help
11 but think of the hotel room being, you know, a commodity
12 like anything else. Would you kindly make an analogy for
13 us with regard to whether it’s buying a hotel room or a car
14 with regard to the taxes that would be paid, hotel
15 wholesale versus retail?
16 MR. SMITH: Sure. I mean, a car is a good
17 example. A car is manufactured at a certain point, and
18 it’s told to a car dealer, so that’s a wholesale
19 transaction. And then they mark it up and sell it to the
20 consumer, and the consumer pays the full tax rate. What is
21 different about this process is that the typical wholesale
22 retail process is happening in reverse. It’s happening
23 chronologically differently. The customer is paying the
24 full retail rate first and then the wholesale price is
25 being remitted to the hotel. So you can make that analogy, 26
1 and that’s really the heart of this matter is the consumer
2 is paying the tax on the retail rate, but it’s not getting
3 to the taxing authority. It’s not all getting to the
4 taxing authorities.
5 And just if I could, and Chairman Millard’s
6 question about the money in that account is that account
7 has not been established yet. There’s technically nothing
8 in it. But the State’s Tourism Department has a $4 million
9 budget right now, which places them at about 46 or 47th in
10 the country, so these additional funds would supplement
11 that funding.
12 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you.
13 Representative Bloom?
14 REPRESENTATIVE BLOOM: Thank you, Mr. Chairman.
15 Just a quick question understanding where the incidence or
16 impact of this falls. So the hotel itself and the consumer
17 pay nothing different? Nothing changes there. The
18 Expedia, the wholesaler now has to remit a piece of what
19 they would have kept under this bill?
20 MR. SMITH: That’s right. That’s right.
21 REPRESENTATIVE BLOOM: And so when that happens,
22 when Expedia or whatever company, Priceline has to pay this
23 extra tax piece that they used to be able to keep, how is
24 that going to change their relationship with the hotels
25 and/or the consumers? At some point does this change the 27
1 rate that the hotel as to charge or does it change the rate
2 that the consumer is going to have to pay as contracts are
3 worked out between Expedia and these other OTAs and their
4 hotels or how does that work? Thank you.
5 MR. DAVIS: It’s going to change it. They’re
6 accustomed to getting a certain level of margin on every
7 transaction. I would imagine that it may, in those
8 incidents, be marked up. But the market will determine
9 that, how much somebody will pay online versus how much
10 they’ll pay directly to a hotel. So that would have to be
11 worked out within the marketplace.
12 Taxes, as a result, are not that big of a -- what
13 w e ’re talking about is not that much per transaction. It’s
14 the difference between whether the OTC will keep the money
15 or it will be remitted for taxes -
16 REPRESENTATIVE BLOOM: Yes, I mean —
17 MR. DAVIS: -- but the market will figure it out.
18 REPRESENTATIVE BLOOM: Yes. I mean, presumably,
19 the OTA would lose their ability to -- I mean, they’re
20 going to want to still be competitive with the hotel on the
21 price, so they would in this situation presumably have to
22 absorb that loss, yes. Or they could. I mean it’s a
23 free -
24 MR. DAVIS: if we work the deal with them?
25 REPRESENTATIVE BLOOM: This is capitalism. They 28
1 could raise their price if they want, but will it be
2 competitive with the hotels rate? Maybe not.
3 FINANCE MAJORITY CHAIRMAN O ’NEILL: Okay.
4 REPRESENTATIVE BLOOM: Thank you, guys.
5 MR. DAVIS: I come from the hotel business, sir,
6 and they’ll charge as much as they possibly can every day,
7 365 days a year.
8 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you. A
9 follow-up to that, have you seen -- in the three cities
10 that you cited in your PowerPoint, have you seen a change
11 since they’ve closed the loophole?
12 MR. SMITH: Absolutely. In the case of
13 Washington, D.C., they have been able -- I mean, as I ’m
14 sure most of you know, the convention business is extremely
15 competitive, and there are convention centers in every big
16 city in this country. And we typically end up competing
17 against Washington, D.C., and Baltimore for conventions.
18 And with these additional resources, Washington, D.C. -
19 our competitor organization in Washington is called
20 Destination D.C. -- has been able to provide a subsidy if
21 you will to some associations to hold their convention in
22 Washington that we were not able to compete with. And yes,
23 we can’t -- I wouldn’t want to talk about them publicly,
24 but there are -- you know, we could talk about that behind
25 the scenes to tell you which associations specifically did 29
1 that. But, yes, there are documented cases where we lost
2 business because they were taking that additional money and
3 using that to help subsidize the convention.
4 FINANCE MAJORITY CHAIRMAN O ’NEILL: Have you seen
5 any negative impact in these cities since they change the
6 loophole, as I think -
7 MR. SMITH: None whatsoever.
8 FINANCE MAJORITY CHAIRMAN O ’NEILL: No?
9 MR. SMITH: No. I don’t think anybody noticed
10 the difference at all.
11 FINANCE MAJORITY CHAIRMAN O ’NEILL: Great. Thank
12 you.
13 Okay. Representative Boback.
14 REPRESENTATIVE BOBACK: Thank you, Mr. Chairman.
15 I need some clarification. Going back to the car
16 analogy -
17 MR. SMITH: Yes.
18 REPRESENTATIVE BOBACK: So if I get a car the
19 end-of-the-year clearance sale and maybe it’s $2,000 less
20 than I would’ve paid in June and I ’m buying it in December,
21 when I pay tax on that car, I pay it on the sale price,
22 correct?
23 MR. SMITH: That’s right.
24 REPRESENTATIVE BOBACK: Now, with this w e ’re
25 saying that if I rent a room through Expedia for $80 I 30
1 would pay tax on $80?
2 MR. SMITH: No, the critical distinction there is
3 you paid $100. On Expedia’s site it said $100.
4 REPRESENTATIVE BOBACK: Okay.
5 MR. SMITH: And they charged you -- your final
6 bill reflects the tax rate on $100. So, no, that $80 is
7 purely an agreement between Expedia and that hotel that is
8 invisible to the customer.
9 REPRESENTATIVE BOBACK: So I guess I ’m still
10 unclear.
11 MR. DAVIS: Sure. So w e ’re asking for the tax on
12 what I ’m paying but they’re not remitting the entire tax -
13 MR. DAVIS: That’s correct.
14 MR. SMITH: That’s exactly right.
15 REPRESENTATIVE BOBACK: So they’re only remitting
16 on the $80?
17 MR. DAVIS: On the $80, not the $100.
18 MR. DAVIS: On the $80, yes.
19 REPRESENTATIVE BOBACK: Even though I’m paying on
20 the $100?
21 MR. DAVIS: Yes.
22 MR. SMITH: Yes.
23 REPRESENTATIVE BOBACK: Okay. As the customer.
24 All right. I think that needed to be clarified.
25 MR. SMITH: Okay. 31
1 MR. DAVIS: Thank you.
2 REPRESENTATIVE BOBACK: Thank you.
3 MR. DAVIS: Thank you for the clarification.
4 MR. SMITH: Thank you.
5 REPRESENTATIVE BOBACK: Thank you.
6 FINANCE MAJORITY CHAIRMAN O ’NEILL: Agreed.
7 Representative Daley, did you have a question?
8 REPRESENTATIVE DALEY: Thanks, Mr. Chairman. Do
9 you have any idea of what these other cities have in terms
10 of budget for their promotions, your competitors, your
11 competitor cities? And like are they getting the full
12 impact of closing the loophole into a fund that’s just for
13 tourism?
14 MR. SMITH: In New York City’s case the money
15 goes into the General Fund, and so the city, you know -
16 oh, sorry.
