As states look for new sources of tax revenue in the service-driven economy, businesses like travel agencies are viewed as likely targets. Part of the problem is ignorance among legislators of how agencies operate and why added taxes would be devastating for many.
Travel advisors in the U.S. states of Connecticut, Utah, and Nebraska are mobilizing for a fight against tax proposals they fear could put travel agencies out of business.
In Utah, a sweeping tax reform bill that would impose state sales taxes on travel agencies and others who provide professional services had been scheduled to go before the state legislature this month. Pressure from the business community, including travel advisors, has caused lawmakers to withdraw the proposal for consideration during the current session. However, the governor announced he may call a special legislative session this summer to address the issue again.
A similar proposal regarding “the gross income received for the services of travel agents and tour operators and for online travel services” is going before the state legislature in Nebraska.
In Connecticut, Governor Ned Lamont’s 2020 budget proposes to expand the state’s 6.5 per cent sales taxes to include “travel arrangement and reservation services.”
None of the proposals are clear on whether the new taxes would pertain to gross sales or only on service fees and markups provided to clients.
The American Society of Travel Advisors, which estimates that the tax expansions could cost some agencies $25,000 a year or more, has launched grassroots campaigns in all three of the states. It also created a portal on its website where advisors can voice their opposition in messages to state legislators.
While currently the issue is confined to three states, Eben Peck, ASTA’s executive vice president, advocacy, said there is reason for advisors across the U.S. to be concerned about the concept spreading elsewhere.
“States tend to copy each other, especially when they see a neighboring state finding a way to raise revenue pain-free,” he said. “While fighting the current threats, ASTA will remain vigilant in identifying new threats.”
Other new tax proposals affecting agencies would not come as a surprise to Paul Ruden, a travel industry consultant who served as ASTA’s vice president of legal and industry affairs for 25 years.
As cash-strapped states look for new ways to generate tax revenue, business services, including those provided by travel agencies, are seen as fair game, he said.
“Despite full employment, states are looking at their budgets and seeing gaps they need to fill,” Ruden said. “They don’t want to raise general income taxes, so they see business services as a good thing to tax.”
Compounding the problem is the fact that legislators have little understanding of how travel agencies operate and why such tax increases would not be sustainable for many, he added.
“The percentages of some of these taxes involved would mean a massive reduction in income for advisors — even if they’re just applied to true income, not to mention gross sales,” Ruden said. “Advisors should be very concerned.”
He noted that ASTA has a good track record in helping squash similar state tax proposals, including those put forth by the governors of Illinois, Pennsylvania, Maine and Ohio in 2017.
Is this likely to work again?
“It depends on how the agency community responds. You need to be writing letters, showing up at hearings, doing inconvenient things to get your voice heard,” Ruden said. “If you don’t show strong resistance, you’re a sitting duck.”
Brian Hollien, president of Morris Murdock Travel in Salt Lake City, what he says is Utah’s largest privately owned leisure agency, is among advisors voicing their opposition. He recently testified before the state’s House Revenue and Taxation Committee, telling legislators the bill would have a “draconian” effect on his and other agencies.
“Unfortunately, there’s a complete lack of understanding of how the travel business works; they think it’s the same as getting a haircut,” he told Skift. “There’s no way that travel agencies could comply with this tax law. The taxes could equal our commission rates. It could shut down every agency in the state.”
When legislators at the hearing told business owners that they could simply pass the taxes to consumers, Hollien argued that many customers would choose to purchase travel directly from airlines or hotels, or from agencies in other states.
“Their response is that every resident in Utah would be required to pay a sales tax on travel no matter where it is purchased,” he said. “They naively assume that suppliers are going to charge all Utah residents this tax and then pay that tax to the state of Utah. This simply is not going to happen. The state would need hundreds of compliance officers to enforce it.”
Ken Sause, an independent contractor with Largay Travel in Waterbury, Conn., is working with ASTA to mobilize advisors in his state. Like Hollien, he is frustrated that state lawmakers seem to have little understanding about how travel agencies operate.
“They don’t see that there is not a big margin on what we provide,” he said. “If they see we do a $1 million in business, they think that’s $1 million in profit.”
Sause worries that advisors, whether they own large agencies or are independent contractors, will be challenged to stay in business.
“The result will be that customers will book elsewhere,” he said. “Ironically, they’ll make Expedia and others who don’t pay taxes in the state of Connecticut richer.”
What Sause thinks would be a better alternative is for Connecticut to charge a licensing fee for selling travel in the state.
“That’s getting revenue in a reasonable way,” he said. “I have a lot of clients who have moved to Florida, so I have to buy a license from the state of Florida in order to sell to them. Connecticut doesn’t require this, but perhaps it should.”
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Photo credit: The Utah state capitol building in Salt Lake City on June 27, 2012. Travel advisors in the U.S. states of Connecticut, Utah, and Nebraska are mobilizing for a fight against tax proposals. Andrew Smith / Flickr