Lobbyists stop anti-loophole bill on hotel taxes

RICHMOND

In a tough budget year, state Sen. Mary Margaret Whipple thought she had found a way to plug a tax loophole and claim an estimated $33 million in annual revenue for Virginia and its hard-pressed localities.

Her legislation was breezing toward passage until the beneficiaries of the loophole got wind of it and mounted a last-minute lobbying blitz. Within days, the bill was history.

The episode is instructive as a small lesson in how things work in the General Assembly. The moral of the story: Money talks. And lobbying works.

Whipple's legislation was directed at online hotel booking companies such as Orbitz and Expedia.com, which book rooms at discounted rates and resell them on the Web. They now pay retail sales and hotel occupancy taxes only on the discounted price they pay the hotel - not on what they charge the customer.

That's not fair, Whipple reasoned: A customer who books a room directly with the hotel pays tax on the full retail rate. So the Arlington County Democrat introduced a bill, SB452, requiring that the tax be computed on the full price of the room. The measure would also mandate that the tax be clearly delineated on the customer's invoice.

The bill was approved by the Senate, 40-0, and a House of Delegates subcommittee, 10-0, advancing it to the full House Finance Committee.

That's when it hit the radar of the Interactive Travel Services Association, the online booking companies' trade group. The association hired Benson Dendy, a veteran Richmond lobbyist, and Dendy started working the phones.

That was on a Friday afternoon. The following Monday morning, industry representatives were lined up to testify against the bill at the Finance Committee's last scheduled meeting of the legislative session.

No other state has levied such a tax, one industry spokesman told the committee.

"It is not a new tax," Whipple countered. "The question is, what amount is it levied on? It's not complicated. It's a tax on the retail value of the room. Virginia is losing tons and tons of money because of this loophole."

Del. Bob Purkey, R-Virginia Beach, the committee chairman, said it seemed the bill might have "unintended consequences." He scheduled an extra meeting for the next day to consider it further.

At that meeting, Purkey said, "My phone's ringing off the hook." He had heard from hoteliers, real estate companies and travel agents, he said, all expressing "grave concern" about the bill.

Committee members appeared taken aback by the sudden onslaught of opposition to the measure. "There were still crickets chirping when it came over here," said Del. Mark Cole, R-Fredericksburg.

Del. Ben Cline, R-Amherst, chairman of the subcommittee that studied the bill, said it had received a full hearing there and should go forward. "I think we need to respect the work of the subcommittee," he said.

But it was not to be. Reversing the subcommittee's unanimous recommendation, the committee voted 12-8 to carry the bill over to the 2011 session.

Arlington Treasurer Francis O'Leary, who suggested the bill to Whipple, said the committee's action will cost Virginia and its localities some $33 million in lost taxes this year - $5 million in Virginia Beach alone - at a time when the state is scrambling to plug a $4 billion-plus hole in the budget and cutting hundreds of millions from public education and health care.

"This stinks," O'Leary said. "These people are stealing our money, and then when we try to get it back, they hire high-priced lobbyists to fight us."

Andrew Weinstein, a spokesman for the online booking companies' trade group, bristled at that charge.

"Every penny of tax owed on a hotel room is paid to the hotel and remitted to the municipality," he said. "We're intermediaries who charge a service fee. Those fees are not part of the cost of the room and they shouldn't be taxed as such."

Whipple said she'll be back next year to try to resurrect her bill.

"It's a fairness issue," she said. "It's just not right for them to pocket that money."

Bill Sizemore, (804) 697-1560, bill.sizemore@pilotonline.com