17 REPRESENTATIVE DALEY: Oh, sorry.
18 MR. SMITH: Sorry. In New York City’s case -- in
19 those three examples in New York City’s case the room tax
20 goes into the General Fund, and then our competitive
21 destination organization has to ask each year, but that pot
22 is now larger that they can ask for. In Washington, D.C.’s
23 case they do get some of the money. They get the lion’s
24 share of it. Our counterpart down there, Destination D.C.,
25 gets the lion’s share of that additional money. And in 32
1 Baltimore’s case they get it as well.
2 REPRESENTATIVE DALEY: So would you be still
3 looking for funds from the General Fund or you would be
4 expecting to just be getting funds from the Tourism Fund?
5 MR. SMITH: We have been told at the local level
6 that in order to close this loophole locally that we need
7 enabling legislation at the State level. So no, we would
8 not be asking for, you know, grant money from the Tourism
9 Fund at the State level. We would be delighted, we would
10 all be delighted that they have more money to market
11 Pennsylvania. It would help us. It would attract more
12 visitors, but it would also then enable us to close it at
13 the local level, thereby freeing up some additional funds
14 for us to do our sales and marketing.
15 REPRESENTATIVE DALEY: Thank you.
16 MR. SMITH: You’re welcome.
17 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you.
18 We’ve been joined by Representative Diamond.
19 Representative Milne.
20 REPRESENTATIVE MILNE: Thank you, Mr. Chairman.
21 On your map that you presented to us which showed some
22 different State models and their response and where they
23 are with approaching the loophole reforms, four States it
24 looked like you indicated had completely closed the
25 loophole. 33
1 MR. SMITH: I think it’s seven or eight.
2 REPRESENTATIVE MILNE: Well, it’s okay. Here’s
3 the question. So there’s a handful of States that have
4 completely close the loophole.
5 MR. SMITH: Yes.
6 REPRESENTATIVE MILNE: You had some States on
7 there that you indicated partially collected remittance.
8 What’s the distinction there? Is that a city versus
9 locality difference in remittance or what’s a partial
10 remittance versus the full closure of the loophole?
11 MR. SMITH: I ’d have to defer to my colleague
12 from the Pennsylvania Restaurant and Lodging Association if
13 it would be okay to -- Melissa, do you know the answer to
14 that question?
15 MS. BOVA: What was the question?
16 MR. SMITH: On this -
17 MS. BOVA: On the map that was presented, there
18 were some States where it was coded full closure of the
19 loophole. There were some other States where it was
20 indicated that it’s some degree of remittance, so slightly
21 partial remittance category. What is the distinction
22 there? How are we defining those two categories?
23 MR. SMITH: Montana.
24 MS. BOVA: Montana is the only one [inaudible],
25 so -- 34
1 MR. SMITH: Melissa, can you come up? Sorry.
2 FINANCE MAJORITY CHAIRMAN O ’NEILL: Please
3 identify yourself.
4 MS. BOVA: Melissa Bova. I ’m the Vice President
5 of Government Affairs at the Pennsylvania Restaurant and
6 Lodging Association. Montana is kind of a misnomer, and I
7 have to get some more details, but if you notice, that is
8 the only State that had some type of agreement, so it’s not
9 really the basis of what all the other States that have
10 close to the loophole have done. We can get you some more
11 information about Montana, but it’s kind of, as you can
12 see, a little bit of a misnomer from what all the other
13 States and cities are doing as it pertains to fully closing
14 the loophole, but we can get you that specific information.
15 MR. SMITH: I suspect that it may be that they
16 negotiated an agreement to make a payment in lieu of
17 closing the loophole to remit a negotiated payment. That’s
18 speculation. We can get you that answer.
19 REPRESENTATIVE MILNE: Sure. No, I appreciate
20 that. And then with the States and that have fully closed
21 the loophole, and I don’t know how long some of that’s been
22 the case. I don’t know how much data has been collected
23 and analyzed, but do you have a sense of what the impact if
24 any on tourism and travel has been to States that have
25 closed the loophole in these intervening years? 35
1 MR. SMITH: Yes, I don’t have -- there isn’t
2 really any empirical data about that. I think if your
3 question is about have they seen any negative effects, the
4 answer is absolutely not. And I think that this is really
5 kind of in the grand scheme of things such a marginal
6 amount of money that w e ’re talking about that it doesn’t
7 end up having any major impact except in those cases where
8 the State takes the money and is able to have more
9 resources for marketing. I think to that degree it has a
10 positive impact. But if you’re asking has it, you know,
11 deterred visitation from any place whatsoever, there’s no
12 evidence whatsoever that that has happened.
13 REPRESENTATIVE MILNE: On these States that have
14 closed the loophole fully, are you aware of any that have
15 designated just allowing a local municipality to close the
16 loophole just for the local level but yet it’s kept the
17 same system in place at the State level? Can we separate
18 out the State and local implications here?
19 MR. SMITH: There most certainly are some States
20 where that enabling legislation has also allowed it to
21 happen at the local level. I don’t have the exact list,
22 but I can get it to you. But what I can tell you is that
23 in some of these States -- and Maryland is the one I ’m most
24 familiar with -- they actually did not need enabling
25 legislation at the local level, and they had many cities 36
1 and counties and Maryland had closed it on their own prior
2 to the State legislation. So that’s the most concrete
3 example I ’m aware of. But we can certainly get you that
4 information.
5 REPRESENTATIVE MILNE: Great. Thank you very
6 much.
7 MR. SMITH: You’re welcome.
8 REPRESENTATIVE MILNE: Thank you, Mr. Chairman.
9 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you.
10 Next is the only Representative I know that comes to
11 Harrisburg to get caught up on his sleep because he has two
12 little twin baby boys, infants at home. Representative
13 Roe.
14 REPRESENTATIVE ROE: Thank you, Mr. Chairman.
15 And gentlemen, thank you for your testimonies this morning.
16 Several of us are in receipt of a letter that
17 says that House Bill 1511 would backfire since this new
18 service tax would be paid only by Pennsylvanians and not by
19 travelers from out of State. Is there any truth to that?
20 MR. DAVIS: None whatsoever. Next question?
21 MR. SMITH: Yes.
22 MR. DAVIS: People by definition that pay the
23 hotel tax are people that are visiting that particular
24 area. And yes, it’s true that a lot of Pennsylvanians do
25 visit within Pennsylvania. That’s part of the process. 37
1 But that’s just I think an argument that doesn’t hold any
2 water. Again, w e ’re talking about tax that people think
3 that they’re paying and are prepared to pay. People, when
4 they go into -- you know, I know from the hotel business,
5 very rarely, unless a tax is just incredible and has been
6 in some cases in other cities and States, you don’t
7 question the tax. But what w e ’re asking is that the tax
8 loophole get closed so that the actual tax that they’re
9 collecting gets remitted to those areas where the consumer
10 believes are being taxed.
11 MR. SMITH: And I believe we have a speaker a
12 little bit later from the hotel industry I believe that
13 will address that in more detail.
14 REPRESENTATIVE ROE: And as a follow-up, I see on
15 that map, Delaware, it’s still unresolved in Delaware. My
16 district borders Delaware. Is there any chance that my
17 district would be losing business across the border?
18 MR. SMITH: I think it is conceivable, sure, but
19 to the degree that, you know, tax in general is lower in
20 Delaware, but I don’t think there’s a connection really to
21 be honest with you that you’re losing business because of
22 this. I think what it does -- again, you go back to the
23 issue of does the local tourism promotion agency have the
24 resources, the full resources that should be available to
25 market themselves aggressively and compete with the State 38
1 of Delaware to that degree. You could be more effective.
2 Your county’s tourism promotion agency could be more
3 effective if they had access to these resources.
4 MR. DAVIS: And the OTAs are benefiting from what
5 each regional tourist promotion agency does when we bring
6 in, for instance, an NCAA event. They sell a lot more
7 rooms when we bring in that NCAA event, and they benefit
8 from this, but they're not paying their fair share of
9 taxes.
10 FINANCE MAJORITY CHAIRMAN O'NEILL: Thank you,
11 gentlemen. One quick question. The two brands that you
12 had mentioned in your slideshow, are either of those brands
13 headquartered in Pennsylvania?
