The Washington Department of Revenue has proposed changes to the regulation, WAC 458-20-258, that describe the activities of Tour Operators and Travel Agents in order to apply the same business and occupation (B&O) tax rate to the primary activities of both.
In this post, we outline some of the issues that arise in the (proposed) rule. This summary does not include several types of income and other nuances that are part of the existing and proposed rule. Furthermore, it is not intended as legal advice for any circumstance and should not be relied up as such. If you intend to apply any information here to your business or if you have any questions, contact your lawyer and your CPA.
The proposed changes, according to the Department, are intended to:
- Update the rule to reflect the identical tax rates for B&O tax applied to Travel Agents and Tour Operators;
- Add clarifying examples for the taxation of income and sale or use of tangible personal property;
- Add clarifying examples for determining appropriate B&O tax classifications;
- Add definition regarding day trips for sight-seeing purposes; and
- Add clarifying language throughout the rule.
The updated rule appears to allow businesses that provide both Travel Agent services and Tour Operator services to determine its taxable income based on the type of transaction.
In the proposed rule both Travel Agent and Tour Operator are re-defined.
|Travel Agent Business||Travel Agent|
|CURRENT: The business activity of arranging transportation, lodging, meals, or other similar services which are purchased by the customer and where the travel agent or agency merely receives a commission for arranging the service.||PROPOSED: A person [or entity] engaging in the business activity of arranging travel including, but not limited to, transportation, lodging, meals, or other similar service that is purchased by the customer from the service provider and where the travel agent merely receives a commission for arranging the customer’s service.|
|Tour Operator Business||Tour Operator|
|CURRENT: The business activity of providing directly or through third party providers, transportation, lodging, meals, and other associated services where the tour operator purchases or itself provides any or all of the services offered, and is itself liable for the services purchased.||PROPOSED: A person [or entity] engaging in the business activity of providing tours directly or through third-party providers including, but not limited to, transportation, lodging, meals and other associated services that are purchased by the customer. The tour operator generally either purchases or provides some or all of the services offered, and is itself liable for the payment of the services purchased.|
The proposed rule clarifies that it is the activity that determines the taxability and tax classification (which rate) of the income. As proposed, “the gross income for engaging in business as a travel agent is the commissions received, which is subject to the travel agent/tour operator B&O tax classification. The gross amount of the commissions is taxable, without any deduction for the cost of materials used, labor costs, interest, discount, delivery cost, taxes, losses, or any other expense.”
Commissions are: “the fee or percentage of the price charged by a service provider to a customer that the travel agent receives from the service provider as compensation for arranging the purchase of the service by the customer. Commission also includes any additional fee charged by the travel agent to the customer that the travel agent receives as compensation for arranging the purchase of the service by the customer.”
Under the proposed rule, “the gross income received for engaging in business as a tour operator is subject to the travel agent/tour operator B&O tax classification. There is no deduction allowed for the cost of materials used, labor costs, discounts, taxes, losses, or any other expense to the tour operator. Amounts received from the customer for pass-through expenses [defined in the rule] are not included as a part of gross income.”
The primary issue of note in the proposed rule is that the Department will determine the gross income amount differently based on the activity that gives rise to the income. For travel companies, the cost difference to them can be significant and comes up in figuring out the gross income amount, i.e. commission (travel agent business activity) versus total revenue from the activity (tour operator business activity). This difference arises because it is not the tax rate that makes a cost difference (because ultimately the Department intends for the same rate to apply to both Travel Agent and Tour Operator activities); instead any travel business should review each transaction or type of transaction to determine if it can classify the business activities in the more favorable category of business activity.
When the business activity is that of a Travel Agent then the Commission makes up the gross income and that is taxable under the B&O tax rate for Travel Agents. When the business activity is that of a Tour Operator then the “gross income” and that is the taxable income under the B&O tax rate for Tour Operators. The rule itself does not further define the Tour Operator’s “gross income” the way that it does for Travel Agent activity. The rule includes examples that indicate that the Department will define “gross income” for Tour Operator business activity is the total cost of the tour.
Here is an example of taxable gross income of Travel Agent business activity as provided in the proposed rule:
Travel Agent books an airplane ticket for Jane in Jane’s name. The cost of the ticket is $250, which is paid by Jane. Travel Agent receives $25 from the airline for providing the service. Travel Agent is at no time personally liable for the ticket price. The $25 commission received by Travel Agent is subject to the travel agent/tour operator B&O tax classification.
Here is an example of taxable gross income of Tour Operator business activity as provided in the proposed rule:
TTT Travel Services (TTT) offers a Washington state tour priced at $1,500. The tour package consists of air transportation, lodging, and bus transportation. TTT is liable for paying the service providers, even if a customer fails to pay TTT for a reserved tour. The gross income of the business is the total tour sales price received, $1,500, subject to the travel agent/tour operator B&O tax classification.
The cost difference is not in the tax rate but in the amount that is taxed: $25 vs. $1,500.
A number of other examples are provided in the rule to help a business determine whether the activity is Travel Agent business activity or Tour Operator business activity. Understanding these differences could mean dramatic tax cost differences.
ANOTHER DISCLAIMER: Nothing in this email is intended as legal advice or tax advice, and it cannot be used (i) for the purpose of avoiding tax penalties or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction.