Online Travel Companies Ordered to Pay Hawai’i Taxes

A ruling in the Hawai’i Supreme Court Tuesday means that nine travel companies that operate businesses online, including Expedia, Orbitz, Priceline, and Travelocity, owe the State of Hawai’i tens of millions of dollars in back taxes for selling local  hotel rooms on the internet.

“The landmark ruling is the first time the Supreme Court ruled that online commerce may be just as subject to pay general excise taxes as local brick-and-mortar businesses,” Attorney General Doug Chin said. “It is the result of years of effort by the Attorney General’s office to collect state taxes from national companies who profited from selling Hawai’i hotel rooms.”

State tax department officials say they issued GE tax and TAT assessments in 2010 against the online travel companies for back taxes retroactive to 2000. The online companies refused to pay the taxes. Part of the online travel companies’ argument against the payment was that the revenue generate from Hawai’i hotel sales did not occur in the State of Hawai’i.

As part of Tuesday’s ruling, the Supreme Court said that the general excise tax applies to “virtually any economic activity imaginable.” Even without a physical presence in Hawai’i, the Supreme Court said that the online companies “were not passive sellers of services to Hawai’i consumers.”

The Court said: “It is clear the occupancy rights that these companies are selling to transients are wholly consumable and only consumable in Hawai’i. Even though an online travel company’s agreement with a transient may take place outside of Hawai’i, the agreement is effected with the intent that performance would occur entirely in Hawai’i”

The Tax Appeal Court’s judgment on Tuesday will uphold the State’s assessment of penalties and interest against the online travel companies who have failed to file tax returns and who have refused to pay general excise tax for a period lasting from 2000 through 2011.

“The amount of taxes, penalties, and interest owed by these online travel companies will be substantial, up to tens of millions of dollars,” Deputy Attorney General Hugh Jones, who has been the lead state attorney in the litigation since 2010, said.

Chin said that based on the ruling, online travel companies need to pay GE taxes to the State of Hawai’i, for the past, to the present, and into the future. “It’s a privilege to do business in Hawai’i. Bottom line, these online travel companies derived substantial revenues from the sale of Hawai’i hotel rooms and they need to pay their fair share.”