14 MR. DAVIS: No, sir.
15 FINANCE MAJORITY CHAIRMAN O'NEILL: Great, thank
16 you. Thank you very much, and thank you for coming out
17 today and coming -
18 MR. SMITH: It's —
19 FINANCE MAJORITY CHAIRMAN O'NEILL: -- up to
20 Harrisburg.
21 MR. SMITH: Thank you. Thanks for the
22 opportunity.
23 FINANCE MAJORITY CHAIRMAN O'NEILL: Yes. Our
24 next set of testifiers are Stephen Shur. Am I pronouncing
25 that right? 39
1 MR. SHUR: You got it right.
2 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you,
3 who is President of the Travel Technology Association; and
4 Joseph Montano. Montano?
5 MR. MONTANO: Yes.
6 FINANCE MAJORITY CHAIRMAN O ’NEILL: Who is
7 Government Affairs Manager for Expedia. Gentlemen,
8 welcome. So introduce yourselves and you may begin.
9 MR. SHUR: All right. Good morning, Mr.
10 Chairman, Members of the Committee. Thank you so much for
11 the opportunity to be here today. My name is Steve Shur.
12 I’m the President of the Travel Technology Association.
13 We ’re based in Washington, D.C., and my members include
14 Expedia and Priceline, Orbitz, Travelocity, booking.com,
15 KAYAK, TripAdvisor, pretty much every major online travel
16 company that hopefully you’ve heard of and used when
17 booking your travel.
18 We ’re here today in opposition to this bill
19 obviously, and I really welcome the opportunity to respond
20 to a lot of what you’ve heard already and happy to answer
21 questions on all of it, everything from the calculation on
22 the fiscal impact of the bill and where that $20 million
23 came from. I can speak to that. I would certainly like to
24 address your question about what happens in border areas.
25 But first, I ’d like to explain a little bit about 40
1 how our industry works and just clarify exactly what takes
2 place. First of all, hotels listing their rooms with
3 online travel sites is completely voluntary. They agreed
4 to enter into an agreement with an online travel agent to
5 help market and distribute their rooms.
6 I think the easiest way to look at this is that
7 an online travel agent does what a brick-and-mortar travel
8 agent does. It helps consumers search, compare, and
9 ultimately book their travel. The online travel agent is
10 never responsible for the inventory, so if a room is listed
11 on Expedia and it goes unsold, they don't have to pay that
12 hotel, that amount that night.
13 The biggest myth in our industry is that online
14 travel agents buy rooms in bulk at wholesale rate and
15 resell them at retail rates. It’s simply not true. The
16 economics of that don’t work. If that were really the case
17 and I were a hotel operator, I would sell 100 percent of my
18 rooms to Expedia every night and not care if anybody ever
19 showed up, right?
20 So online travel agents are truly just a
21 marketing and distribution partner, and it’s also important
22 to note that the hotel, in the context of those agreements,
23 sets the room rate and they control the inventory at all
24 times. They can log into the Expedia system behind the
25 scenes and they can add rooms. They can change the rate. 41
1 They can take rooms off. In an example when there’s an
2 NCAA event in Pittsburgh, for example, most of the time in
3 times of peak demand the hotels take all their inventory
4 off of the online travel sites because they know they’re
5 going to sell those rooms directly, okay?
6 So what’s really taking place here is that there
7 is a negotiated rate that is something less than the
8 consumer pays, and when you book a room on Expedia, the
9 amount you pay includes that negotiated room rate, all
10 applicable taxes on that room rate, and the travel agent
11 service fee. And it’s that travel agent service fee which
12 is really the subject of this legislation, which is whether
13 the State sales, and/or lodging tax should apply to the
14 service fees that travel agents charge their customers.
15 In the context of this legislation, that same tax
16 would apply to any entity inside Pennsylvania that books
17 hotel rooms for their clients, brick-and-mortar travel
18 agents, event planners, wedding planners, meeting planners.
19 If they are charging a service fee to book rooms for their
20 clients, those fees would be subject to the same tax.
21 In your packet is a letter from the American
22 Society of Travel Agents that testify to the fact that
23 there are over 3,000 people that work at brick-and-mortar
24 agents in Pennsylvania who would be subject to the same
25 tax. 42
1 In Maryland where they recently enacted this tax
2 after Governor Hogan vetoed the legislation, the
3 Legislature came back and overrode his veto, a travel agent
4 there testified that the tax on his business -- this is
5 essentially a double tax because he’s already paying income
6 tax on his fee revenue -- was the equivalent of six
7 employees. He’s a very successful event and meeting
8 planner in Hartford County, Maryland. And so the tax has
9 very real consequences on small businesses here in
10 Pennsylvania.
11 I’d like to address a little bit about who shops
12 on online travel sites. It’s mostly leisure travelers.
13 You know, we heard a little bit from Visit Philly and Visit
14 Pittsburgh about convention business. Those people are
15 going to stay in the cities where the conventions are
16 taking place. Most of the folks who are booking rooms on
17 online travel sites are leisure travelers. They’re looking
18 for the best deal in the best location that’s just right
19 for them. And online travel sites provide that
20 opportunity. Most of them are brand-agnostic. They’re not
21 really loyal to one single brand; they just want the best
22 option.
23 And so Priceline looked at all their data across
24 America and they found that when you raise the room rate 1
25 percent, you saw a 2 percent reduction in bookings. That’s 43
1 the price sensitivity of a leisure traveler. And I grew up
2 in South Jersey right outside of Philadelphia. It is quite
3 easy for someone to stay in Cherry Hill and visit Center
4 City than it is to stay in Center City. And what happens
5 when a traveler, because of a higher room rate because
6 these taxes will ultimately be passed on to the consumer in
7 the form of higher room rates, as was explained by the
8 previous testifiers -- is not immediate. It will come into
9 play in the next time that there’s a negotiation for those
10 room rates. But if a traveler chooses to stay on Route 70
11 in Cherry Hill, they’re going to eat at King of Pizza
12 instead of Pat’s Steaks.
13 And so what the State may gain in tax revenue
14 from taxing travel agent service they’ll lose all the
15 ancillary benefits of what happens when a traveler actually
16 visits the Commonwealth and spends their time and money
17 there, right? So the impact of these taxes is significant.
18 Nationally, the national average is that 25
19 percent of hotel bookings on online travel agent sites are
20 instate bookings, so people traveling for soccer
21 tournaments, et cetera, within the State. So
22 Pennsylvanians will pay more as a result of these taxes.
23 And so I really want to answer a lot of the questions that
24 have come up before.
25 But I really just want to clarify that what w e ’re 44
1 talking about here is a new tax on travel agent services.
2 There’s no loophole. All the proper taxes are being
3 collected and remitted. In fact, I know that the hotel
4 used this graphic, which w e ’ve seen many times before.
5 It’s what was displayed on the screen earlier. In my
6 packet I took the liberty of adding some commentary to that
7 to really point out what happens.
8 The example of wholesale retail, let me address
9 that. W e ’ve heard the hotel industry -- and I ’ll use the
10 car example that came up before, that consumers don’t pay
11 the tax on the wholesale rate, they pay the tax on the
12 retail rate. Well, it doesn’t really apply here because
13 that car dealer is responsible for that car, right?
14 And I think, Representative, that you pointed out
15 correctly that if someone reduces the price of that car,
16 the tax is based on the reduced amount, the same with the
17 AAA discount or an AARP discount on a hotel room. If the
18 room rate is reduced, the tax is based on the reduced room
19 rate. It’s exactly what’s happening in the online travel
20 agent environment. The tax in this example is based on $80
21 because that’s the room rate set by the hotel. That’s what
22 the hotel requires to allow someone to sleep in that room
23 that night. That’s the basis for the tax, right? Anything
24 above the room rate and the taxes is the service fee, and
25 that’s really what’s in question here is whether to apply 45
1 the lodging tax or the sales tax to that travel agent
2 service fee.
