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IPT 2015 Sales Tax Symposium Indian Wells, California The Hotel Industry: Checking In
IPT 2015 Sales Tax Symposium Indian Wells, California
The Hotel Industry: Checking In
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Presenters
Daniel P. Kelly, Esq. – Hodgson Russ LLP – Buffalo / New York, NY & Palm Beach, FL – [email protected] – (716) 848-1561
D. Mitchell Morton, CMI, CPA – Senior Manager, Tax Audit, Hilton Worldwide – Memphis, TN – [email protected] – (901) 374-6245
Learning Objectives
Develop an overview of the hotel industry Identify developments and issues found in
recent legislation, rulings/case law, & audits Identify best practices for dealing with
industry issues, special taxes, & tax resources
Discuss states’ aggressive tax positions
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The Hotel Industry – Some Quick Stats
4 Statistics sources: American Hotel & Lodging Association & The U.S. Bureau of Labor Statistics
Quick Stats on U.S. Hotel Industry, cont.
52,887 properties in 2013 4,926,543 guestrooms in 2013 $163,000,000,000 in 2013 sales (!) Average room rate was $110.35 in 2013 Hotel industry employs 15.1M (June 2015) Summary: The hotel industry is vastly
important to our economy, and also to state and local government revenue streams
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Presentation Overview
1. Hotels: What & Who Get Taxed?
2. Hotel Industry Issues & Hot Topics
3. Handling Hotel Audits – Best Practices
4. Room Remarketers & Airbnb – Update
5. NY Publication 848 & Final Notes
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1. Hotels – What & Who Get Taxed?
Guests/Hotels/Operators: – Sales & use taxes – Occupancy/bed taxes – Tourist development/various local taxes – Per night/room fees
Management Companies/Hotels/Operators – Management fees?
Rewards Entities & Programs – Rewards reimbursements?
Guests/Hotels/Operators
Sales tax on room charge/rental – that’s easy Occupancy taxes
– Several different occupancy taxes, often tracing the sales tax rules
Other local taxes – Sometimes ad hoc, significant source of local
revenue w/ occupancy/bed taxes – be careful messing with it!
Per-night room fees – What constitutes a room? Is it $2, or $4 /night? 8
Guest/Hotels/Operators
Telecom Taxes (Communication Services) Liquor Taxes Meals Taxes Business Licenses
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Management Companies/Operators
10 http://abovethelaw.com/wp-content/uploads/2012/03/money-mouse-trap.jpg
Are management fees taxable?
Management fees – Issues with employees on the
brand’s/management company’s payroll, performing services for hotel owner.
– Do the services include maintenance or cleaning services? Other taxable services? Taxability of specific services, and services in general,
varies by jurisdiction
– Watch out for the “Cheeseboard Rule”. It’s not fun.
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Temporary Employees vs. Taxable Service
Housekeeping (cleaning of real property) Security Food & Beverage
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Royalties and Franchise Fees
Taxation of Royalties and Franchise Fees – Hawaii – New Mexico – South Dakota – Washington B&O – Local Jurisdictions
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Solutions
What is the purpose of the service? What’s the “primary function” of the service offered by the management company?
Is the hotel actually the “employer”? PEOs – could be the fix
– Professional Employer Organizations – NY’s PEO statute: “Worksite employees whose services are
subject to sales tax shall be deemed the employees of the client for purposes of collecting and levying sales tax on the services performed by the worksite employee.”
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Rewards Entities & Programs
Mitch & his wife, circa 1992, enjoying the HHonors program:
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Rewards Issues Overview
Matter of Marriott International, Inc. et al., New York Tax Appeals Tribunal (Jan. 2010)
– Hodgson Russ’s very own Mark Klein & Tim Noonan, holding it down
Are rewards reimbursements subject to sales taxes, occupancy taxes? – Mixed approach, do the sales tax & occupancy
tax laws follow each other within a state? Do state advisories cover both taxes?
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Rewards Reimbursements, cont.
