By: Jeffer, Mangels, Butler & Marmaro LLP

October, 1996

Earlier we discussed a bankruptcy court decision holding a hotel liable for sales tax on complimentary food and beverages provided to hotel guests. We also mentioned that some states have agreed not to impose sales tax on that portion of the room revenues attributable to the free food if the value is less than 10 percent of the total room charge. In a recent ruling, the California State Board of Equalization confirmed the application of the “de minimis” concept, resulting in the return of over $500,000 in sales tax payment to the petitioners.

In general, California sales tax applies to the sale of meals, whether consumed on - or - off premises. However, the California SBE determined that the “true object” of a hotel guest in selecting a hotel is the lodging service provided, as long as the complimentary amenities (such as food and beverages, soap, shampoo, towels and hand lotion) incidental to the lodging service are de minimis in value. If so, the portion of the room revenues attributable to the complimentary meal would not be subject to sales tax.

In determining what constitutes “de minimis” value, the California SBE has established a bright line test. The rule is best understood by simply looking at the formula:

Retail Value of Comp F&B per Occupied Room divided by 10% of Average Daily Rate

If the numerator is less than or equal to the denominator, the meal will be considered “de minimis” and, thus, not subject to sales tax.

Both the numerator and denominator are defined terms, the precise definitions of which should be carefully examined in applying this ruling to a particular situation. For example, the “Retail Value” is based upon the hotel’s food ingredient cost, increased by a 100% markup; neither labor costs nor the rental value of hotel facilities are included. The “Daily Rate” is based upon gross revenues for the prior tax year.

Action Item: If the application of the de minimis rule is favorable in your situation, consider filing refund claims for all open sales tax periods.

Beware: Additional transient occupancy or “rooms” taxes may be due if a portion of the room rate was allocated to the complimentary food and beverage service.

Beware: A hotel providing meals of de minimis value is deemed to be the consumer of the food ingredients. Accordingly, sales tax may be due upon the hotel’s acquisition of the ingredients, as well as the tangible personal property used in preparing and serving the meals.

Planning Point: Regardless of the outcome of the de minimis test, if a hotel regularly sells its otherwise complimentary meals and beverage to the general public, the hotel will be treated as “retailer”, and those meals and beverages may be subject to sales tax.