The cruise industry is suing Skagway over a new policy that makes a controversial change to how the borough taxes excursions sold by cruise companies.
Skagway charges local sales tax on tours that start and finish in the borough. Historically, that excluded commission fees that cruise lines slap on top of tour prices in exchange for arranging the excursion.
But late last year, Skagway approved an ordinance to tweak its tax code to collect taxes on the full price that tourists pay – including the commission.
The borough said at the time that the aim was to tax all tours consistently, regardless of whether they’re booked in Skagway, online, or from a different location entirely.
But the industry says the ordinance violates both state and federal law. The Cruise Line International Association, or CLIA, one of the industry’s largest trade groups, filed a lawsuit against the borough in Alaska state court over the issue earlier this month. Skagway’s borough manager and treasurer are named as defendants in the suit.
The group said in a statement that the ordinance risks “double taxation and placing undue financial strain on cruise guests and Alaska businesses alike.”
When asked for comment, CLIA referred KHNS to Steven Mahoney, an Anchorage-based tax attorney who is not involved in the litigation.
“Under Alaska law, we believe that the Skagway ordinance is illegal. It’s not appropriate, and it should be reversed,” he said.
Mahoney said the lawsuit is rooted in Skagway’s attempt to tax the industry’s commission fees, even on tours that are booked from other locations. A European customer could, for instance, purchase a Skagway kayaking tour online from Europe. The Skagway ordinance would tax the commission fee on that sale even though neither the transaction nor the service of booking the tour occurred in Skagway.
“So the person who sat in their office made all the arrangements, made sure the communications occurred, made sure the company understood what was going on, the little bit of margin they take there is now subject to sales tax. And that’s problematic,” he said.
The industry argues the U.S. and Alaska Constitutions say municipalities can only tax activities that have a “substantial relationship to that community.”
Mahoney said the U.S. Constitution also prohibits states or localities from interfering in interstate commerce. So when an entity does business between two locations in the U.S. on a vessel, typically, that transaction can’t be taxed locally, either.
The industry group’s lawsuit requests that the ordinance be lifted and that CLIA get compensation for its legal fees.
Skagway Borough Manager Emily Deach, for her part, said in an email that she is not aware of other communities with the same sales tax code – but that the borough’s goal is simple.
“The bottom line is that Skagway made this change to treat tour sales by the cruise lines the same as other sales of products and services within the municipality,” Deach said.
The policy has met with local support. Deb Potter, a Skagway assembly member, welcomed the move at a December meeting.
“I think this is great work on the part of our staff to modernize and streamline a way of collecting sales tax from tours that better reflects a modern day tourist,” Potter said.
At least one resident who spoke in favor of the change at the December meeting also emphasized that the multibillion dollar industry has deep pockets. She added that cruise lines have a responsibility to support the small community, which hosted more than 1.2 million cruise passengers last year.
The law firm that represents Skagway did not respond to a request for comment.