3 So when looking at this graphic, I think it’s
4 really important to acknowledge that on the right side of
5 the graphic, the room is not $100. The room is $80. The
6 tax is based on the 80. And so that graphic depicts the
7 truth when it comes to how the marketplace works.
8 With regard to the map, I also took the liberty
9 of making my own map, and they’re right. There are six
10 States that have enacted legislation that tax travel agent
11 service fees. And those States probably are benefiting in
12 terms of seeing some increased tax revenue from taxing
13 travel agent fees. And the only State that we really have
14 hard data on the impact of those taxes is Minnesota. We
15 looked at -- Minnesota enacted this tax in 2012, and we
16 looked at their tourism numbers from 2013 -- or they
17 enacted in 2011. We looked at their numbers from 2012 and
18 2013.
19 And getting back to my earlier point, these
20 taxes, they provide a disincentive for travel agents to
21 steer travelers to or from a destination. If they can
22 steer you towards Wisconsin instead of Minnesota where the
23 tax is not owed, they might do that. And they do that with
24 their marketing and advertising. So Minnesota, they
25 promised during the debate $9 million in annual tax 46
1 revenue. In the first year of enactment they collected $3
2 million and they lost about 1.5 million room nights. So
3 just to make sure there were no other anomalies, we looked
4 at Wisconsin’s data during the same time period, and they
5 gained about 3 million room nights at the same time.
6 So that’s an indicator that leisure travelers are
7 looking for deals, they’re getting those emails from
8 Expedia and Priceline inspiring them to travel and go
9 places and visit an amusement park or ballpark or a game or
10 campsite and they’re making decisions based on price. And
11 these taxes will ultimately be passed on to the consumer.
12 It’s going to make Pennsylvania room rates more expensive
13 and less competitive with States that don’t impose these
14 taxes like New Jersey and Delaware and Ohio so over there
15 in those border areas. Again, leisure travelers will most
16 likely choose to drive a little bit further to save a
17 little bit of money.
18 So I ’ll stop there. I ’m happy to answer any
19 questions. I really appreciate the opportunity here to
20 clarify the record and just urge you not to impose these
21 taxes on tourism in your State. I think it will have the
22 opposite intended effect. The way to grow your travel and
23 tourism budget is to get more people to come here, not to
24 provide incentives for travel agents to steer people
25 elsewhere. Thank you. 47
1 MR. MONTANO: Good morning, Chairman O'Neill, and
2 distinguish members of the House Finance Committee, also
3 members of the Tourism and Recreational Development
4 Committee. My name is Joseph Montano. I'm the
5 Pennsylvania Government Affairs Manager for the Expedia
6 Group. I want to thank you for the opportunity to testify
7 before you today on our opposition to House Bill 1511.
8 I don't want to belabor the points that my
9 colleague Steve has already mentioned. I look forward to
10 your questions as well. But I just want to state, you
11 know, Expedia Group platforms, they shine a light, an
12 international spotlight on Pennsylvania's small businesses,
13 including independent hotel operators who don't have the
14 same marketing dollars that the big hotel chains do. We
15 connect them to a world of potential travelers on 200
16 travel booking sites in more than 75 different countries,
17 and we compare them side-by-side with some of the biggest
18 hotel chains in the world. Now, this model helps
19 travelers, helps hotels, and it helps many other tourism-
20 related industries in this State such as restaurants,
21 museums, arts venues, transportation companies, and others.
22 It's become apparent that there is a fundamental
23 misconception among supporters of this bill and similar
24 bills like this. The fallacy, as my colleague Steve
25 mentioned, that we resell or rent hotel rooms is 100 48
1 percent false. Again, we have no access to that inventory
2 whatsoever. The hotels control the room 100 percent of the
3 time. And we don’t buy blocks of rooms. We never own or
4 carry any of the inventory risk that goes with it. Room
5 rates are set by the hotels themselves. We charge a
6 service fee in exchange for providing a service to our
7 customers. Therefore, the notion of a markup is completely
8 false.
9 Another myth that has been proscribed is that
10 taxes are going unpaid under this fee-for-service model.
11 This is simply false. When the hotel sends us an invoice
12 after a customer has completed their stay, we pass on to
13 the hotel the negotiated room rate w e ’ve collected from the
14 customer up front plus any taxes due on that hotel stay so
15 that the hotel can then remit it to the State or county
16 authorities, as required by law.
17 As for any claim collecting tax money from our
18 customers and preventing it from being remitted is 100
19 percent false, and in your packets I ’ve supplied you with a
20 list of court cases that have ruled on this, and in fact
21 every single court that has ever considered this question
22 before it has found that accusation to be completely
23 untrue.
24 You know, the last thing I want to say actually
25 is that the most egregious myth here is that this isn’t a 49
1 new tax. It is. If right now you take something that is
2 not taxed today, put a tax on it tomorrow and it requires
3 the legislature action to pass a law to tax this, that is
4 by any reasonable definition a new tax. And, you know, as
5 in your packets, you’ll see the Americans for Tax Reform
6 have also stated this is a brand-new tax. Proponents
7 suggest that this is a matter of fairness when in reality
8 legislation of this type is pushed by large hotel chains
9 whose aim it is to make independent hotels and inns less
10 competitive with theirs.
11 Simply put, a new tax on travel services would
12 make it harder for the entire Commonwealth of Pennsylvania
13 economy to succeed from small businesses to standby travel
14 dollars to independent hotels and local travel service
15 providers. So I respectfully urge you to protect local
16 travel tourism here in the Commonwealth of Pennsylvania and
17 not go down the uncertain path of raising taxes on travel
18 here.
19 Thank you for your time and consideration.
20 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you,
21 gentlemen.
22 Chairman Wheatley.
23 FINANCE DEMOCRATIC CHAIRMAN WHEATLEY: Thank you,
24 Mr. Chairman. And thank you, gentlemen, for your
25 presentation. 50
1 When I came here, I was pretty convinced that
2 this was very simple and straightforward in my mind. Help
3 me understand when you say this could hurt small
4 independent operators if in fact it’s a negotiation between
5 OTAs and the operator or a hotel about what the price of
6 the room will be for that evening, and no matter what, the
7 consumer is going to pay whatever the cost is. If it was
8 $100, the consumer, once they see their bill, is paying
9 $100 plus whatever tax on that $100. They don’t know
10 anything about the negotiation between the two operators,
11 so how would this hurt the independent operators?
12 MR. MONTANO: So the independent hotel operators
13 would be hurt because this would cut -- so at the end of
14 the day what happens is the traveler is very keenly aware
15 of price differences. And my colleague Steve can speak to
16 that a little bit more about how a traveler, when looking
17 at two different sites -- so we talked about Delaware and
18 the gentleman who asked a question earlier said would this
19 affect my region, my constituents, my district because he
20 so close to the Delaware line. And the answer is yes.
21 Travelers are keenly aware. And even a small amount of
22 changes within a room rate between Delaware and
23 Pennsylvania, that borderline there -- and as my colleague
24 Steve mentioned earlier, travelers will choose the lower
25 rate. Therefore, travelers will not be spending money in 51
1 Pennsylvania. They’ll instead be spending that money in
2 Delaware to stay at a hotel in Delaware.
3 FINANCE DEMOCRATIC CHAIRMAN WHEATLEY: I guess
4 that’s where I ’m kind of confused. Why would the consumer
5 see any change? If we were to change this tomorrow, right,
6 why would the consumer see any change? Because really,
7 w e ’re not changing the percentage of tax, right? If the
8 room was $100 today, tomorrow, the room would still be
9 $100. At the end of the day, they’re going to still pay
10 $100 plus whatever tax, so why would there be a change to
11 the consumer if we really w e ’re talking about a change in
12 the relationship between the two operators?
