Ready or not, the holidays are coming. Although they have different meanings for different people, the holidays do have a common theme for many Americans. Travel. Approximately 28.5 million people are expected to fly domestically to visit (or escape from) family and friends this Thanksgiving; it seems a fitting time to consider lodging taxes.
File here, there, and everywhere. In addition to state taxes, some states allow localities to impose a local tax on temporary lodging sales. Because it’s not uncommon for such localities to administer their own lodging taxes, tax compliance may involve remitting taxes to two or more tax departments: state, city, and county. This is the case in Minnesota and Wisconsin, the latter of which recently clarified that local lodging taxes are legal, and that lodging marketplaces (e.g., Airbnb, VRBO) must collect and remit them on their sales.
This can complicate compliance. The Texas Comptroller estimates approximately one third of local governments (cities, counties, and special purpose districts) impose a local hotel tax. However, it admits, “Unfortunately, … due to the piecemeal implementation of hotel occupancy taxes across Texas, there is no comprehensive list of local rates, or even of jurisdictions levying the tax.”
Keep up. It was only a matter of time before the novelty of staying in someone else’s home instead of a hotel wore off. Airbnb, which recently revolutionized the lodging industry, is at it again with its sales of new, packaged, “experiences.” In addition to offering lodging, some hosts are now offering encounters with wolves, jazz crawls, retro photoshoots, and more. This can complicate taxability for the businesses breaking this ground. Services, if they’re taxed, are often taxed at a different rate than lodging. Furthermore, the service provider may be different from the host.
Location matters. Size too. In some parts of the country, lodging taxes vary depending on the size of the facility. Prosser, Washington, imposes a $2 lodging fee on lodging businesses in its Tourism Promotion Area (TPA) that have 40 or more rooms and have a nightly room rate of at least $70.01. Lodging businesses that have fewer than 40 rooms or are located outside of the TPA shouldn’t charge the $2 fee. In Texas, hotel owners, operators, and managers are required to apply state hotel occupancy tax when a space rents at $15 or more each day. However, local hotel taxes apply to sleeping rooms costing $2 or more each day.
Off-season perks. On top of the state sales tax, South Dakota imposes a tourism tax of 1.5 percent on certain lodging and amusement services. This tax applies year-round “on lodging establishments, campgrounds” and certain other events and services. However, on “visitor-intensive businesses,” it only applies June through September. A motel with a gift shop, for example, must always apply the tourism tax to lodging fees; but the tax applies only to gift shop sales if 50 percent or more of the gift shop’s annual gross receipts occur June through September and the gift shop is distinct or physically separate from the motel.
Pick your destination wisely. Rates vary widely from location to location. According to the National Conference of State Legislatures, Connecticut has one of the highest state taxes on lodging, at 15 percent (there are no additional local taxes). The District of Columbia comes in a close second at 14.8 percent. Throw local taxes in the mix, and you get an impressive 17.5 percent in El Paso, Texas. On the other end of the spectrum, Alaska, California, and Nevada have no state lodging tax (although local lodgings taxes apply in some locations).
As travelers, we’re usually able to choose where we stay — unless family politics dictate our choices. Those of us who research our options may find that staying outside of city limits, or the next town over, allows us to seriously save on lodging taxes. Lodging businesses don’t have that luxury when it comes to tax compliance: They have to get it right. Tax automation software can help.