Travel marketplaces to collect Virginia sales tax and lodging tax as of October 1

Virginia is changing sales and use tax requirements as well as transient occupancy tax requirements for accommodations providers (e.g., hotels, inns, short-term rentals) and accommodations intermediaries (e.g., online travel companies, travel agents, marketplaces). The changes take effect October 1, 2022.

Whenever multiple parties are involved in the sale or rental of accommodations, it can be difficult to determine 1) which charges and fees are subject to tax, and 2) who’s responsible for collecting and remitting the taxes due. Such a lack of clarity can lead to the undercollection or overcollection of tax — and sometimes legal battles.

It’s therefore critical for state and local governments to develop tax policies that reflect current business practices.

House Bill 518 and Senate Bill 651 take Virginia a step in that direction. The measures:

  • Clarify tax obligations of accommodations intermediaries (“intermediaries”)
  • Clarify tax obligations of accommodations providers (“providers”)
  • Impose local transient occupancy tax reporting requirements on intermediaries
  • Study local lodging tax processes

Intermediaries are liable for taxes on room charges

Effective October, 1, 2022, intermediaries such as online travel companies, travel agents, or third-party marketplaces are responsible for collecting and remitting Virginia retail sales and use tax and transient occupancy taxes on the “room charge.”

The measures define “room charge” as the full retail price charged to the customer, before taxes. “Room charge” includes:

  • The charge for use of the accommodations
  • Any charges made in connection with rental of the accommodations
  • Any fee charged and retained as compensation for facilitating the sale

That’s worth repeating: Fees imposed by intermediaries are subject to Virginia sales and use tax and applicable transient occupancy taxes.

Intermediaries must remit Virginia sales and use tax to the Virginia Department of Taxation. However, they should remit local transient occupancy taxes to the applicable local tax departments, as required. The taxes must be separately stated on all invoices.

Intermediaries no longer need to remit the portion of the tax not attributable to the “accommodations fee” (i.e., the room charge less the discounted room charge, if any) to the hotel or other accommodations provider, for them to remit to the department. This requirement is eliminated as of October 1, 2022.

HB 518 and SB 651 also specify that if a transaction involves two or more accommodations intermediaries, they may agree on who will collect and remit the applicable taxes. Whichever party assumes responsibility for the tax must be registered to collect and remit tax in Virginia. 

Special requirements for marketplace facilitators

If an intermediary is a marketplace facilitator, it may be required to register and collect applicable retail sales and use tax under Virginia’s marketplace facilitator law.  

Per HB 518 and SB 651, “accommodations intermediaries, where they are deemed dealers for purposes of a retail sale of accommodations, may not assign or otherwise transfer their duty to collect and remit taxes as required by law to accommodations providers or any other entity.”

Providers are liable for the tax on additional charges

Effective October 1, 2022, accommodations providers such as hotels, inns, and short-term rentals, are responsible for collecting and remitting applicable taxes on any charges that aren’t part of the “room charge.” For example, charges for food and beverages, clothes, toiletries, and other tangible personal property.

And of course, the provider is responsible for collecting and remitting all applicable taxes if no intermediary is involved. Taxes must be separately stated on the invoice.

As above, sales and use tax is remitted to the Virginia Department of Taxation, local transient occupancy taxes are remitted to the appropriate local taxing authority.

Additional reporting requirements for local transient occupancy tax

Each month, intermediaries are required to submit the following to the appropriate local taxing authority:

  • A list of the property addresses for all accommodations in the locality facilitated by the intermediary
  • The gross receipts for all accommodations in the locality facilitated by the intermediary

This information should help local governments better enforce local zoning ordinances and business licensing regulations, particularly with respect to short-term rentals. Local governments in Virginia generally require short-term rental operators to register with the locality and collect and remit applicable taxes, as noted above, but some short-term rentals still operate under the radar. About 750 short-term rentals were operating in Richmond back in 2018, despite the fact that short-term rentals were illegal at the time.

The requirement also creates another layer of complexity for accommodations intermediaries. In addition to registering then filing and remitting sales and use tax with the state tax department, intermediaries must register then file and remit local transient occupancy taxes with multiple local tax departments. Now, on top of tax returns, they need to provide the above information to each local department.

It’s a lot.

More details, including sample scenarios, are available in 2022 Guidelines for the Application of the Retail Sales and Use Tax to Sales of Accommodations Facilitated by Accommodations Intermediaries. These guidelines represent the Virginia Department of Taxation’s “interpretation of the relevant laws” but do not have the “force and effect of law and regulation.” Taxpayers are encouraged to seek advice from the department if uncertain how to apply these guidelines to their situation.

Studying local lodging tax processes

The Virginia Department of Taxation is tasked with examining the processes used to collect local lodging taxes in order to improve “the efficiency and uniformity of those processes.” Their recommendations must be submitted to the Chairmen of the House Committee on Finance and the Senate Committee on Finance and Appropriations by October 31, 2022.

Scott Peterson, vice president of Government Relations at Avalara, is interested in seeing the results of their study. He says not many states evaluate the complexity of their local tax systems, and although local lodging taxes are a bit of a mess, “there’s almost no incentive for the state to fix them.”

A number of states are broadening their marketplace facilitator laws to include lodging, with some interesting results. For example, Kansas holds marketplace facilitators liable for the tax on third-party lodging, but not the tax due on facilitated sales of hotel accommodations.

Learn how automation can help simplify tax compliance for hospitality businesses.

 

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