13 MR. SHUR: If I may, Mr. Chairman, Joseph?
14 FINANCE MAJORITY CHAIRMAN O ’NEILL: Go ahead.
15 MR. SHUR: So when a State chooses to tax service
16 fees, if you tax the service fee of an accountant, then
17 it’s pretty clear, it’s dollar for dollar the accountant is
18 going to pay more and tax. In this environment it’s a
19 little bit different because of the negotiation that takes
20 place. It’s not going to be an immediate -- if there’s an
21 extra $5 in taxes that are owed, that room’s going to be $5
22 more expensive tomorrow, right?
23 The way that independent hotels get hurt in this
24 environment is that the next time these -- these room rates
25 are set on either annual or three- or five-year agreements. 52
1 The next time that the OTA meets with that independent
2 operator and says, okay, now w e ’ve got this new tax and
3 w e ’re going to have to take that into consideration, and so
4 therefore, that negotiation becomes a little bit -- and
5 those taxes are taken into consideration during that
6 negotiation.
7 It hurts independent hotels in a way that
8 Marriott and Hilton are a bit insulated from because they
9 have broad global agreements that are negotiated over time,
10 right? So for Expedia and Priceline, they have individual
11 market managers they call them that literally meet with
12 every single independent hotel on a one-on-one basis and
13 talk about listing their rooms and how do we help you, you
14 know, design your, you know, photos on your site, et
15 cetera, to make you more attractive to help you grow your
16 business. It’s something that I think the OTAs don’t get
17 enough credit for, which is to help small independently
18 owned hotels compete against the Marriott and Hiltons of
19 the world.
20 So these taxes will be taken into consideration
21 during the next negotiation. And what that ultimately
22 means is that all Pennsylvania hotel rates will rise and
23 make them less competitive with neighboring States that
24 don’t have these taxes.
25 MR. MONTANO: And just one more point, you know, 53
1 in your packets you also have the Independent Lodging
2 Association who wrote a letter in opposition to this for
3 that very same reason.
4 FINANCE DEMOCRATIC CHAIRMAN WHEATLEY: And this
5 is the last thing, Mr. Chairman. It sounds to me -- and
6 this is just me and I ’m, you know -- it sounds to me the
7 reason these pressures would be on the independent
8 operators and the reason Pennsylvanians can see a rise in
9 the cost potentially for them is less to do about the
10 change necessarily but it’s the interest to keep the profit
11 margins on both sides because I ’m assuming the big hotel
12 people want to keep their profit margin and OTAs want to
13 keep their profit margin. And the ones that get caught in
14 the middle is the consumer who all they’re trying to do is
15 get the best deal for their buck.
16 And what we as government officials are trying to
17 figure out because we don’t necessarily want a broad-based
18 tax that raises their sales tax all up. If we did make
19 this change, it would be because we would see we got a 6
20 percent tax on hotel stays. You know, it’s consumers
21 paying it to somebody. And we might want to recapture two
22 of those dollars. So in this equation it’s really about
23 people’s profit margins and less about, you know, the
24 consumer. So that’s just where I ’m at.
25 And I think from a governmental perspective one 54
1 of the questions becomes what’s our role in making sure, if
2 the consumer is paying that 6 percent and they think it is
3 going towards governmental services, do we have a role in
4 trying to recapture some of that? And call it your tax on
5 service fees or whatever. I think that’s the major
6 question w e ’re struggling with. Do we have a role in
7 recapturing some of that?
8 Thank you, Mr. Chairman.
9 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you,
10 Chairman.
11 Chairman Millard?
12 TOURISM MAJORITY CHAIRMAN MILLARD: Thank you,
13 Mr. Chairman.
14 Gentlemen, I read your testimony in an effort to,
15 you know, have a better understanding of prior testimony to
16 yours. You have to guide me through this. With the
17 diagrams that were shown to us earlier and the diagram that
18 you showed us on that same transaction, I think that what
19 w e ’re looking at is not an increase in price to the
20 consumer. I think what the question here is the unremitted
21 amount of money out of that transaction. I think that the
22 sponsor of the bill is going after the unremitted amount,
23 not an increase.
24 But, you know, I have a couple other questions
25 here. I ’m just going to go through all of them. I think 55
1 you can wrap up your response all at one time, trying to
2 expedite, you know, this hearing. How often do you
3 negotiate? And are there price swings for holidays and
4 special events? What I'm trying to get at is when you are
5 notified that these rooms are available, that you put them
6 on your website, I mean, if there is no difference in the
7 price, what is the incentive to book with you as opposed to
8 booking directly with the hotel?
9 And I have to believe that your business model
10 probably includes some type of a discount. We talked
11 wholesale or retail here, so there has to be some incentive
12 there. But I'm thinking that it all boils down to, again,
13 the unremitted amount that you're incorporating not in your
14 negotiated price that you're paying but the amount that
15 isn't remitted to the State as far as a revenue source or
16 to local TPAs who would get a slice of that pie to market.
17 And my final question to you would be since,
18 again, we're going to the unremitted amount, do you not
19 agree that advertising more, whether it's through DCED or
20 local TPAs would make more business for you? You know, an
21 empty room does a hotel nothing. They get nothing out of
22 it, nor does the Department of Revenue or local TPA. But
23 if that room is occupied, there's money coming in. It's
24 just a question of remitting the amount, you know, based
25 upon whatever the retail price of that room is and you 56
1 still collect your profit margin on your negotiated price.
2 It’s a lot of questions there, but I think -
3 MR. SHUR: I took notes. Yes.
4 TOURISM MAJORITY CHAIRMAN MILLARD: Very good.
5 Thank you.
6 MR. SHUR: Shall I start?
7 MR. MONTANO: Yes, go ahead.
8 MR. SHUR: Okay. First, to address the question
9 of whether there is an unremitted amount, the court case
10 document that Joseph submitted in your packet, that is the
11 exact question that those courts explored. Are the proper
12 taxes being collected and remitted in every single
13 transaction? And virtually every court that looked at that
14 based on the statute -- and the current statute in
15 Pennsylvania is that the tax is based on the room rate set
16 by the operator. There’s no incentive for an online travel
17 agent to not collect the proper taxes and pass them through
18 to the hotel. There’s no incentive for them to do that,
19 right?
20 So with regard to the question of whether there
21 is an unremitted tax, we don’t believe that to be the case,
22 sir. We really believe that what you’re talking about is
23 the service fee. And what this bill would essentially tax
24 the service fee. And in that case, in that scenario, sure,
25 more tax revenue would be passed through, but it’s a new 57
1 tax on services in Pennsylvania.
2 You asked about how often are these agreements
3 between hotels and OTAs? Again, they are either one-,
4 three-, or five-year agreements typically. The big brands
5 have global agreements that are extremely complex with
6 regard to how those rates are set, particularly with
7 Marriott and Hilton. Most of their properties are
8 franchisees and there’s a lot of complexity to those
9 situations as well. But on an individual basis I would
10 imagine that those are more frequent. They want every
11 year, every two years.
12 How often does the price change? As often as the
13 hotel wants it to change. As I mentioned before, hotels
14 have the ability to log into Expedia’s system and change
15 the price or add rooms or take the rooms down. Remember,
16 they view our members as marketing and distribution
17 partners, so if they have maybe a 50 percent occupancy one
18 night and think that they might try to get a few more
19 travelers to come in even at a discounted rate, it’s better
20 for them to have somebody in there at a slightly discounted
21 rate than nobody at what they would consider to be their
22 full rate, okay?
23 Which leads me to the next point, which is that
24 what’s the incentive for a consumer to book on an OTA
25 versus a hotel-direct website? Well, there’s a lot 58
1 actually. One is leisure travelers, as I mentioned before,
2 primarily the ones shopping for rooms on OTAs, are not
3 brand-loyal. They’re looking for the best deal. There are
4 oftentimes situations where a consumer will see a lower
5 price on an OTA than on the hotel’s own website, and the
6 reason is that the hotel logged into the system and lowered
7 their rate to be more competitive because they know leisure
8 travelers may be driving through and need a place to stay
9 for the night at the last minute. They’re trying to grab
10 that traveler when they can by incentivizing them. By
11 lowering their rates, they rank higher in the search
12 results because most consumers will shop for a hotel and
13 then sort by price to see what’s least expensive. And so
14 they’re trying to be more competitive by using the OTA
15 distribution channel.
