State lawmakers working to close loophole in online sales, hotel taxes

Indiana is one step closer to closing what lawmakers describe as a loophole in online sales and hotel tax collection. 

Senate Bill 322, authored by Sen. Travis Holdman, R-Markle, would require so-called “marketplace facilitators” that sell goods or services online on behalf of other entities to collect and remit sales tax to the state. The legislation is in response to a June ruling from the U.S. Supreme Court that allowed states to pass laws requiring sellers without a physical presence in the state to collect sales tax from customers. 

Indiana passed a law in 2017 that required online retailers with sales of at least $100,000 or more than 200 customers in the state to collect and remit the state’s 7 percent sales tax. That law didn’t take effect until October 2018, though, because of the legal challenge from American Catalog Mailers Association, NetChoice Wayfair Inc. and Overstock.com. 

Since October, the Indiana Department of Revenue estimates it has collected $30 million to $40 million from online merchants through the end of February.

But the 2017 law did not address marketplace facilitators, such as Amazon or Expedia, and now lawmakers are hoping to fix that.

The House Ways and Means Committee amended and passed SB 322 to the full House on Wednesday. If it passes the House, it will return to the Senate, because it was amended. It passed the Senate 40-0 in February. 

The legislation has divided hospitality industry officials, with hoteliers arguing online travel websites like Orbitz or Expedia should have to collect and remit the same taxes that they do when they sell rooms. But those travel sites disagree. 

Joseph Montano, government affairs manager for Expedia Inc., argued that online travel agents are providing a service for hotels by advertising their rooms. He said the holding them responsible for paying the tax would be taxing their service rather than a tax on a hotel room. 

He said Kentucky passed a similar law recently and the state saw a decrease in room night bookings afterward. 

Patrick Tamm, president and CEO of the Indiana Restaurant and Lodging Association, said online booking sites aren’t remitting taxes on the full price the customer pays, even though it is portrayed that way to consumers. Instead, they are collecting and remitting taxes based on the wholesale rate that the booking agency paid for the room.

Meanwhile, Tamm said, if someone books a room on the hotel’s website, the hotel pays taxes on the full price the customer pays. 

That means for customers, there isn’t any price difference. A room that costs a total of $180 on Hilton’s website, for example, can cost the same amount on Expedia. The difference is in the “taxes and fees” each entity collects and remits to the state. 

Tamm said that loophole means the state is losing out on millions of dollars in revenue. 

“This is absurd,” Tamm said at a recent committee hearing. “This has been going on for years.”

The Indiana Retail Council also is supporting the bill, saying it closes a loophole to the 2017 law. 

“This is the right thing to do,” Grant Monahan, president of the Indiana Retail Council, said at a recent committee hearing. “It’s a perfect followup to the Wayfair decision.”

SB 322 also would require short-term rentals, such as those on platforms like Airbnb or VRBO, to collect sales and innkeeper’s taxes. If an individual rents their home for fewer than 15 days per year, they would be exempt from the law. 

The language was initially in a separate bill—Senate Bill 497—but the Ways and Means Committee folded it into SB 322 on Wednesday. 

Jeffrey Brown, CEO of Schahet Hotels, said at a previous Ways and Means hearing on SB 497 that he thinks the state is probably missing out on $15 million to $20 million in annual tax revenue by not requiring short-term rentals to collect and remit these taxes.

“We believe in competition, but we also believe in fairness,” Brown said. 

Short-term rental companies like Airbnb and VRBO have not opposed the proposal.