State and Local Tax Team
08.02.2018 | Berdon Industry Insights
Notwithstanding the nearly $2 billion in tax revenue collected by New York City (NYC) annually, the hotel industry remains one of, if not, the most highly susceptible to examination by both NYC and New York State (NYS). The nuances and complexities of the numerous state and local taxes imposed specifically on the industry make hotels a prime target for testing compliance. This article seeks to break down each of these intricacies and identify common oversights that too often lead to costly mistakes.
Taxes and Fees Imposed on Room Rentals
For each guestroom rental there are three distinct taxes imposed. The first is the commonly known sales tax administered by the NYS Department of Taxation and Finance (NYSDTF), which is imposed on the rent for occupancy of a hotel room. The tax rate is 8.875% for hotels located within NYC and applies to all room rentals, except for the rental of a place of assembly (PA), which includes any room(s) not containing, and not intended to be used as, sleeping or living quarters. For example, a conference room would constitute a PA and, thus, not be subject to sales tax. However, the rental of a PA in conjunction with the sale of food or drink may be subject to sales tax as taxable catering service.
The second tax, also administered by NYS, is the Hotel Unit Fee (HUF). The HUF is in addition to the sales tax and is a charge of $1.50 per unit, per day, imposed on occupancy of a unit in a hotel located in NYC. Like the sales tax, the HUF is not imposed on the rental of a PA. For purposes of imposing the fee, a single unit may include two or more adjoining rooms where the occupant intends to use the otherwise separate rooms as a single unit and the rooms are rented and billed to the occupant as such. This should be evidenced in the rental agreement executed by the hotel and the occupant.
The last tax is the NYC Hotel Occupancy Tax, otherwise known as Hotel Tax. As discussed in a previous Hotel Tax article released last year, the Hotel Tax is composed of a flat fee ranging from $0.50 to $2.00 per day per room plus the hotel room occupancy tax imposed on the rent charged for the room at 5.875%.
Sales and Use Tax Due on Purchases
Some purchases that often seem to be the focus during a NYS sales tax audit of a hotel are software, services or improvements to real property. The tax law governing each can appear vague on the surface, and without the necessary expertise or ability to research specific cases and advisory opinions, the uncertainties often lead to a finding of additional tax due. Nevertheless, those same ambiguities leave room for interpretation that can also be advantageous to the taxpayer.
As a general rule, prewritten or “off the shelf” software is subject to sales tax, while custom (personal and individual in nature) software designed and developed to the specification of a particular purchaser is exempt. However, with the simple days of purchasing a CD or floppy-disk long behind us, taxing authorities are continuously modernizing their sales tax rules to adapt to the technological advancements of software sold through intangible mediums. As such, taxpayers, including hotels, are tasked with keeping up with the nuances of these constant changes in order to determine whether they are, in fact, actually purchasing software to begin with.
For example, a recently released Technical Service Bulletin (TSB) issued by the NYSDTF discussed the taxability of customer service software purchased by hotels. Hotel operators were offered three different software-as-a-service (SaaS) products, A, B and C, with the option of purchasing each separately or all together as a package.
Product A allowed the hotels to log in to the software provider’s website and gain access to reviews written by hotel guests from over 60 websites. It also provided numeric ratings based on a list of standardized topics and questions presented to the hotel guests. The hotel operator could download the reviews into a report and respond accordingly to individual guest reviews. The NYSDTF determined that while Product A had some attributes of prewritten software, its principal purpose was to gather data from multiple websites so that a hotel operator can have one platform for viewing guest reviews. As such, Product A was deemed not to be software, but rather considered an information service, the taxability of which, like software, is dependent on whether the information is personal and individual in nature. The NYSDTF opined that even though each hotel operator was granted individual access for purposes of obtaining its own reviews, Product A was not custom, therefore, taxable, for two main reasons: 1) any hotel operator can search for reviews on any hotel listed in the database; and 2) the questions and ratings system were not designed and developed to the specification of each particular hotel.
Conversely, products B and C both compiled a list of answers to questions specific for each hotel and presented it as a survey to the hotel guests of each particular hotel. Both products allowed the hotel operators to edit and modify the questions prior to being sent to the hotel guests. Product B generated the information by sending questions to the hotel guests after the duration of their stay, while Product C provided each guest with the ability to complete the survey during their stay on iPads provided by the hotel. Reports were then generated specifically for each hotel based on the questions that were sent to the guests. Again, the NYSDTF determined that products B and C were not software, as one might initially believe, but rather information services. Here, however, both Products B and C were deemed personal and individual in nature because the information was derived from a survey designed for each particular hotel, as opposed to a common and non-confidential database, as was the case with Product A. The NYSDTF concluded that products B and C were not subject to sales tax so long as the information compiled from each could not later be repurposed and resold to other hotels.
