Tax changes for online hotel booking create level playing field

November 3, 2011

It was little noticed, but Minnesota did score a small victory this legislative session: The state budget created a level playing field between similar businesses, and it updated our tax system to catch up with modern technology.

Online booking agencies such as Priceline were collecting less sales taxes to book Minnesota hotel rooms than traditional travel agents or even the hotels themselves. The system created a competitive advantage for online companies and revenue losses for state and local governments.

Governor Dayton proposed closing the loophole in his budget. The proposal resurfaced as part of budget negotiations and was included in the final tax bill. It will raise $9 million in FY 2012-13.

Here’s how the online booking system works, and what the change means: Hotels contract with online travel companies to market some of their rooms. The online agencies get a discount room rate, then sell them to customers at higher prices. The problem is that the online agencies were only collecting sales tax on the wholesale room rate, not the higher retail rate that customers paid, as hotels and traditional travel agents do. With the change in Minnesota’s tax law, online travel companies will collect the sales tax on the retail price.

On any individual transaction, the difference between the taxes on wholesale and retail room rates is small. But it adds up. Online agencies account for an estimated 14 percent of room receipts in 2011, according to the Center on Budget and Policy Priorities. It reports that the difference costs state and local governments roughly $275 million to $400 million a year nationally. It recommends states update their tax laws to keep up with technology, arguing that:

At a time when sharply reduced revenues are forcing states and localities to cut health care for the poor, lay off teachers, close fire stations, and increase tuition at state universities and community colleges, all of which are reducing economic growth, it is counterproductive to permit [online travel companies] to exploit a tax loophole that pads their profits at the public’s expense.

Minnesota’s new law leaves some questions unanswered. Some Minnesota local governments have their own local lodging taxes. In cases where the Minnesota Department of Revenue collects the lodging tax for the local unit of government, the new law will apply. If the tax is collected locally, the new law may or may not apply, depending on the ordinance’s wording.

Treating online travel agencies and other similar companies equally is part of the larger national debate over a level playing field in e-commerce. On a larger scale, this debate asks whether it fair for online retailers to sell taxable products without collecting sales tax while Main Street businesses selling the same product have to collect the sales tax.

At the national level, the proposed Main Street Fairness Act would make it easier for states to require remote sellers to collect sales taxes on Internet and catalog purchases, putting them on a level playing field with their Main Street competitors. Governor Dayton’s budget also would have required “remote sellers who sell to Minnesota purchasers that are referred under an agreement by a business that has nexus (physical presence) in Minnesota to collect the sales and use tax on those purchases.” That proposal would have raised $11 million in FY 2012-13, but it was not part of the final budget deal.

-Scott Russell


State revenue and cash flow steady, but economic worries remain

October 12, 2011

First the good news. The State of Minnesota started out the first quarter of the FY 2012-13 biennium with higher-than-expected revenue. From July through September, the state collected $59 million above estimates, up about two percent from earlier projections, according to the state’s October 2011 Economic Update. Corporate income tax, individual income tax and sales tax receipts all exceeded forecasted levels.

While revenue is up slightly, Minnesota’s cash reserves remain low. Still, state financial experts reported at a legislative hearing last week that they do not expect that it will be necessary to take any administrative actions or turn to short-term borrowing in order to cover our bills during the current fiscal year. (State leaders took out a line of credit in 2010, just in case.)

The national economy continues to be the problem. The October Update reiterated concerns raised earlier this summer:

While most economists expect the U.S. to avoid a recession, real GDP growth over the next six to nine months is expected to be very slow…Forecasters’ major concern is that the tepid growth rate now seen likely through at least mid-2012 leaves the expansion dependent on the absence of extraordinary events and the avoidance of policy errors both in the U.S. and in the Eurozone.

State economist Tom Stinson says Minnesota will likely face a new deficit for the current biennium, MPR reported. When Governor Dayton and the Legislature made FY 2012-13 budget decisions, the national economy was expected to grow at a somewhat respectable pace – 3.2 percent growth in GDP in 2011 and 2.9 percent in 2012. The latest GDP growth estimates have been cut by about half, to 1.7 percent for 2011 and 1.4 percent for 2012. The steep drop in economic growth means a decline in state revenues, which increases the likelihood that a deficit will open up within the current biennium.

Federal and state leaders need to steer a careful course. This subdued level of economic growth assumes Congress will extend the expiring employee payroll tax cut into 2012, a proposal that is part of President Obama’s jobs bill. Stinson said last week that if Congress fails to extend the payroll tax cut, it would further reduce GDP growth expectations by one percent in 2012, resulting in a virtually no-growth scenario nationally.

We’ll know whether the state will face a deficit in the current biennium – and the size – when Minnesota Management and Budget releases the November Forecast. And on January 24, the Minnesota Legislature will reconvene. Given the current fiscal instability, policymakers need to focus on supporting Minnesota families struggling in the slow economy, and investing in the future economic health of the state.

-Scott Russell

Going full circle on the cycle of advocacy – tell your story

October 6, 2011

As the leaves fall, many of us are bracing for the next legislative session and continuing our advocacy for critical state services.  But we also know that the cycle of advocacy is a complete circle—including raising awareness of the consequences of past budget cuts in order to strengthen our case for a balanced approach to meet our state’s future needs in the next budget.

If you are seeing first-hand how families and communities throughout Minnesota are suffering because of severe cuts in the state budget, your stories can help us ensure that the public and policymakers see the human impact of over $2 billion in budget cuts.

Together we can complete the cycle of advocacy and shape public opinion to prevent such severe cuts in the future. If you know about someone who was harmed by a budget cut, or if you or your organization has a story to share, please complete our online Tell Your Story form. We’ll be in touch after we receive your information to discuss ways to publicize it.

For more information, contact me at 651-757-3063 or

– Leah Gardner

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