Internet Sales Tax Could Hamper OTAs Like Priceline & Expedia

July 15th, 2011 by Trefis Team
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One of Internet retailers historical advantages vs. brick-and-mortar stores is that they previously avoided state sales taxes in most cases. This is set to change as states take a harder look at these laws amid growing pressure from industry and lobbying groups like the Alliance For Main Street Fairness. Currently only five states (Connecticut, Illinois, New York, North Carolina and Rhode Island) require Internet retailers to collect sales tax while a dozen others are considering the proposal. [1] [2] We decided to take a closer look at the potential impact on online travel agencies (OTAs) like Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN).

We have a $506 price estimate for Priceline and $30.50 for Expedia which are both in line with the current market prices.

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We believe the momentum is building for a more uniform Internet sales tax in an attempt to streamline and harmonize tax rules. This could offer states struggling with burgeoning fiscal deficits a way to boost revenues without raising taxes and create a more level playing field between the traditional brick-and-mortar retailers and their online counterparts.

How Internet sales tax could impact online travel

1. Slower growth in travel bookings

We expect the online travel agencies to pass along the increased tax burden to the end consumer if Internet state sales taxes are implemented. This means higher prices, and for budget travelers, this could cause them to delay or put off travel leading to slower growth in travel bookings than we currently expect.

2. Reduced commissions for travel agents

While we do not expect travel agents (both online and the traditional ones) to directly cut margins on account of sales tax, the travel suppliers (hotel chains, airlines etc) could feel the pricing pressure with declining occupancy levels.

Airlines have already been attempting to reduce the distribution costs by bypassing the Global Distribution System (GDS) and encouraging the OTAs to connect directly to their servers and by selling air tickets themselves on their websites. The commissions for travel agencies, which appear within travel suppliers’ distribution cost are very likely to decline in such an event.

It is difficult to predict the price sensitivity of leisure travelers (i.e. the impact in demand to rise in prices of travel products and services) or the decline in commissions of travel agents yet. However, we do know that Expedia draws close to 67% [3] while Priceline draws around 31% [4] of its bookings from the US. So we can infer that Expedia is 2x more sensitive to the imposition of sales tax on e-commerce in the U.S.

View our detailed analysis for Expedia | Priceline here.

Notes:
  1. Online sales tax battle looms in US, FT.com, June 12’ 2011 [↩]
  2. States look to Internet taxes to close budget gaps, Yahoo News, June 19’ 2011 [↩]
  3. Expedia strengthens its Brazilian operations, eyefortravel.com, Aug 18’ 2011 [↩]
  4. Company 10-K Filings [↩]