Additionally, the hotel operators were also given the option of purchasing products A, B and C as one bundled package. In such case, the entire bundle could have been subject to sales tax, unless the products were itemized on the invoice or contract. Even though products B and C standing alone were exempt, the fact that Product A was taxable could taint the entire purchase.
Services to Real Property
Renovations and remodeling are commonplace for hotels. Determining whether sales and use tax is due on such projects can be quite challenging and largely depends on the seemingly inconsequential difference between what NYS deems a taxable repair and maintenance versus an exempt capital improvement. A capital improvement is defined as any addition or alteration to real property that substantially adds value to the real property or extends the useful life of the real property, is permanently affixed to the real property so that removal would cause material damage to the real property or article itself, and is intended to become a permanent installation. An example of a capital improvement would be the removal of an existing roof and installation of a new roof on a building. A repair and maintenance project is any work performed to keep real property in a condition of fitness, efficiency, and readiness, or restoring the real property to such condition. An example would be repairing a crack in the roof of a building to prevent leaks.
As an additional example, a hotel operator demolishes its recently purchased hotel to the studs, with plans to develop a brand new hotel. The hotel operator hires a general contractor to install new electricity, plumbing, and furniture and fixtures. In this case, as a general rule, the construction of the hotel would be deemed a capital improvement and, thus, the hotel would not be required to pay the contractor sales tax on the cost of the construction. While nearly all purchases performed in conjunction with such construction should be exempt from tax, there are certain overlooked aspects of the project that NYS could still deem taxable. This typically comes up when purchases are made from an out-of-state vendor.
Other examples where sales tax errors frequently occur on these types of hotel projects are interior design services, painting, and flooring. For example, if all walls of the property are demolished and replaced with sheetrock, then the painting of the new walls would constitute as an exempt capital improvement. However, any walls that were stripped of the original paint or wallpaper and thereafter painted are typically deemed a taxable repair and maintenance outside the scope of the overall capital improvement project. The same principle applies for floors. The installation, cleaning, sanding, and staining or waxing of new wood or tile floors are an exempt capital improvement, while the same services performed on the existing wood floors are deemed a taxable repair and maintenance.
Places of Assembly: Banquet/Social Halls and Conference Rooms
In the Hotel Tax article distributed last year, the many nuances and intricacies regarding how NYC applies hotel occupancy tax to the rental of conference rooms and banquet halls were detailed. For sales tax purposes, the rules are much more straightforward.
For sales tax purposes, the rental of a room that qualifies as a PA is not subject to sales tax (with the exceptions noted below). A PA is a room containing no sleeping accommodations and is intended to be used for purposes other than sleeping and living accommodations, such as, meetings, recreation, education, business or religious purposes. In these instances, an operator does not have to worry about the 75- or 200-person rule, which is the number of occupants the NYC Department of Buildings (DOB) uses as a basis for qualifying a space to be a PA, and issuing a Place of Assembly Certificate classifying it as a PA, or the division of rooms. A hotel operator renting a space that qualifies as a PA is not required to charge sales tax, plus the $1.50 unit fee on such rental. However, if the hotel operator is providing catering services in connection with the rental of space that qualifies as a PA, the hotel operator must charge sales tax on the entire transaction regardless of whether the charge for the room is separately stated. If the hotel is just providing some incidental snacks (e.g., chips, pretzels, cookies and coffee) in conjunction with the rental of space that qualifies as a PA, the hotel operator can separately state the price of the room and just charge sales tax on the price of the food and beverage included.
Hotel operators are not required to charge or accrue any sales tax (including the $1.50 fee) 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 sales and use tax (including the $1.50 fee) 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
If a customer receives a complimentary room by redeeming points, the hotel operator is not required to charge the customer sales tax (including the $1.50 fee). Additionally, since the hotel is not receiving actual rent for the complimentary room provided to the customer, the hotel operator is not required to charge sales tax to the rewards program provider. However, if the rewards program actually reimbursed the hotel for the price the customer would have paid, then the hotel operator must charge or accrue sales tax on that transaction (including the $1.50 fee).
Operating a hotel in NYC can be very challenging given the City’s and State’s complex tax structure. Hotel operators need to be mindful of the aforementioned sales and occupancy tax rules, as their effective navigation is imperative to operating a successful hotel in NYC. To avoid any costly mistakes, contact your Berdon advisor to further clarify the breakdown of these intricacies as they apply to your business.
If you have questions regarding sales and use tax or any other matters impacting the hospitality industry, please contact your Berdon advisor.
Berdon LLP, New York Accountants
 The tax rate is made up of the NYS rate of 4%, the Metropolitan Commuter Transportation District (MCTD) rate of 0.375%, and the NYC local rate of 4.5%. For hotels located outside of NYC, MCTD may not apply, and the local rate will depend on the locality.  The room rental is not subject to sales tax if the customer hires a separate caterer.  $0.50 for rentals between $10 and $20; $1.00 for rentals between $20 and $30; $1.50 for rentals between $30 and $40; and $2.00 for rentals of $40 or more.