News for the Hospitality Executive
| By: Rob
In 1966, George Harrison wrote Taxman, which was the opening track on the Beatles’ Revolver album. The lyrics -- “If you drive a car, I’ll tax the street; If you try to sit, I’ll tax your seat; if you get too cold, I’ll tax your heat; if you take a walk, I’ll tax your feet; cause I’m the taxman, yeah, I’m the taxman” -- may well be the rallying cry of many state and local governments who, faced with budget shortfalls due to the recession, are forced to scramble to find ways of increasing revenue.
In California and across the United States, local governments are seeking to collect transient occupancy taxes (TOT) from on-line travel companies (“OTCs”), such as Expedia, Orbitz, Travelocity, Hotels.com and Priceline (to name a few). TOT is a tax assessed by local governments on the privilege of occupying a hotel room. The rates vary from city to city, but in California they typically range from 9% to 14% of the rent paid for a room. Under most TOT ordinances in California, the TOT is imposed (assessed) on the consumer, and the hotel operator1 is obligated to collect the tax from the consumer, to hold it in trust and to remit it to the local government’s taxing authority.
governments are now seeking
to collect TOT from the OTCs based on the difference between the
rates the OTCs pay for hotel rooms (the “Discounted Rate”) and the
rates they collect from their customers (the “Marked-Up Rate”). The following example is illustrative:
1Most TOT ordinances in California define “operator” to mean any person who is the proprietor of the hotel, whether in the capacity of owner, lessee, sublessee, mortgagee in possession, debtor in possession licensee or any other capacity. And where the operator performs its functions through a managing agent, the managing agent is also deemed to be an operator. Operator as used in this article shall have the same meaning.
Considering that millions of room nights are reserved through OTC websites, there are millions of dollars at stake and local governments want their share.
Much has been written about the various lawsuits that have been filed across the United States by local governments seeking to assess and collect TOT from the OTCs. While the results of these suits have been mixed, local governments in California were dealt a huge blow in a case filed by a number of OTCs2 against the City of Anaheim (the “Anaheim Case”), Los Angeles Superior Court Case No. JCCP-4472 (while Anaheim is in Orange County, the case was transferred to Los Angeles). The City of Anaheim had issued approximately $21.3 million in assessments against a number of OTCs for alleged underpayment of TOT over a period of eight years. The OTCs filed suit for declaratory relief and a writ of mandate to compel the City of Anaheim to comply with its TOT ordinance which, they alleged, did not support the assessment. On February 1, 2010, Judge Carolyn B. Kuhl of the Los Angeles Superior Court issued a ruling in favor of the OTCs, finding that (a) the OTCs were neither “operators” nor “managing agents” of the hotels and, therefore, were not obligated to collect and remit the TOT, (b) the intent of the TOT ordinance was to tax commercial activity occurring within the City of Anaheim, not on activity occurring outside the City of Anaheim (i.e. the collection of service fees and taxes by the OTCs), and (c) any attempt on the part of the City of Anaheim to expand the plain meaning of the hotel tax ordinance without voter approval violates Proposition 218.
The Anaheim Case is good news for hotel operators, right? Well, maybe yes and maybe no.
Even prior to the Anaheim Case, a couple of cities had revised their TOT ordinances to require the OTCs to pay taxes on the amounts received from their customers in excess of the Discounted Rate. The outcome of the Anaheim Case will likely encourage more cities to follow suit.
For example, the citizens of City of South San Francisco (“SSF”) in November, 2009, passed Measure “O”, which (1) increased the TOT by 1% to a total rate of 10%, (2) applied the TOT to separate charges for vehicle parking, and (3) expanded the definition of rent to include the consideration received by OTCs. Without commenting on the clarity (or lack thereof) of the amendments to SSF’s hotel tax ordinance, one thing is clear, SSF is trying to make hotel owners liable for the TOT not paid by the OTCs.
Similarly, the City of
amended its TOT ordinance in 2004 to expand the definition of
include “principal operator” and “secondary operator.”
A principal operator was defined as any
person who is either the proprietor of the hotel or any other person
the right to rent rooms within the hotel, whether in the capacity of
lessee, mortgagee in possession, licensee or any other capacity. A secondary operator was defined to include
OTCs. The Los Angeles ordinance requires
collect and remit the TOT to the taxing authority.
It allows the OTCs to satisfy their
obligations by submitting the full amount of tax due, with credit for
remitted to any other operator, either directly to the taxing authority
through the principal operator. And, finally, it provides that
principal operator may satisfy any potential liability it may have for
owed by a secondary operator by “entering
into a legally binding agreement with that secondary operator to remit
portion of the tax owed by the secondary operator directly to the City.”
While TOT rates have traditionally varied from city to city, now the definitions of “rent” and “operator” will also vary from city to city. Therefore, you can no longer assume that the TOT ordinance applicable to your hotel in one city will be the same as the ordinance applicable to your hotel in a different city. The failure to understand the TOT ordinance for the particular city in which your hotel is located may result in unintended consequences. For example, if you own or operate a hotel in
Moreover, hotel owners and managers should also be aware that OTCs have lobbied the United States Congress to pass a law preventing local governments from imposing TOT on them based on their Marked-Up Rates. If this were to happen, hotel operators would be put at a competitive disadvantage by having to pay a tax that the OTCs would not have to pay.It appears that the law is in flux and will remain in flux until the law catches up with the technology. In the meantime, if you are a hotel operator, you may be well advised to:
The attorneys at Haas & Najarian are experienced in representing hotel operators. If you have any questions or would like to know what the ordinance applicable to your hotel provides, please feel free to contact Rob Nicholas.
ABOUT THE AUTHOR: Rob Nicholas, a partner with Haas & Najarian LLP, specializes in representing owners, developers and managers in the acquisition, financing, management, leasing, construction and disposition of commercial real property, with an emphasis on hotels. He also has extensive experience in the negotiation and drafting of hotel management agreements (on behalf of owners and managers) and in the review and negotiation of hotel license agreements. Mr. Nicholas is an allied member of the Asian American Hotel Owners Association, the Academy of Hospitality Industry Attorneys, the American Hotel & Lodging Association, and is a member of the Real Property Section of the American Bar Association (Hotels and Hospitality Subsection) and the California State Bar and San Francisco Bar Association. Mr. Nicholas enjoys an “AV” rating in Martindale-Hubbell.
ABOUT HAAS & NAJARIAN: Since its inception in 1973, Haas & Najarian LLP has provided legal counsel to a diverse client base in the areas of real estate, entity structuring and formation, taxation, estate planning and trust administration, employment law and litigation/alternative dispute resolution. The Firm’s Hotel Real Estate Practice Group represents owners and developers locally and nationally in the acquisition, disposition, financing, leasing, construction and management of hotels and other hospitality properties. Many of the Firm’s attorneys have significant experience in negotiating hotel management, license and operating agreements. In order to better serve its hotel and restaurant clients, the Firm recently hired Baxter Rice, a past director of the California Department of Alcoholic Beverage Control, as an in-house consultant to advise clients on and to facilitate the acquisition and transfer of liquor licenses in California. Mr. Rice works with Dan Kramer, Esq. in providing legal representation and counsel regarding all aspects of liquor licensing, including working with lenders and receivers in making sure troubled hotels will be able to continue to provide alcoholic beverages to their guests.
To learn more about Haas & Najarian, visit its website at www.hnattorneys.com.
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San Francisco, CA 94108
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