WSR 07-12-046

PROPOSED RULES

DEPARTMENT OF REVENUE


[ Filed May 31, 2007, 4:14 p.m. ]

Original Notice.

Preproposal statement of inquiry was filed as WSR 06-18-090.

Title of Rule and Other Identifying Information: WAC 458-20-258 Travel agents and tour operators, this rule provides information on the tax obligations of persons engaging in business as a travel agent or tour operator.

Hearing Location(s): Capital Plaza Building, 1025 Union Avenue S.E., Olympia, WA 98504, on July 24, 2007, at 9:30 a.m.

Date of Intended Adoption: September 1, 2007.

Submit Written Comments to: Kate M. Adams, Interpretations and Technical Advice, P.O. Box 47453, Olympia, WA 98504-7453, e-mail katea@dor.wa.gov, phone (360) 570-6115, fax (360) 586-5543.

Assistance for Persons with Disabilities: Contact Sandy Davis at (360) 725-7499, no later than ten days before the hearing date. Deaf and hard of hearing individuals may call 1-800-451-7985 (TTY users).

Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The proposed rule will clarify the rate applicable to tour operators based on 1996 legislation; permit both travel agent and tour operator income to be apportioned in the same manner as under WAC 458-20-194; provide additional information and examples on pass-throughs; and clarify the application of lodging taxes in the travel industry.

Reasons Supporting Proposal: The revisions are necessary to provide current and accurate tax-reporting guidance, particularly with respect to income apportionment, pass-through treatment, and the application of lodging taxes in the travel industry.

Statutory Authority for Adoption: RCW 82.32.300 and 82.01.060(2).

Statute Being Implemented: RCW 82.04.260(5) and other tax statutes relative to the travel industry.

Rule is not necessitated by federal law, federal or state court decision.

Name of Proponent: Department of revenue, governmental.

Name of Agency Personnel Responsible for Drafting: Kate M. Adams, 1025 Union Avenue S.E., Suite #544, Olympia, WA, (360) 570-6115; Implementation: Alan R. Lynn, 1025 Union Avenue S.E., Suite #544, Olympia, WA, (360) 570-6125; and Enforcement: Janis P. Bianchi, 1025 Union Avenue S.E., Suite #544, Olympia, WA, (360) 570-6147.

No small business economic impact statement has been prepared under chapter 19.85 RCW. The revised rule, as proposed, does not impose new performance requirements or administrative burdens on any small business not required by statute or the state and/or federal constitution.

A cost-benefit analysis is not required under RCW 34.05.328. The proposed rule is not a significant legislative rule as defined by RCW 34.05.328.

May 31, 2007

Alan R. Lynn

Rules Coordinator

OTS-9790.1


AMENDATORY SECTION(Amending WSR 90-17-003, filed 8/2/90, effective 9/2/90)

WAC 458-20-258   Travel agents and tour operators.   (1) Introduction. This section ((describes the business and occupation (B&O) taxation of travel agents and tour operators. Travel agents are taxed at the special travel agent rate under RCW 82.04.260(10). Tour operators are generally taxed under the service or other business classification under RCW 82.04.290. However, the business activities of tour operators may sometimes include activities like those of a travel agent. This section recognizes the overlap of activities and taxes them consistently.

(2) Definitions:

(a) "Commission" means the fee or percentage of the charge or their equivalent, received in the ordinary course of business as compensation for arranging the service. The customer or receiver of the service, not the person receiving the commission, is always responsible for payment of the charge.

(b) "Pass-through expense" means a charge to a tour operator business where the tour operator is acting as an agent of the customer and the customer, not the tour operator, is liable for the charge. The tour operator cannot be primarily or secondarily liable for the charge other than as agent for the customer. See: WAC 458-20-111 Advances and reimbursements.

(c) "Tour operator business" means a 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.

(d) "Travel agent business" means 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.

(3) Travel agents.

(a) The gross income of a travel agent or a travel agent business is the gross commissions received without any deduction for the cost of materials used, labor costs, interest, discount, delivery cost, taxes, losses, or any other expense. It is taxed at the special travel agent rate.

(b) Gross receipts, other than commissions, from other business activities of a travel agent, including activities as a tour operator, are taxed in the appropriate B&O classification, service, retailing, etc., as the case may be.

(4) Tour operators.

(a) The gross income of a tour operator or a tour operator business is the gross commissions received when the activity is that of a travel agent business.

