Fairness of Taxation of Off-Airport Firms

The author, William Lobeck, Jr., is president of Thrifty Car Rental System Inc. (Tulsa, Okla.)


A recent study of the Consumer Federation of America (CFA) shows prices for car rentals could increase by as much as $500 million in the future and maybe more if airports continue to impose gross receipts taxes on off-airport car-rental firms.

The issue of charging off-airport firms a tax for allowing them to access the airport via public roadways is hotly debated and complex. Simply stated, off-airport car-rental companies are facing an average 10 percent gross receipts tax and are hard pressed to understand how eight to 10 percent of gross receipts constitutes fair and reasonable.


Where It Started

Last year, a U.S. Circuit Court of Appeals ruling (limited in effect to the area under the court's jurisdiction) permitted a Florida airport authority to charge off-airport car-rental firms a tax of 10 percent of their gross revenues for the privilege of picking up pre-reserved customers at the airport. That tax is the same rate as the fee charged to car-rental companies which operate on the airport grounds, but the privileges these companies are given are not being extended to their off-airport competitors.

Since the ruling, 19 airports have begun charging similar taxes to off-airport firms, and 24 have stated they intend to charge similar taxes. The fees range from five to 10 percent of gross revenues, and in most cases, are equal or just below those fees charged to on-airport companies.

Their reasoning for charging the tax seems logical in an initial review: airports must be as self-sustaining as possible and to do that, must raise operational revenue from those who use their facilities. Airport authorities also maintain the taxes are intended to provide "a level playing field" for on-airport car-rental companies which willingly pay these fees for in-terminal access to the air traveler, and which airport executives maintain are at a competitive disadvantage if off-airport competitors also are not similarly charged.

But gross receipts taxes are harmful and unfair for many reasons, as a closer examination of the issue bears out. In fact, the Consumer Federation of America's study, Airport Fees for Aula Rental Companies: A Consumer's Perspective, concludes airport fee structures are both inequitable and inefficient.

The report estimates widespread use of gross receipts taxes could raise car-rental prices by a half billion dollars or more. The reason is that off-airport companies simply can't afford to absorb that additional operating expense.

The tragedy of this scenario is these typically smaller companies, which have been forcing pricing competition on the industry, will no longer be able to be competitive. That means the market will once again be dictated by a small circle of large concerns.

But the inequity in the taxes goes even further. Because the tax is percentage-based and bears no relation to use, different individuals who use the airport in identical ways may be charged at different levels. For example, if two customers are picked up at the airport and returned once, the customer with a higher rental bill will pay a greater tax even though the airport facility usage was exactly the same.

Along that same line, some airports only tax rentals that are at the airport pickup point. The passenger who rents both a room and a car at an off-airport company can avoid paying the gross receipts tax if he goes to the hotel first.

Company-Urged Fees

Because off-airport firms have been aggressive in pricing and marketing, they have gained a following with many consumers who rent cars for personal use. Until recently, this market was largely ignored by the big on-airport operators - they preferred to cater to the frequent business renter.

But with deregulation has come a tidal wave of price-sensitive leisure travelers, and the big car-rental companies perceive this new market as a lucrative one, and they want to access it. Some of these large companies are going so far as to pressure airport authorities into charging access taxes to their off-airport competitors in an effort to ease the downward pricing pressure.

"We have four major concessionaires telling us they might have to move off airport, too," Gordon P. Selfridge told Business Week in an interview published in August 1987. He was referring to the fact an off-airport firm in Palm Beach County, Fla., for which he serves as assistant attorney, is running neck and neck in market share with the big on-airport companies. As a result of this pressure, Palm Beach International now charges off-airport firms a tax of eight percent of gross revenue, compared with the 10 percent charge to on-airport operators.

Frank Olson, president of Hertz Corp., in a speech to a national meeting of airport executives, urged airport (managers) to provide on-airport operators an advantage in the marketplace through this competitive taxation.

