Extras on Excise: New York State Legislature Amends NYC Hotel Tax Law, Addressing Taxability Gray Area

Over the last several years, jurisdictions around the country have struggled to deal with the proliferation of online travel companies (OTCs) as a popular hotel booking option and the impact of their business model on hotel tax collections.

Under a common OTC business model, OTCs negotiate room rates with hotel operators and then sell rooms to consumers through their website at a higher rate than what was negotiated, keeping the difference as a service fee. The hotel operator pays the hotel tax, which is collected by the OTC, based on the negotiated room rate rather than the rate paid by the occupant. This model is dissatisfactory to revenue departments because they feel the classification of a portion of the occupant’s room rent as an OTC service fee unlawfully cuts into their tax base.

Although the governments have achieved some signature victories, the results of litigation that addresses this issue have been largely skewed in the favor of OTCs. As a result, some jurisdictions have enacted or attempted to enact legislation that eliminates the gray area concerning what rate is subject to the hotel tax.

In this vein, the New York State Legislature enacted S.B. 6049, which included amendments to the New York City hotel room occupancy tax law in Part X, sections 3 and 4.

Under the amended law, which went into effect on June 1, the conveyance or furnishing to a room remarketer of an occupancy that the remarketer plans to convey or furnish to an occupant for rent, is exempt from the New York City hotel occupancy tax. Room remarketers include OTCs such as Expedia, Travelocity and Priceline.

As explained in a finance memorandum published by the New York City Department of Finance, room remarketers no longer have to pay tax on the amount they pay to hotel operators for rooms to resell. However, remarketers must collect hotel tax on the full amount they charge the occupant. Further, they are also responsible for remitting the tax to the Department of Finance.

The exemption from hotel tax for the cost or consideration paid to the hotel operator for the right to resell the room effectively eliminates uncertainty over the proper tax base. Hopefully this clarification will also help stakeholders save on legal fees.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are legislative remedies the most effective solutions to tax disputes between OTCs and governments?

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