(i) When a tour operator receives commissions from a third party service provider for all or a part of the tour or tour package, the gross income of the business for that travel agent activity is the commissions received.

(b) However, if the activity is that of a tour operator business, receipts are B&O taxable in the service classification without any deduction for the cost of materials used, labor costs, interest, discount, delivery cost, taxes, losses, or any other expense; except, receipts attributable to pass-through expenses are not included as part of the gross income of the business.

(5) Examples:

(a) A travel agent issues an airplane ticket to a customer. The cost of the ticket is $250 which is paid by the customer. The travel agent receives $25 from the airline for providing the service.

(i) The gross income of the business for the travel agent is the $25 commission received.

(ii) The gross income of the business is taxed at the special travel agent rate.

(b) A tour operator offers a tour costing $1,500 per person. The tour cost consists of $800 airfare, $500 lodging and meals, and $200 bus transportation. The tour operator has an arrangement with each of the service providers to receive a 10% commission for each service of the tour, which in this case is $150 ($80 + $50 + $20). The tour operator issues tickets, etc, only when paid by the customer and is not liable for any services reserved but not provided.

(i) The tour operator is engaged in a travel agent activity and the gross income of the business is commissions received, $150.

(ii) The gross income of the business, $150, is taxed at the special travel agent rate.

(c) The same facts as in example (b) except that the tour operator has a policy of requiring 10% or $150 as a down payment with the remaining $1,350 payable 20 days prior to departure with 95% refundable up to 10 days prior to departure and nothing refunded after 10 days prior to departure. The customer cancels 15 days prior to departure and is refunded $1,425 with the tour operator retaining $75.

(i) The gross income of the tour operator business is the $75 retained. No amount is attributable to pass-through expense since the tour operator was not obligated to the service provider in the event of cancellation and the tour operator was not acting as the agent of the customer.

(ii) The gross income of the business, $75, is taxed in the service B&O tax classification.

(d) A tour operator offers a package tour for the Superbowl costing $800 per person. The tour operator purchases noncancellable rooms in a hotel for $300 per room for 2 nights, and game tickets which cost $100 each. The package includes airfare which costs $200 per person for which the tour operator receives the normal commission of $20. As an extra feature, the tour operator offers to provide, for an extra cost, special event tickets, if available, at his cost of $50 each. The tour operator is B&O taxable as follows:

(i) The gross income of the tour operator business is $600 ($800 less $200 airfare). Because the tour operator purchased the rooms and the game tickets in its own name and is liable for the rooms or tickets if not resold, the tour operator is not operating as a travel agent business and is B&O taxable in the service classification. If the tour operator receives a commission on the rooms sold to itself, the activity remains taxable as a tour operator business under the service classification and the commission received is treated as a cost discount, not included in the gross income of the business.

(ii) The $50 received for the special event ticket is attributable to a pass-through expense and is not included in the gross income of the tour operator business. The special event ticket receipt is attributable to a pass-through expense because the tour operator is acting as an agent for the customer.

(iii) The $20 received as commission from the sale of the airfare is a travel agent business activity and is included as gross income of a travel agent and taxed at the special travel agent rate)) provides information on the tax obligations of persons engaging in business as a travel agent or tour operator. Engaging in business as a travel agent means arranging transportation, lodging, meals, or other similar services which are purchased by the customer and for which the travel agent or agency merely receives compensation, such as a commission, for arranging the service. Engaging in business as a tour operator means providing transportation, lodging, meals, and other associated services which the tour operator purchases from third party service providers or which the tour operator itself provides.

Drafter's note: Formerly, income from travel agent business activities was taxed under a different reporting classification than income from tour operator business activities. Because travel agents and tour operators now report under the same classification, the current version of this section treats income from the business activities of both travel agents and tour operators in the same manner. The current version of this section is organized by tax type.

(2) What other sections might apply? The following sections may contain additional relevant information:

WAC 458-20-111 (Advances and reimbursements);

WAC 458-20-118 (Sale or rental of real estate, license to use real estate);

WAC 458-20-12401 (Special stadium sales and use tax);

WAC 458-20-166 (Hotels, motels, boarding houses, rooming houses, resorts, summer camps, trailer camps, etc.);

WAC 458-20-175 (Persons engaged in the business of operating as a private or common carrier by air, rail or water in interstate or foreign commerce);

WAC 458-20-179 (Public utility tax);

WAC 458-20-183 (Amusement, recreation, and physical fitness services); and

WAC 458-20-194 (Doing business inside and outside the state).