"Either you, the airport (operators), need to make the off-airport operators shoulder their fair share of the cost of operating the airport, or you need to limit their access to the customers for whom we pay you such a high price," he said, emphasizing only on-airport concessionaires should have access to the airport traveler. "Until the large hubs (implement a tax), we won't have stemmed the flow of revenues off-airport."

But the Consumer Federation of America sees this issue differently. "These fees are not only inequitable and inefficient, they are anticompetitive in an industry that has a very checkered past," the federation says. "The big three on-premise companies have found a perfect trigger man to kill their competition. They want the airports to put their off-premise competitors at a tremendous disadvantage, just the way they themselves did back in the 1970s before they signed the Federal Trade Commission's cease and desist order."

The fact these taxes are being implemented at the urging of on-airport operators and that the taxes are only charged to car-rental companies and not other off-airport businesses - like hotels that operate courtesy vans - demonstrates they are meant to be anti-competitive rather than solely for recouping operational costs or producing revenue.

In essence, the airport is hand-picking the companies from which customers may choose their car-rental services. This is in direct conflict with standing court decisions which have upheld the passenger's right to choose the companies from which they purchase services.

Questionable Practices

Aside from the fact airports are putting themselves in the business of saying who can and can't rent cars to travelers, their methods of implementing these taxes also raise tremendous concern.

In many cases, airport officials give little or no notice that off-airport taxes are being considered or implemented. Many off-airport companies which raise objections have been harassed to the detriment of their businesses.

A case in point is the situation of an off-airport operator in Huntsville, AL. After objecting to the airport's off-premises tax, the location at which he was allowed to pick up pre-reserved customers was moved to a remote area, making it inconvenient and difficult for his customers to find. Upon protesting that action, airport officials moved his pickup location so customers were forced to walk across four lanes of busy traffic to reach the courtesy van.

In Knoxville, TN, an off-airport operator filed a lawsuit against the airport protesting the tax, and as, a result, airport officials issued a letter to all general aviation facilities (called fixed-base operators) which service corporate and other private aircraft, telling them the off-airport operator could no longer provide rental cars to the pilots and passengers of these aircraft, even though the operators and the fixed-base operators had a longstanding and positive business relationship.

Similarly, airport officials in Corpus Christi, TX recently prohibited an off-airport operator specifically from servicing a fixed-based operator located in direct view of an on-airport facility, although the operator is allowed to continue doing business at other fixed-based operators.

How Far Is Off-Airport?

Defining "off-airport" for the purpose of levying these taxes is another area of concern. While one airport defines off-airport business as all car-rental operations within a 15 mile radius, another has said they will charge the tax on all parking within five miles of the entire metropolitan area affected.

Las Vegas officials have stated they intend to charge the tax on all car-rental business from direct and indirect airport customers, with indirect customers being any renter with an out-of-state driver's license. Some airport officials have even said they will charge the tax on revenue derived from customers picked up at the airport by all companies who are not airport concessionaires.

Not only does the definition of off-airport vary, but differences between what airport officials consider as gross receipts applicable to the tax are even greater. In some areas, the term "gross receipts" is viewed as revenue the car-rental operator receives from time and mileage charges only. Others include in their definition with time and mileage, any revenue from the sale of Collision Damage Waiver, Personal Accident Coverage, and Personal Effects Coverage. Yet other airport officials believe other items should be included, as well, including all revenue from gasoline sales, any recovery receipts from renter collision damage to vehicles, and all revenue from the operator's sale of used cars from the fleet.

Clearly, without some guidelines, airport authorities have proven they will reach to the farthest extent possible to put off-airport operators either out of business or at a severe competitive disadvantage. They are forcing them to raise prices and, thereby, penalizing the consumer for choosing an off-airport company.

