Marketing through online travel agencies (OTA) is required to stay competitive in today’s market but comes with added complexity in recording these transactions and reporting and remitting taxes, specifically, Washington retail sales tax and lodging taxes. In a previous article, we discussed revenue recognition standards on sales through OTAs under generally accepted accounting principles. Here we’ll focus on the state and local tax impact of these transactions.
Hotels contract with OTAs to market rooms on their website and facilitate the sales process. Under many standard OTA contracts, once a room is sold, the OTA transfers funds equal to the price paid by the customer less commissions charged by the OTA and taxes withheld.
These transactions occur on what the Washington Department of Revenue (DOR) deems to be an online marketplace. Online marketplaces facilitate sales between three parties: a marketplace seller (the hotel), a marketplace facilitator (the OTA), and a consumer. Hotels are required to collect retail sales tax and lodging taxes on the sale of lodging; however, selling through an OTA can create uncertainty in determining the dollar amount to report and remit for B&O and sales taxes, as the price paid by the guest includes OTA commissions. While the contract with the OTA may dictate the responsibilities of the parties, many times it is unclear.
In Washington, under an agreement with an OTA, a hotel is often only responsible for the retail sales tax and lodging tax collected on the net amount remitted to the hotel (paid by guest less commissions withheld by the OTA). When an OTA collects and withholds sales tax (retail sales tax and lodging tax) on the total guest price, including the commission piece, the hotel is still required to report the total sale for B&O and sales taxes purposes on their Washington State Excise Tax Return. The hotel may, however, claim a deduction from sales taxes for any taxes paid by the facilitator. Regardless of who is responsible for ultimate payment to the DOR, the hotel should report 100% of the sale price paid by the guest under B&O and sales taxes, with a deduction from retail sales tax for the amount paid by the OTA, as “Retail Sales Tax Collected by Facilitator.”
We recommend reviewing the terms of your contract with all OTAs used along with current reporting practices to ensure sales are being properly reported and taxes properly remitted.
For more information please contact State and Local Tax Senior Manager Sonjia Barker.