16 So the incentive is not only shopping across
17 brands but also because of that what I just described. In
18 the dynamic pricing and the hotel’s desire to lower their
19 rates at times to bring people in, they can often find good
20 deals. Now, it actually happens in the opposite, too, when
21 there’s a period of peak demand, the hotels will take all
22 of their inventory off the OTAs and raise their rates
23 typically is what happens in those peak demand times.
24 TOURISM MAJORITY CHAIRMAN MILLARD: Well, and the
25 thing that rings in my mind is the ad that I see on TV, and 59
1 your ads are very effective. I just wish we had more money
2 in Pennsylvania to market tourism. W e ’d be very effective,
3 too. The one of the hotel where the lights are off in the
4 hotel rooms and there’s a price that, you know, shows up
5 and then all of a sudden the prices are discounted and the
6 lights are going on. So that’s the allure to you to sell
7 it at a discounted rate where the consumer has to believe
8 that they’re getting a buy. They’re getting a deal.
9 But, you know, I still go back to this little
10 slice of the pie. I ’m still struggling with what your rate
11 is negotiated, what the rate of capture is for that hotel
12 tax that gets distributed locally and statewide. But thank
13 you for your response. I appreciate it.
14 MR. SHUR: Thank you for the question.
15 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you
16 Chairman.
17 Chairman Longietti?
18 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Thank
19 you, gentlemen, for being here and for your testimony. I ’m
20 going to ask a somewhat parochial question to start with,
21 but can you tell me, Expedia, how many folks do you employ
22 in Pennsylvania?
23 MR. MONTANO: In Pennsylvania, we have an office
24 in Philadelphia. I ’ve unfortunately never had the time to
25 visit it. I always spend my time up here. But I can get 60
1 you those numbers. I just don’t know them -
2 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Any
3 approximate, ballpark?
4 MR. MONTANO: I wouldn’t be able to even
5 guesstimate. Sorry.
6 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Are you
7 able to tell us your various partners? There’s multiple
8 ones. About how many folks do they employ in Pennsylvania?
9 MR. SHUR: I don’t have an exact number either,
10 Representative. If you’re able to get those -
11 MR. MONTANO: Of course.
12 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: — to the
13 Committee, I think that would be something that w e ’d like
14 to see.
15 You know, I certainly appreciate the services
16 that you provide. I use them from time to time.
17 MR. MONTANO: I ’m going to need that in writing,
18 Representative.
19 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: I ’d be
20 happy to give it to you. So, great, it’s recorded -
21 MR. MONTANO: I don’t know if I can shop that
22 around.
23 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: — and
24 the whole nine yards so -- but here’s the way at least it
25 looks like to me as somebody who’s a consumer, maybe not 61
1 the most sophisticated consumer. So I go on the site and I
2 see prices. And, you know, I compare those prices maybe to
3 other sites or maybe to the hotel. And my expectation is
4 that I know that’s not the end price. I know, you know,
5 this is the advertised price. There’s going to be some
6 additions to that when I get the check out whether I go on
7 the hotel’s website or your site. And my sense is most of
8 that is tax. I know that with you all there’s going to be
9 some service fee. And, sure enough, when I get to the
10 bottom I see that, right?
11 Now, the way that I see it on the screen is it
12 says taxes and fees, so it doesn’t separate what is tax and
13 what is fee. I ’m assuming that if the price is $135, that
14 I am paying tax on $135 depending on which city I ’m in. It
15 might be 15.5 percent if I ’m in Philadelphia I assume, and
16 then the rest is fee. But if I ’m understanding correctly,
17 that’s really not what’s happening, that my taxes are
18 actually less than that because you’re basing the tax on
19 your wholesale price and it’s less than $135.
20 MR. MONTANO: Right.
21 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Why
22 doesn’t the website sort that out for me? Why doesn’t it
23 show me here are the taxes and here are the fees?
24 MR. MONTANO: That’s a great question,
25 Representative. So the reason why is because these 62
1 contracts are usually done very specifically with each
2 individual hotel chain, with each individual hotel
3 operator, and what we wouldn't want is other competitors
4 out there to understand or know what the specific contract
5 agreements do. So by bundling the taxes and the service
6 fee, we prevent folks from being able to reverse engineer
7 that and then figure out what specifically our contracts
8 are, what specific hotel chains, and then have them
9 undercut us. So it's really just to make sure that we
10 still have a competitive advantage over all our competitors
11 such as Priceline, which happens to be our biggest
12 competitor.
13 MR. SHUR: If I may add also, it's actually
14 mandated by the hotels during the negotiation that that
15 negotiated rate is not disclosed to the consumer. And
16 there's a pretty clear reason for that. So in this
17 example, the hotel's example in my marked up version, the
18 room rate is $80. Marriott has the best rate guarantee
19 minus 25 percent. So if that transaction was itemized, if
20 the taxes and fees were not bundled and it was itemized,
21 the consumer could figure out that the Expedia rate for
22 that room was $80. Then, they can call Marriott up and say
23 I want the Expedia rate minus your 25 percent guarantee.
24 So it's actually the hotels that prohibit the
25 OTAs from disclosing that negotiated rate for that very 63
1 reason, right? They don’t want -- hotels have many prices
2 on any given night. They have a completely full hotel and
3 everybody in the hotel could have paid something different
4 depending on where they booked, which channel, whether they
5 booked through AAA, AARP, government rate, corporate rate,
6 on the OTA, or they walked in the door 10 minutes ago.
7 Everybody paid something different, right?
8 So the hotel doesn’t want that negotiated rate to
9 be made public or to allow somebody to, as Joseph said,
10 reverse engineer the tax base and figure out what the rate
11 is, particularly in cases where they have a best-rate
12 guarantee minus an additional discount, which will only
13 hurt the hotel. So it’s actually in the contract, a
14 nondisclosure clause in the contract on that rate.
15 TOURISM DEMOCRATIC CHAIRMAN LONGIETTI: Well, I
16 appreciate that. I appreciate that explanation. And I
17 guess in my mind it seems to me primarily, basing it on my
18 own experience, that I ’m really looking at what you’re
19 advertising. So if it’s a $135 room, that’s really what
20 I ’m looking at. And I ’m expecting that there’s going to be
21 some additional charges on the backend. But I ’m not so
22 sure that this change is going to change necessarily that
23 room rate or my decision on what to book. What it is going
24 to do I think is it’s going to produce revenue for
25 Pennsylvania to market itself and hopefully attract more 64
1 businesses.
2 Now, I hear what you’re saying about Minnesota
3 and Wisconsin. I guess w e ’ll find out if any States
4 actually walk away from this change in the law. But that’s
5 what it seems like for me on the consumer end. Thank you.
6 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you.
7 We have a couple more questions, and I ask that we speed it
8 up a little because w e ’re running a little behind.
9 Representative Quinn?
10 REPRESENTATIVE QUINN: Thanks very much.
11 Gentlemen, I appreciate your testimony here, though I
12 disagree with some of it. Yes or no question. In the
13 States where you’ve closed this loophole, have your
14 companies had to increase their prices? Have they
15 increased their prices from what the hotel is charging?
16 MR. MONTANO: I ’m sorry, Representative. I ’m not
17 privy to the negotiations or the contractual agreements. I
18 barely have any marketable skills other than being here and
19 testifying before you all, so I ’m not on the business side
20 unfortunately.
21 MR. SHUR: I don’t have that information either.
22 REPRESENTATIVE QUINN: Thank you. I ’d appreciate
23 it if you could look into it and get back to us.
24 Another thing. You mentioned travel agencies and
25 compared your business model to that of a travel agency. 65
1 It’s my understanding that a travel agent traditionally
2 gets a commission for what’s sold but does not have the
3 ability to, you know, raise the rates going forward. So I
4 just want to put that out there, that I don’t think it’s
5 quite an apples-and-oranges approach.