Reasons Vary, Results Same

Airport authorities on the whole have been reluctant to say categorically they are implementing these percentage-based taxes specifically for the purpose of putting off-airport companies at a disadvantage to benefit their on-airport operators. Instead, some airport officials have said the taxes are being applied strictly for the purpose of controlling the amount of vehicles they must deal with on the airports' already crowded public roadways. Yet the taxes do not reflect peak usage since they are not differentiated by time of day. Also they do not reflect differences in the traffic burden placed on airports since other vans which use the airport in the same way are charged less, and on-airport companies, which cause more congestion, are charged no more.

A second excuse often used by airport executives for implementing the taxes is to recoup facility operational costs. They have been given the task, they say, to maintain the public roadways that service the airport. It is the repair and maintenance of these roadways for which off-airport companies must pay.

But, according to the CFA study, "The cost to the airport per vehicle trip is in the neighborhood of 25 cents, but even a one-day rental would be charged five to 10 times that amount under the gross receipts fee."

Already Pay

Another excuse for off-airport gross receipts taxes is that off-airport companies use airport public roadways to conduct their businesses and they should have to pay to help defray the cost of maintaining those roadways.

They do pay. In many cities, off-airport companies are already assessed fees for the privilege of picking up their customers. These companies have said, time and time again, they are very willing to pay fair and reasonable fees for their use of airport facilities.

Off-airport companies are prohibited from soliciting new business at the airport; the only customers they are allowed to pick up are those who have pre-reserved with them prior to their arrival. They also are not allowed to install courtesy phones in the terminal for customers to use upon arrival. Instead, customers must either have prearranged a pickup time or alert the company by using a public telephone at their own expense. In addition, off-airport companies are not allowed to advertise their services in any way on airport grounds.

On-airport companies, on the other hand, have free and complete access to air travelers in the terminal, a tremendous marketing and visibility advantage for which they consistently have been willing to pay. Yet these companies and airport authorities maintain off-airport taxes levied at a slightly lower level are fair.

"Then why don't off-airport companies simply move onto the airport?" observers ask.

The answer is most couldn't move onto the airport grounds if they wanted. In most cases, they are prohibited from bidding on in-terminal space because of long-term contracts with current on-airport operators and because of what are usually very high minimum bidding requirements. In the case of Thrifty Car Rental, it would likely take years to move all its U.S. locations into terminals.

Legal Loophole

One of the primary problems off-airport operators, and therefore consumers, must face in dealing with these taxes is there is no regulatory body that oversees airport authorities to assure they operate in a fair and efficient manner.

"The consumer has been denied protection under the Constitution because the courts decided that there is a close enough connection between airports and off-premise businesses for the fees to be considered nominally rational, even though they arc clearly inefficient and inequitable," says the CFA. "At the same time, the consumer has been denied protection under the Federal Aviation Act because the regulatory agency decided that there is not a close enough connection between air travel and off-premise auto-rental to trigger language in the law which clearly outlaws such unfair and inequitable pricing."

This Catch-22 situation is what has led a coalition of consumer groups and off-airport companies to ask the U.S. Congress to adopt a bill that would enact legislation that would authorize airports to charge fees to off-airport operations, but require those fees be reasonable, not discriminatory.

It also would permit an aggrieved party to undo any discrimination through a private action in the local courts.

Next month, Hertz chairman Frank Olson provides a counter-argument for the imposition of such fees on off-airport firms. Read here.


Comment On This Story

Comment: (Max. 10000 characters)  
Please leave blank:
* Please note that every comment is moderated.

Newsletter: Sign up to receive latest news, articles, and much more.

Read the latest

Auto Focus Blog: A blog covering fleets, auto rental and the business of cars

Why Do We Visit Capitol Hill?

Members of the American Car Rental Association met with U.S. senators, representatives, and their aides last week. Here’s why bringing the message to this forum matters.

The Customer Isn’t Always Right

Not caving to a customer with a blatant agenda may have consequences, especially for a small rental company that relies on stellar Yelp ratings to advertise. But business integrity must prevail.

The Truth Behind Compact Van Depreciation

Why are large van values holding up better than their compact counterparts, and will it last?

Job Finder: Access Top Talent. Fill Key Positions.