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Primer on Hotel Occupancy Tax in New York City

Terence Avella, J.D., LL.M. and Michael Gelbtuch 08.01.2017 | Berdon Industry Insights

Hotels are an increasing target for tax revenue and are constantly being audited by New York State ("NYS") and New York City ("NYC") governing agencies, generating an estimated $1.8 billion in 2015 for just NYC alone. NYS and NYC impose multiple taxes that may apply to transient occupancy or tourist use, subject to certain exemptions. Unfortunately, the complexity of hotel occupancy tax laws in New York makes it difficult for hotels to remain compliant.

Hotel Occupancy Tax and Fees

NYC hotel operators are required to charge the following taxes and fees, which make the market more complicated than others throughout the U.S. 

  • NYS hotel unit fee of $1.50 which is reported and remitted on the quarterly sales tax returns;
  • NYC hotel room occupancy tax of 5.875%; and
  • NYC hotel room occupancy fee of $2 per room for rooms priced at $40 or more.

Since the NYC hotel room occupancy tax and fee are reported jointly on the NYC hotel room occupancy tax return, they are referred to as "NYC hotel room occupancy taxes" collectively.  However, it is important to note that they are separate items, and must be calculated as such.
 
The most efficient way to illustrate the nuances of these taxes and fees is by example:
 
A presidential suite in a NYC hotel contains 3 luxury bedrooms, two bathrooms, a living room, and walk-in kitchen complete with appliances. The price per night for the suite is $5,000. 

NYS Hotel Unit Fee - The $1.50 is a unit fee so regardless of how many rooms are in the suite, the occupant still pays a total of $1.50 per night because the fee is imposed on the rental of an entire unit not per room.

NYC Hotel Room Occupancy Tax - The suite is subject to hotel occupancy tax of 5.875% on the $5,000, or $293.75.

NYC Hotel Room Occupancy Fee - Unlike the NYS hotel unit fee, this fee is imposed on each room rented per day.  In this example, the occupant is renting three bedrooms, a living room, and a kitchen (kitchens are considered rooms when it is a walk-in area enclosed by walls with normal kitchen appliances) for a total of five rooms. Bathrooms and lavatories are not considered rooms for hotel occupancy purposes. Therefore, the occupant is required to pay the hotel a total of $10 per day. 

The most common error in applying these taxes is that many hotels charge the $2 NYC hotel room occupancy fee per unit and not per room. Another issue which often occurs on the $1.50 NYS hotel unit fee is that hotels frequently bundle the NYC $2 room occupancy fee together with the NYS $1.50 unit fee and remit the amount collected with their NYC hotel room occupancy tax return. These types of issues may seem small when viewed on a standalone basis, but they can quickly add up and prove costly over time.

Banquet/Social Halls and Conference Rooms

Hotel room occupancy taxes must be charged on the rental of any room in a hotel. However, if a room has been certified as a place of assembly ("PA") by the Department of Buildings ("DOB"), or if a banquet or catering contract indicates the expected attendance to be 75 or more persons (200 for a rooftop lounge), it will be considered a place of assembly and thus not subject to the charge for hotel occupancy tax on that space.

In order to be certified as place of assembly, a hotel must receive an inspection from the NYC Fire Department and then obtain a PA Certificate from the NYC DOB. Once the certificate is in place, the hotel operator can stop charging the hotel occupancy tax plus the $2 hotel occupancy fee per room.  However, PA Certificates are not always accepted as being blanket exemptions for purposes of this tax. 

The DOB initially provides the PA Certificate on the space as a whole.  If a room that qualifies as a PA is converted to several smaller rooms by any means-such as folding walls, partitions, curtains, plants, or trees, and doors-each room must qualify independently as a PA with separate certificates.  If a hotel receives a PA certificate for a particular space and then subsequently divides it into multiple rooms without certification, the certificate is invalid and the hotel is required to charge hotel occupancy tax plus the $2 NYC occupancy fee per room if the expected attendance listed on the contract will be less than 75. 

Additionally, if the space is divided into separate rooms and it is determined upon inspection that each room can hold occupancy of less than 75 or 200 respectively, the rooms no longer qualify as a PA and the hotel is required to charge the appropriate NYC hotel room occupancy taxes. 

Hotel occupancy tax auditors are required to test PA Certificate validity. When testing PA Certificates, auditors typically select a month of folios for review to determine if two separate events occurred in the same space simultaneously.  If separate events occurred in a specific space simultaneously, and there is only one certificate for that space, the conclusion will generally be that the space was separated by some sort of partition thus invalidating the PA Certificate.

Complimentary Rooms

Hotel operators are not required to charge or accrue any hotel occupancy (including the $1.50 and $2 fees) for complimentary rooms provided to family members or employees, as long as the complimentary room is not considered wages for federal income tax purposes.  However, a hotel operator must charge or accrue hotel occupancy tax (including the applicable fees) on the normal daily price of the room for complimentary rooms provided to travel agents, musicians, photographers, florists, and any other contractor or vendor who procures future business for the hotel.

Hotel Rewards Programs

Reward Programs present another nuance in hotel occupancy taxation. In most cases, hotels participate in rewards programs offered by independent companies.  The company offering the rewards program will periodically reimburse participating hotels for occupancy obtained by customers that redeem their points from a pool of money that has been paid into by the participating hotels.  Since the hotel is not receiving actual rent for the complimentary room provided to the customer, the hotel operator is not required to charge hotel occupancy tax to the rewards program. 

If a case exists where the rewards program reimburses the hotel directly for the price the customer would have paid, then the hotel operator must charge or accrue hotel occupancy tax on that transaction (including the applicable fees).  Additionally, if the customer is paying rent for the room and the rewards program allows the customer to receive a room upgrade with their stay, the hotel operator must charge the hotel occupancy tax on the value of the original room.

Conclusion

NYC hotel occupancy taxation contains many intricacies and nuances which hotel operators must be cognizant of.  These rules should be implemented into an establishment's point of sale systems to ensure the proper hotel occupancy tax is charged on folios issued to customers.  Even minor mistakes can generate significant assessments upon audit due to the volume of transactions that occur in NYC.  Therefore, be mindful of the aforementioned hotel occupancy tax rules as compliance is imperative to operating a successful hotel business in New York.   

Berdon LLP New York Accountants

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