6 The other thing, it seems to me that the -- you
7 know, I ’m curious, as you answered Representative Longietti
8 or Chairman Longietti with regard to the hotels actually
9 not wanting that model put out. It was said earlier that
10 the big hotel chains are pushing this bill. If they are, I
11 have yet to be spoken to by any of them. And it would seem
12 to me that it’s only fair in this age of transparency that
13 we actually ask and potentially even impose legislation if
14 doesn’t grow the legs we want to separate that service fee
15 from the tax because, as a consumer, that service fee is
16 synonymous with profit.
17 And while I ’m not against profit and I ’ve looked
18 at was some of your companies have been doing and it’s
19 terrific, it seems to me, just like what some of our other
20 Chairmen have said, this is actually taking away from
21 dollars that should be coming right into Pennsylvania’s tax
22 base to promote all of the industries in this room.
23 So thank you. More comment than question.
24 MR. MONTANO: Okay. Thank you. If I may,
25 Mr. Chairman, just address one point about commissions. I 66
1 did note in the legislation the commissions are exempt from
2 this tax. And you’re right. Traditionally, brick-and-
3 mortar agents, meeting planners, event planners, wedding
4 planners would get a commission from the hotel. Just about
5 one month ago, Marriott announced that they were cutting
6 all travel agent commissions completely. It’s been
7 happening. It’s a trend in the industry. I believe that
8 the letter from the American Society of Travel Agents
9 addresses that as well. And so what that means is that any
10 agent in Pennsylvania is now changing their business model
11 and charging their clients a fee because that commission
12 revenue is no longer there.
13 REPRESENTATIVE QUINN: Mr. Chairman, if I may, I
14 believe -- and I ’m not the expert in this industry, but I
15 believe what that means is that Marriott is updating their
16 business model to today, maybe moving out of the 1971
17 business model. And they’re recognizing the trends in the
18 industry and they’re addressing that, and that’s what this
19 legislation is to do for Pennsylvania. Thank you.
20 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you.
21 Representative Boback?
22 REPRESENTATIVE BOBACK: Thank you, Mr. Chairman.
23 I ’m really taken aback by the accusation that
24 we ’re trying to impose a new tax. To simplify it for our
25 viewers -- we’re being televised -- so I’m paying $100 to a 67
1 service company, a great deal in a room, and I ’m paying 6
2 percent because I ’m in Pennsylvania now. And I realize
3 that 6 percent is a tax. A tax is a tax is a tax. And yet
4 when w e ’re talking about perhaps that company is only
5 paying $80 and w e ’re looking at the $6 tax that I ’m paying,
6 6 times 80 is $4.80. So they’re actually leaving $1.20,
7 which is actually a fee. So there again, I have to concur
8 with Representative Quinn and our Chairman that it’s a fee.
9 It’s not imposing a new tax.
10 So perhaps it would be better off if these
11 companies imposed a fee, $2, $3, whatever the case is, so
12 that at least your consumer knows what they’re paying for
13 because otherwise, until this bill came out, I thought my
14 $6 on a $100 room was going right to the State of
15 Pennsylvania. So I think we have to look at that.
16 Remember, a tax is a tax. A fee is a fee. And to combine
17 the two I just think is disingenuous. Thank you, Mr.
18 Chairman.
19 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you.
20 Representative Corr?
21 REPRESENTATIVE CORR: Thank you, Mr. Chairman.
22 Thank you both for your testimony and for those
23 that preceded you. You make an interesting and compelling
24 argument, and there’s nothing quite like a tax debate to
25 start off your Tuesday. I ’d like to if I could pick up a 68
1 little bit on what Representative Boback was talking about
2 and use the graphic, Mr. Chair, that you provided. In the
3 graphic where the consumer -- I'm looking at the right side
4 using OTAs. The consumer is paying $100 for the room, the
5 customer. The customer pays a total of $110. And you're
6 using 10 percent tax rate. That's 6 percent here in PA,
7 but we'll use 10 percent for the purposes of this
8 discussion. That represents what we would call the hotel
9 tax here in Pennsylvania. Why are you keeping $22 as
10 opposed to $20 in this hypothetical?
11 MR. SHUR: Quite simply because the room rate,
12 the basis for the tax, is $80, not $100, and so the proper
13 taxes are being calculated and collected and remitted, and
14 there based on the room rate, not the room plus the
15 service.
16 REPRESENTATIVE CORR: Then in your hypothetical,
17 why are you applying the 10 percent tax to the entire $100?
18 MR. SHUR: So the way it works is that the
19 negotiated rate, all the taxes on the room rate are passed
20 on to the hotel, right? That service fee is actually a bit
21 of a dynamic number, and the reason for that is price
22 parity agreements where the hotel in their agreements will
23 tell the OTA that they can't list that room for less than,
24 in this case, all-in cost of $100, right? So now that
25 service fee actually changes. It's not static. It's not 69
1 that Expedia charges $8 or $10 or $20 on every single
2 booking. It’s the delta between the room rate, the taxes
3 on the room rate, and the floor that the hotel says that
4 the OTA can’t go below.
5 REPRESENTATIVE CORR: But surely your computer
6 systems know that in this hypothetical that the room rate
7 is $80?
8 MR. SHUR: That’s right.
9 REPRESENTATIVE CORR: So the tax that needs to be
10 applied should be on the $80, correct?
11 MR. SHUR: That’s correct.
12 REPRESENTATIVE CORR: I think what you’re telling
13 me -- and correct me if I ’m wrong because I know w e ’re
14 looking at a graphic.
15 MR. SHUR: Sure.
16 REPRESENTATIVE CORR: But if the graphic — and
17 it’s designed for the simpleminded politician, but I think
18 what you’re telling me is that in practice you are showing
19 the consumer the application of the tax on the gross number
20 and then in reality, behind the scenes, you are allocating
21 a portion of what the consumer sees as a tax toward your
22 fee.
23 MR. SHUR: Sir, I don’t believe that to be the
24 case, and the reason is that the taxes and fees are bundled
25 purposely again at the request of the hotel. 70
1 REPRESENTATIVE CORR: And what does the customer
2 see on the screen? And I think that’s what the Chairman
3 was getting at before.
4 MR. SHUR: They see the room rate and then they
5 see the taxes and fees bundled, and then the bottom line is
6 the total all-in cost.
7 REPRESENTATIVE CORR: And when they see the
8 application -- am I correct that what you’re testifying to
9 hear today is, though, that you are calculating an amount
10 in excess of the room charge that would include -- I guess
11 what I ’m asking is you’re calculating everything in excess
12 of the actual room charge by applying a percentage, and the
13 consumer is looking at that percentage and saying that’s
14 the tax. And then you’re divvying it up between what is
15 actual tax and what is your fee and then bundling it
16 together and calling it service fees and taxes.
17 Okay. You’ve answered my question. I just think
18 that it’s disingenuous for the customer to be seeing
19 something that appears to be a tax, which is then -- well,
20 Representative Boback said a tax is a tax is a tax. I
21 think what I ’m saying is the tax isn’t a tax in this
22 situation. It’s actually an element of service fee. And
23 I ’m okay with that. Everybody has to make -- well, I want
24 you to make money, and I certainly want the hotels to make
25 money. We all want the hotels to be filled. But I think 71
1 if you’re going to -- you know, it just seems to me that
2 under this hypothetical you’d have a better case with me if
3 the hypothetical said it’s $100 and w e ’re charging $8 in
4 tax.
5 MR. SHUR: Right. That’s exactly right.
6 REPRESENTATIVE CORR: You know, and —
7 MR. SHUR: Maybe the graphic doesn’t do that, but
8 that’s exactly what’s happening because the room rate is
9 $80 and the $8 applies -
10 REPRESENTATIVE CORR: But that’s not what’s
11 happening. I think what’s happening is you’re applying 10
12 percent to the full $100 and you’re saying w e ’re going to
13 keep 2 of it. And that’s what I think the underlying
14 purpose of the bill is. And so I think if you came into
15 the room today and said, look, you guys, w e ’re only
16 charging $8 here and w e ’re making money on the other side
17 because w e ’re a business. That’s what we do.
