Lodging tax collection and remittance for OTAs

Few are the folks who consider navigating taxes a leisure activity. Taxes are complicated and ever-changing, and the stakes for getting them wrong are pretty high. And as much as people grouse about the complexity of sales tax or income tax, one gets the impression the minds behind occupancy tax laws took one look at those and said “Hold my beer.”

So, let’s take a look at the challenges online travel agencies (OTAs) face when collecting occupancy tax (also referred to as lodging tax or hospitality tax) as well as remitting it to the tax authorities. We’ll address:

Some peculiarities of occupancy tax

Unlike sales tax, lodging tax is applied in every state. Even in California and Alaska, which don’t have a state-level lodging tax, local jurisdictions can and do apply their own tax rates. Naturally, each jurisdiction has its own lodging tax rates and rules for how and when they’re applied.

Beyond location, other factors can affect which taxes are applied and at what rate. Things like the type of property, size of the business, and number of occupants all contribute to how hospitality taxes are applied.

But beyond figuring out what rate to charge in a given location, it’s important to identify who’s responsible for collecting and remitting the taxes — especially for rooms or homes booked via an OTA. A few examples of collection requirements:

  • Some states require the OTA to collect all of the taxes on the net rate and the markup
  • Some states require the OTA to collect taxes only on their markup
  • Some states have voluntary collection agreements (VCAs) and allow the OTA to collect state-level taxes but require property owners to collect local taxes
  • Some states let the OTA and property owner determine who collects what

Marketplace facilitator laws have changed the obligations in some states — but not all of them. While many states consider online travel agencies to be marketplaces, others, like Washington state, exempt OTAs from marketplace facilitator rules. But regardless of whether an OTA is classified as a marketplace, they typically have to collect at least some taxes. Even if a state deems the property owners responsible for the tax on resort fees or rental rates, an OTA is obligated to collect and remit tax on at least the markup.

Therefore, the first step in collecting and remitting taxes is identifying where you’re responsible for which types of lodging taxes. We recommend consulting a tax professional, especially if your OTA lists properties in multiple states.

How to remit occupancy tax

Unfortunately, remitting lodging tax isn’t as simple as:
Step 1 Collect tax
Step 2 Send tax to state
Step 3 Relax

With occupancy tax, you must identify which taxes you’ve collected and remit them to the proper authority. For example, if you collect state and local lodging taxes, you may have to remit separately to the state, county, and city, depending on the location. And again, depending on how the locality determines obligations, you may need to remit tax to some authorities while the property owner remits tax to others.

Collecting insufficient taxes at the time of booking or check-in can also leave you in a bind. Chasing down and collecting missing tax from customers is nigh impossible, which means any tax shortfall comes out of your own bottom line.

Per usual with taxes, each jurisdiction has its own filing schedule and process. You’ll need to familiarize yourself with the rules for each location where you have listings. After all, failing to file correctly or on time can result in penalties and fees. And you don’t get partial credit if you accidentally send your return to the wrong tax authority.

Again, tax professionals are your friend here. Working with third parties who know the laws inside and out can significantly reduce your risk of errors when it comes to filing in multiple states, counties, and cities.

How Avalara can simplify occupancy tax obligations

Of course, Avalara can also be a reliable third-party when it comes to lodging tax compliance — and we are for most of the big online travel agencies. Our platform is designed to help you identify which taxes you’re obligated to collect and remit.

Our team of researchers track rate and rule changes, as well as changes to things like marketplace facilitator laws. The software is automatically updated with any changes, so you get more accurate rates, without doing all the legwork. 

For remittance, our software helps you prepare timely returns for the jurisdictions you need to file in. We can even help with submitting your returns and remitting payments for the right taxes, to the right people, at the right time.

Ready to make collecting and remitting lodging tax easier for your OTA? Contact us to schedule a call.

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