We all know the old saying there are two things guaranteed in life—death and taxes.
Just like there are many complexities when it comes to staying healthy and putting death off for as long as possible, there are a lot of intricacies in handling taxes for hoteliers. Much like it is important to stay healthy by consulting a health professional, when it comes to taxes, it is imperative to work with a tax professional.
“It’s a complicated process,” said Pam Knudsen, director, compliance, Avalara, which specializes in transactional taxes. “One of the things that changes every year are the rates—and that is something hoteliers need to keep on top of. Often there is a state, a city, a county and sometimes a special taxing jurisdiction that come into play. They change frequently and change across the country.”
Pamela Knudsen, Avalara
Rates can also change based on a guest’s length of stay. “In a lot of jurisdictions, any stay of more than 29 days becomes tax exempt because that almost considered more of a lease,” she said. “Hotels don’t have to charge the lodging transaction tax. But, if the guests leave earlier than those 30 days, they will have to pay the tax.”
In other jurisdictions, hoteliers may have to charge a nightly fee. “If they don’t charge it, the taxing authorities will come to them and say, ‘Look, you owe us this,’” said Knudsen. “Then it is just an out-of-pocket expense because it is difficult to go back to every guest that stays there and tell them they owe the amount of the fee.”
Beyond the actual lodging taxes, hotels with other services have to pay attention to other types of taxes they must collect.
“For hotels that offer more services, like valet parking or dry cleaning, how those are taxed can also get changed,” she said. “That’s a different mechanism because that is often sales and use tax and not a lodging tax.”
Another area of confusion is how some states view OTA responsibilities when it comes to taxes. “Some states expect those marketplaces to pay some of the taxes, while in others, they don’t,” said Knudsen. “In some states, they have agreements. It really varies. Any hotel owner needs to look and say, ‘How am I listing my property? Where are they getting booked? Who’s got the tax obligation and for what?’”
As a business grows, the frequency in which they need to file may also change. “A lot of times, the filing rates are based on revenues,” she said. “They may have been a quarterly file and now they have to file monthly. That will be something that comes to them from the jurisdiction. It is something they need to stay on top of.”
If they don’t file on time, Knudsen said they face penalties and interest on tax liability, adding, “If they’ve gone from quarterly to monthly, and they wait and try to file that return, they won’t be able to do it.”
With all of these different types of taxes that hotels may need to collect, she said it is important that hotels know what they need to register for.
“They may have registered for a lodging permit, but they may not have registered for a sales and use tax permit, but they still need to charge sales and use tax,” she said. “If they don’t, they be in a world of hurt.”
New federal legislation that is being enacted dealing with “junk fees” may affect hotels as well.
“They have not necessarily been as impactful on hotels because they have already dealt with them,” said Knudsen. “It will impact short-term rentals because they don’t always disclose their fees, like a cleaning fee. But for most hotels, housekeeping services are built into that nightly rate already. In some cases, they are taxable. Again, it varies by the jurisdiction.”
With all of the complications of the tax process and variations by jurisdiction, the most important thing is to work with someone who knows the ins and outs. “If a hotelier is using a service like ours or an accounting firm to file their taxes, they should be helping to keep them on track.”