18 But I ’m looking at it saying if you’re going to
19 have books and records that are saying w e ’re applying a tax
20 rate to the full amount and you’re serving as a third-party
21 conduit for the hotel and you’re trying to tell me that it
22 should be the policy of the Commonwealth of Pennsylvania
23 that if the hotel is really going to use a third party to
24 sell its rooms, that it should therefore not only give the
25 consumer a discount on the hotel room but it also should 72
1 give us a discount on taxes, I ’m not sure I ’m buying that.
2 So I appreciate what you’re saying, and I really think
3 you’ve made a good argument, but I don’t think I ’m going to
4 get there with you on that one. So I appreciate it. Thank
5 you.
6 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you.
7 And thank you, gentlemen, for coming in. And I appreciate
8 you traveling up from D.C. to visit us and -
9 MR. SHUR: My pleasure. Thank you for the
10 opportunity to be here.
11 FINANCE MAJORITY CHAIRMAN O ’NEILL: We appreciate
12 it.
13 MR. SHUR: Thank you.
14 FINANCE MAJORITY CHAIRMAN O ’NEILL: Our last
15 testifier is Mr. Matt English, who is the General Manager
16 of the Holiday Inn in Hershey/Harrisburg. Thank you.
17 MR. ENGLISH: Good morning.
18 FINANCE MAJORITY CHAIRMAN O ’NEILL: Good morning,
19 sir.
20 MR. ENGLISH: Thank you, Chairman O ’Neill,
21 Chairman Millard, Chairman Longietti, Members of the
22 Finance and Tourism Committees. My name is Matt English.
23 I ’m the General Manager of the Holiday Inn
24 Harrisburg/Hershey located in Grantville, Pennsylvania. I
25 am here today to testify on behalf of the Pennsylvania 73
1 Restaurant and Lodging Association, PRLA.
2 Contrary to other testimonies today and letters
3 sent to the Committee, the PRLA is the only organization
4 that represents the 1,500 hotels, inns, bed and breakfasts
5 located in the State of PA that employ over 121,000
6 Pennsylvanians. PRLA supports House Bill 1511 sponsored by
7 Representative Marguerite Quinn.
8 I want to reiterate something that continues to
9 be misrepresented in these hearings. Our industry has not
10 nor ever will be opposed to competition in the industry.
11 What we oppose is the fact that these online booking sites,
12 by remitting lesser taxes, profit on the backs of the
13 hotels that are located here and employ Pennsylvanians.
14 Fritz Smith and Craig Davis did a very good job
15 explaining how this loophole works so I will not revisit
16 the specific details of it, but I will provide another
17 analogy to help clarify what is happening. We call it the
18 Best Buy/Sony TV analogy. When Best Buy purchases a
19 television from Sony, they pay let’s say $80. Best Buy
20 then assesses a markup to that television and sells it to
21 the consumer let’s say for $100. When the consumer
22 purchases that television, Best Buy is remitting sales tax
23 on $100, because that is the retail price of the
24 television. They are not remitting sales tax on $80, and
25 if they did, I expect that the Department of Revenue would 74
1 act expeditiously.
2 We feel that the loophole utilized by online
3 travel companies is exactly the same. They are remitting
4 hotel occupancy tax on the wholesale amount rather than the
5 retail amount. The problem here is that our tax code is
6 not quite in the 21st century and therefore does not
7 recognize the markup assessed by online travel companies as
8 taxable.
9 Our tax code was written well before the enormous
10 growth of Internet commerce, and this situation is another
11 example of the need for modernization in order ensure
12 parity. I urge you to go online and begin to book directly
13 with a hotel through their website, then go to an online
14 travel agency and book that same hotel. You’ll see that
15 it’s exactly the same price, yet the hotel is remitting tax
16 on the full retail amount, and the online travel company is
17 not. How does that make sense?
18 The Department of Revenue has told us closing
19 this loophole would bring $20 million in new revenue. This
20 legislation would direct that $20 million to statewide
21 tourism promotion, a line item that has been extremely
22 neglected over the past few years. In the last two years,
23 the line item has been funded at $4 million compared to $70
24 million in New York and $21 million in Virginia. PRLA
25 commissioned a study that shows if we increase the tourism 75
1 line item, it would be a three-to-one return on investment
2 for every dollar spent.
3 Currently, that $20 million that the State is not
4 seeing because of the loophole is going to the marketing
5 efforts of billion-dollar out-of-state companies who are
6 using profits made on the backs of the hotels in the State
7 to make even more money for themselves. This legislation
8 would direct that $20 million to the Statewide Tourism
9 Office to promote Pennsylvania and bring more visitors to
10 the Commonwealth, which will generate more tax revenue for
11 the State and more economic opportunities for its
12 residents.
13 Finally, I want to address some of the comments
14 made in previous testimony. This bill is not a tax on
15 travel agents, as is being insinuated. Travel agents
16 receive a commission from hotels. They are not assessing a
17 service fee. If there is a concern from true travel agents
18 in the Commonwealth, not online travel companies, we would
19 be happy to address those concerns.
20 There has also been a comment that independent
21 hotels would be hurt by this legislation. That is also a
22 misnomer. Independent hotels certainly use online booking
23 sites similar to the way any other hotel does. This
24 legislation will not hurt their ability to sell rooms
25 unless the online travel company refuses to list the hotel 76
1 anymore, which hurts the online travel company that profits
2 from the sale as much as the hotel.
3 I urge you to recognize this legislation for
4 exactly what it is: ensuring a level playing field.
5 Currently, instate hotels are at a disadvantage to these
6 billion-dollar companies that utilize a loophole in the
7 code to profit themselves. This legislation ensures
8 consistency by assessing tax on the retail cost of all
9 hotel rooms, whether booked through an online travel
10 company of directly through the hotel.
11 Please support this commonsense legislation and
12 Pennsylvania businesses. Thank you.
13 FINANCE MAJORITY CHAIRMAN O'NEILL: Thank you,
14 sir. Does anybody have any questions?
15 You got off easy there. Thank you very much.
16 MR. ENGLISH: None for today.
17 FINANCE MAJORITY CHAIRMAN O'NEILL: I want to
18 thank everybody for being here today, and I'll turn it over
19 to Chairman Millard for some closing remarks.
20 TOURISM MAJORITY CHAIRMAN MILLARD: Thank you,
21 Chairman O'Neill.
22 As the Chairmen of Tourism and Recreational
23 Development, Chairman Longietti and I have traveled all
24 across the State, and we're certainly well aware of the
25 lack of dollars that remain for promoting tourism all 77
1 across the Commonwealth. So, Mr. Chairman, I just want to
2 take a moment here, although our Committee will not be
3 voting on this bill to come to the House Floor, I do want
4 to compliment the Representative for proposing this
5 legislation. I think that my personal opinion is that it
6 will close the loophole. And if the dollars are directed
7 for what’s intended in the legislation, then it will
8 accomplish a lot of good for what our Committee represents
9 in the Commonwealth. Thank you.
10 FINANCE MAJORITY CHAIRMAN O ’NEILL: Thank you.
11 Once again, I want to thank Representative Quinn for
12 introducing the legislation, and I want to thank all the
13 members. And I apologize to the Members who were here that
14 it was such a crowded room because rooms are at a premium
15 this time of the year.
16 But I want to thank everybody for coming today,
17 and we look forward to continuing the discussion. Thank
18 you, and this hearing is closed.
19
20 (The hearing concluded at 10:49 a.m.) 78
1 I hereby certify that the foregoing proceedings
2 are a true and accurate transcription produced from audio
3 on the said proceedings and that this is a correct
4 transcript of the same.
5
6
7 Christy Snyder
8 Transcriptionist
9 Diaz Transcription Services