(3) Business and occupation tax. Persons engaging in business as a travel agent or tour operator must pay business and occupation (B&O) tax on gross income. Gross income means the value proceeding or accruing by reason of the business engaged in, including gross proceeds of sales, commissions, and compensation for the rendition of services, all without any deductions for costs or losses.

(a) Exclusion: Advances and reimbursements. Persons purchasing transportation, lodging, meals, or other similar or associated services solely as an agent on behalf of a principal may exclude from gross income amounts received as an advance or reimbursement from the principal only if all elements of WAC 458-20-111 are met, including:

(i) The advance or reimbursement is received for the purchase of services in accordance with the regular and usual custom of the agent's profession;

(ii) The principal alone is liable to pay the seller of the services. The agent may not have any primary or secondary liability to pay for the services; and

(iii) The agent does not or cannot render or provide the services, and has no liability to provide the services or otherwise with respect to the services.

For example, ABC Travel, a travel agency, is hired to book airline tickets for a customer. After locating a flight the customer wants, ABC Travel purchases the ticket in the name of the customer. The airline agrees that ABC Travel has no liability to pay for the flight and that the customer alone is solely liable to pay for the flight. The customer agrees that ABC Travel has no liability for providing the purchased service, and the customer will not be entitled to a refund from ABC Travel if the flight is canceled. In these circumstances, ABC Travel may exclude an advance or reimbursement received from its customer as repayment for the purchase of airline tickets from its gross income. However, if ABC Travel provided the airline with a guarantee of payment, then ABC Travel would have a secondary liability to pay for the tickets, and would not be entitled to exclude the advance or reimbursement from gross income.

In either case, ABC Travel must include all commission income received from the airline and all service or other fees it collects from the customer for travel agency services.

(b) Exclusion: Funds collected on behalf of a principal. Persons selling transportation, lodging, meals, or other similar or associated services solely as an agent may exclude from gross income funds collected on behalf of the principal only if there is an agency relationship under which:

(i) The purchasing customer alone is liable to pay the principal for the services. The agent may not have any primary or secondary liability to pay for the services;

(ii) The agent does not or cannot render or provide the services, and has no liability to provide the services or otherwise with respect to the services;

(iii) The agent has no right to the funds collected from the purchasing customer, except as agent for the principal; and

(iv) The service provider is directly obligated to the purchasing customer, not to the agent, to provide the services. For example, The Excurzion Company (EC) sells sightseeing tours provided by a local harbor tour company. EC acts as the agent for the tour company, promoting offered tours and selling tickets to the tours over the telephone and at a small retail establishment located on the waterfront. When a customer purchases an offered tour, EC forwards to the tour company the purchase price for the tour, less a commission promised by the tour company. The customer is unaware of the commission, which is built into the lump sum price of the tour ticket. The tour company agrees that EC has no liability to pay for the purchased tour, only to collect and remit the customer's payment. Only the tour company has the right to the funds paid by the customer, and EC has no right to those funds, except as agent for the tour company. EC has no liability for ensuring the customer receives the purchased services and the customer is not entitled to a refund from EC if the tour is canceled.

In these circumstances, EC may exclude income it receives on behalf of the tour company from customers purchasing offered tours. EC must, however, report all of its commission income. The tour company must report the total amount paid by the customer, including the amount of commission income retained by EC, because the tour company rather than the purchaser has agreed to pay EC the commission.

(c) Business and occupation tax reporting classifications.

(i) Retailing. Persons engaging in business as a travel agent or tour operator must report gross income from retail sales of transportation, lodging, meals, and other travel or related services under the "retailing" classification. (See RCW 82.04.250.) Retail sales are those sales defined under RCW 82.04.050 and include the sale of or charges made for day trips for the purpose of sightseeing, fishing charters, "bareboat" charters, and the furnishing of lodging for periods of less than thirty days. "Sightseeing" means the act of viewing places or things for recreation, amusement, pleasure, or education.

(ii) Travel agent/tour operator. Gross income from engaging in business as a travel agent or tour operator is reported under the "travel agent/tour operator" classification, unless the activity is subject to tax under any other classification in chapter 82.04 RCW, such as retailing (RCW 82.04.250), or the motor or urban transportation public utility tax.