States have mixed approaches to what is, and isn’t, a taxable reimbursement – Compare NY & FL:
NY – none of the reimbursement is subject to sales tax. FL – reimbursements to a hotel that exceed the amount
paid into the rewards fund by that hotel during the reimbursement period are taxable
Refunds – Strategies vary on a state-by-state basis. Compare NY, FL & IL
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2. Hotel Industry Issues & Hot Topics
Besides unruly and flat-out dangerous guests, that is
18 Johnny Depp in “Fear and Loathing in Las Vegas”
Capital Improvements
Maintenance, repair & other services are sometimes taxable.
However, when the services qualify as a “capital improvement”, in NY like other places, the service isn’t taxable.
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What Constitutes a “Capital Improvement”?
In NY: – Work to RP that adds
value; – Results in an installation
that, if removed, would cause damage to RP; and
– It’s intended to be a permanent installation
Auditors have field days with these tests
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Other Issues With Renovations
Characterizing charges from vendors, and accruing use tax when necessary.
New York’s Pilot Program to streamline the capital improvement question, including a working matrix developed from auditor site visits.
Stories from the front lines
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Solutions
States that settle on a taxable % -- NY heading in this direction after collaboration
Keep an eye language in contracts and invoices
Proposed (but not passed) NY legislation: Capital Improvement only if “complete replacement” (i.e., new build, new addition)
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Furnished Apartments – Are They Taxed like a Hotel?
Did the butler do it? In the parlor? Hint: “Was there even a butler” is an important question.
23 Simon Jarratt/Corbis, http://static.guim.co.uk/sys-images/BOOKS/Pix/pictures/2010/12/9/1291899410252/Butler-Carrying-Serving-T-005.jpg
Furnished Apartments, cont.
New York advisory opinions uphold nontaxability of furnished rental apartments, – Generally for 30-days or more & lacking normal
“hotel services” and demonstrating landlord-tenant relationships.
Audits are still occurring in this area. – Be very careful about how these are marketed
and pay attention to agreements. Look-out for NYC rules. They treat furnished
apartments as hotels!
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3. Handling Hotel Audits – Best Practices
Where are hotels most suspect to liability? – Answer the questions asked. – Get requests for information in writing. – Consider where to hold the initial audit meeting,
and who will be in attendance. – Requests for extending the period of limitations
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Handling Hotel Audits, Cont.
Obtain and organize common supporting documentation ahead of time: – Exemption certificates and forms
Auditors often find minor issues in these audits, resulting in small adjustments. Refunds aren’t unheard of, either. Employees should be trained on the relevant state exemption forms, and why it’s important to get these documents up-front. Even the best companies and hotels find exposure here on audit.
– Capital & expense purchase invoices – Sales tax returns
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Handling Hotel Audits, Cont.
Anticipate auditor’s questions & area of review
Have a plan to get detail information Know who to go to in the organization for
answers Quantify possible issues Research & Network
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Handling Hotel Audits, Cont.
Push back on “Crazy” positions by Auditor Get Auditor’s Supervisor involved Don’t be afraid to go to hearings Know good Tax Attorneys
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4. Online Travel Agencies (OTAs) & Room Remarketers – Update
Room remarketers are taxable as hotel operators in NY (and other places), required to collect sales tax on charges to customers for hotel occupancy
What amount does the room remarketer charge sales (and occupancy) taxes on? – NY sales tax: The full amount charged, including
any service or other charge or amount paid as a condition of occupancy
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Airbnb – What’s Going On?
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Recent round of funding would value Airbnb at $20bn
Airbnb, cont.
Fighti with NYS Attorney General about subpoena for information on hosts. This is likely more of a local law/under30-day rental issue than a tax issue.
Airbnb claims that it wants to collect state and local hotel taxes, but that New York law prohibit it.
What’s going on elsewhere? Varies depending on location – who is required to
collect/remit the taxes?
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5. New York Publication 848
New in February 2015 A Guide to Sales tax for Hotel and Motel
Operators
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THANK YOU FOR ATTENDING
Mitch suggested that we offer each of you 70,000 HHonors points for attending today’s presentation. I told him that seemed like too much, so instead, we’ll stick around up here afterwards to answer questions.
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