Hotel Owners/Operators Beware: You May Be Responsible for More Than 25 Tax Types Paid Regularly to Multiple Jurisdictions

By: Sam Guevara, Principal, Practice Leader of Tax Technology at Ryan

Operators of hotels face a daunting challenge in keeping up and complying with the myriad of tax types, rates, and rules in the locations in which they operate. Failure to comply with local and state taxes can result in liens, loss of licenses, or portions of your operations being temporarily shut down, all potentially impacting revenue, sales of properties, or refinancing.  

A Typical Weekend Stay

Take for example a typical weekend visit by a couple at one of your properties. This couple used an online travel agency (OTA) to book a room and rented a car upon arriving at the airport. Upon arriving, they used a valet service to park their car and then had dinner at an on-site restaurant. The next day, they ordered room service before renting bikes to see the city. In the afternoon, one person decided to play a round of golf while the other one visited the hotel’s spa. That evening, they purchased tickets for a convention the hotel was hosting where they purchased numerous items. As the weekend continued, they visited a third-party coffee shop at the hotel, had a few drinks at the bar, and purchased a few souvenirs at the hotel gift shop before returning home. 

Those of us in state and local tax may recognize the compliance headache lurking behind this example. The hospitality industry is particularly unique in how it serves as a nexus of state and local taxes designed to extract the maximum amount of tax dollars from transient tourists. And there are a lot of dollars to be had. Hotel guest spending on lodging, transportation, food and beverage, retail, and other expenses is expected to exceed $758.6 billion in 2024. But you may not realize that hotels offering such a wide range of services can be responsible for more than 20 to 30 different tax types and fees paid regularly to multiple jurisdictions. The room charge alone is often subject to both sales tax and a separate hotel occupancy tax in addition to local taxes. In fact, there are seven different taxation models states use for room charges. In 2024, these taxes are expected to generate more than $54 billion in state and local tax revenue.

Hotel Occupancy Taxation Models 

As the chart above shows, even four out of five states without a statewide sales tax impose hotel occupancy taxes. Hotel occupancy tax rates are sometimes much higher than the sales tax rate, going up to 15% and potentially higher when local taxes are added. Length of stay also impacts the amount of tax owed in most states. And all this is before we get to special fees and assessments based on other goods and services hotels offer.

Resort Map Showing a Wide Range of Goods and Services Available

Tax Type Table

No Vacancy for Tax Traps

Hotels are particularly susceptible to surprise tax bills. Depending on the state and city where a hotel is located, the types of taxes, administrators, and rates can vary greatly. Many hospitality services are also accounted for in various financial systems that track only their service and need to be incorporated into wider data systems for proper tax analysis. 

If the couple from our previous story had visited a hotel in San Diego, California, that hotel could be responsible for around 22 different state and local taxes and fees reported to five tax administration agencies or paid directly to vendors. If the hotel had been in Manhattan, it could be responsible for around 25 different state and local taxes and fees reported to two tax administration agencies or paid directly to vendors. 

Tracking this nexus of taxes and fees is not just a task for multijurisdictional operators. Even a single hotel in a single location needs help to ensure all taxes and fees are properly paid.

What Happens When an OTA Is Used to Book a Room?

OTAs introduce another layer of complication. OTAs are companies that operate websites to facilitate the booking of hotel rooms on behalf of hotels. OTAs have had success in the past year avoiding responsibility for hotel occupancy taxes. Cases in Arizona, Arkansas, Louisiana, and Mississippi have confirmed that OTAs are not directly responsible for hotel occupancy taxes in those states. However, OTAs do collect hotel occupancy taxes on booking fees, which are then passed along to the hotels that pay the tax directly to tax authorities. This can leave the hotels footing the tax bill if itinerary changes or other considerations impact the amount of tax owed and the hotel itself never directly charges the customer. 

Furthermore, some of the determinations involving OTA tax responsibilities are for tax periods preceding the implementation of marketplace facilitator rules. Marketplace facilitator rules were enacted as part of states’ responses to the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair. The rules ensure tax dollars from sales delivered in-state are being paid. A marketplace facilitator is generally a company that operates a website where other companies can list their goods and services for sale, with transactions completed directly through the marketplace. While companies like Amazon were the target of broad-based marketplace facilitator rules, the definition also sounds a lot like an OTA that offers booking services for hundreds or thousands of hotels. In fact, OTAs are the original marketplace facilitators, with at least 17 states passing legislation making them responsible for tax collection independent of any marketplace facilitator rules. 

When special legislation does not exist, OTAs usually qualify as marketplace facilitators because they list rooms available at many different hotels and collect payment directly from customers which is then passed on to the hotel. However, at least seven states specifically exclude OTAs from their definition of marketplace facilitator. Other states do not specifically exclude marketplace facilitators from occupancy taxes, but instead do so by operation of their tax laws as privilege taxes on certain types of businesses.

States also vary in their treatment of OTA upcharges. Around 35 states view upcharges and service fees as part of the overall cost of a hotel room. Other states view OTA charges as separate fees not subject to hotel occupancy taxes. For example, part of the holdings in the Priceline case from Mississippi was that such charges were not part of a room rental charge. 

We already discussed how hotel operators need to track multiple revenue streams from disparate systems. With OTAs involved, they also need to track the source of those revenue streams, the difference between what customers pay to an OTA and what gets passed on to the hotel as the room charge, and who is responsible for remitting taxes on each charge and revenue stream in that state. With more than 25 different taxes and fees reported to up to five state tax administration agencies, everybody could use a little help.

What Can We Do About This?

These considerations combine to create compliance and audit headaches for hotel owners and operators. Many of the taxes and fees paid by hotels are paid to local tax administrators. Rates are hard to find. There are no comprehensive databases of local hotel occupancy tax rates, and local returns often cannot be automated. Even if you manage to track the 25 different taxes and fees you need to pay, the odds are extremely good that you are not tracking all applicable exemptions and are overpaying tax. 

Hotel owners, operators, and OTAs need to understand the source data generated by a hotel operation and how it fits into complex statutory reporting requirements for many different tax types. The lack of detailed information available for these compliance efforts increases the importance for hotels and OTAs to develop strategic relationships with an appropriate tax service provider to support this function. It is critical for these tax service providers to leverage technology investments and tax subject matter expertise to assist with the administrative burden placed on taxpayers within this industry by the various state and local taxing authorities.

The hospitality industry’s intricate web of more than 25 tax types across multiple jurisdictions presents formidable challenges for hotel owners and operators. From varying tax rates to complex compliance requirements, failure to navigate these issues can result in significant financial implications, jeopardizing operational continuity and profitability. Strategic partnerships with knowledgeable tax experts, equipped with advanced technology and deep industry expertise, are essential to mitigating these risks.