(d) Apportionment. Persons engaging in business as a travel agent or tour operator who are doing business in Washington and in other states may apportion gross income reportable under the "travel agent/tour operator" classification in the same manner as under WAC 458-20-194.

Drafter's note: The department requested public comments on possible apportionment approaches in the original CR-101 version of this rule. Because no comments were received, the department proposes to use the same apportionment approach as in WAC 458-20-194. Taxpayers wishing to provide comments on this proposed approach should contact the department as soon as possible. In the event a significant number of comments are received, the department will file a second CR-102 for additional public comment.

(4) Retail sales tax. Persons engaging in business as a travel agent or tour operator must collect and remit retail sales tax on sales of transportation, lodging, meals, and other travel or related services that are defined as retail sales under RCW 82.04.050 (see subsection (3)(c)(i) of this section). Retail sales include the sale of or charges made for day trips for sightseeing (for pleasure, education, etc.), fishing charters and bareboat charters. Retail sales tax does not apply to trips or tours lasting longer than one day or charters not defined as retail sales under RCW 82.04.050. Retail sales also include the furnishing of lodging for periods of less than thirty days. See WAC 458-20-118: Sale or rental of real estate, license to use real estate for more information on the furnishing of lodging for thirty days or more. Persons engaging in business as a travel agent or tour operator must collect and remit the retail sales tax on the entire retail sales price, even if the travel agent or tour operator is acting solely as the agent of a principal in selling travel or tours to purchasers.

(a) Retail sales price. The retail sales price upon which sales tax must be collected is the entire amount paid by the customer to purchase the travel services. However, commission income received directly from the customer for travel agency services is not subject to retail sales tax. For example, ABC Travel is hired to book a hotel room for a customer. The customer pays ABC Travel for the cost of the hotel room. The cost of the room includes retail sales tax charged and collected by the hotel. The customer also pays ABC Travel a fee for its services as a travel agent. Because the sale of travel agent services is not a retail sale, the fee received by ABC Travel for its services is not subject to retail sales tax. In contrast, The Excurzion Company (EC) acts as a sales agent for a local tour company. When a customer purchases an offered tour, EC forwards the purchase price to the tour company, less the commission amount the tour company promised to pay EC. EC must charge and collect retail sales tax on the entire purchase price the customer pays for the tour, including the portion retained by EC as its commission. This is because the commission income is paid to EC by the tour operator, not directly by the customer.

(b) Exemption: Certain sales of interstate passenger transportation. Sales of interstate transportation of passengers by motor carrier are exempt from the retail sales tax. (See 49 U.S.C. 14505.)

(5) Lodging tax. Persons engaging in business as a travel agent or tour operator are required to collect and remit any lodging tax levied by a county or city on the sale of or charge made for the furnishing of lodging. (See RCW 35.101.050, 67.28.180, and 67.40.090.) Lodging taxes do not apply to commissions or fees received directly from a customer for the provision of lodging-related travel services such as offering information about the availability of lodging to a customer and/or facilitating the reservation of lodging for that customer, where the travel agent or tour operator does not itself furnish the lodging. A travel agent or tour operator is not furnishing lodging if it has no right to use, possess, sublease, or sublicense the rooms.

For example, a hotel (located in a jurisdiction with a lodging tax) agrees to provide hotel rooms to customers of ABC Travel. The hotel agrees to charge ABC Travel a rate of $100 per night per room, with the understanding that ABC Travel will charge its customers a higher rate for the rooms. Customers of ABC Travel obtain the right to possession and use of the room and other facilities directly from the hotel and recognize they will pay a commission or fee to ABC Travel for its services. ABC Travel does not obtain a lease of or license for the rooms, or any other right of possession or use. No liability for the rooms, other than as agent, attaches to ABC Travel. ABC Travel charges its customers $125 per night for the rooms, retaining $25 and remitting $100 to the hotel.

In these circumstances, ABC Travel is not furnishing lodging to its customers. The hotel is furnishing lodging and must collect and remit any applicable lodging tax on the charge made for that service: $100. The additional $25 paid by the customer is a fee or commission paid to ABC Travel for its travel services, not part of the sale of or charge made for the furnishing of lodging. ABC Travel must pay B&O tax on the $25 at the travel agent/tour operator rate. (See subsection (3)(c)(ii) of this section.)

[Statutory Authority: RCW 82.32.300. 90-17-003, 458-20-258, filed 8/2/90, effective 9/2/90.]

Washington State Code Reviser's Office