Why hotels and hospitality businesses should look out for lodging tax

Whether it’s the cozy ambience of a quaint B&B, the bustling energy of a city motel, or the grand allure of a luxury resort, at the heart of any successful hospitality business lies the seamless handling of guest services — from room upgrades and early check-ins to booking guided tours and arranging spa sessions. Effortlessly managing a myriad of requests looks easy. Yet beneath the surface of these services and amenities lies an often unappreciated and invisible operation: the management of lodging tax.

Many hoteliers and staff believe they have insufficient procedures in place for tax collection and reporting or that they are using outdated practices that don’t stand up against current tax laws. They may also confuse general sales tax types with lodging taxes, overlooking specific conditions and exemptions that might apply to lodging tax. Then there’s the smaller hotels and hospitality businesses that might rely on basic accounting software or manual systems to manage their finances, including tax calculations. However, these systems may not be equipped to handle the nuances of multiple tax rates and special lodging tax rules, which can vary dramatically across different jurisdictions.

Handling these complex tax reports manually is time-consuming and also an inefficient use of resources. Spending valuable time putting together lodging tax returns manually or calculating varying tax rates pulls staff away from their core duties, impacting service quality and operational efficiency.

As the travel industry grows, the importance of handling hotel tax compliance becomes more evident, especially with changing tax rates. If a hotel struggles to manage or apply the correct tax rates, or cannot quickly correct billing errors, it might deter potential guests, ultimately harming the hotel’s reputation and financial health — and that’s a scenario every hotelier wants to avoid. More than just maintaining a polished front desk service, hotels need to closely monitor their tax management processes behind the scenes. Ensuring accuracy not only avoids regulatory penalties but also guarantees that guests experience transparency and meticulousness in every detail, down to every transaction.

What’s in a name: Are lodging tax, occupancy tax, hotel tax, and tourist tax all the same thing?

Lodging tax introduces unique challenges that can catch even the most organized staff off guard, especially when managed manually. As guest numbers and service offerings fluctuate — each with its own tax implications — the tax landscape shifts accordingly (yes, even that complimentary bottle of water must be accounted for).

But let’s first unscramble some common lodging tax terms.

Lodging tax (also called hotel tax) is charged to travelers when they rent accommodations in a hotel, tourist home or house, motel, or other lodging, generally unless the stay is for a period of 30 days or more (depending on the state). You may also know lodging tax or hotel tax by other names depending on the jurisdiction: occupancy tax, tourist tax, transient occupancy tax, room tax, bed tax, or just good old-fashioned resort tax. The names are interchangeable but may slightly serve a different function.

Fundamentally, they are all lodging taxes no matter where you go in the U.S. While these taxes are ubiquitous and in just about every jurisdiction, the specific rules and rates may vary. Each jurisdiction or region may apply its version with a different set of rules (per stay, per night, or per person) and rates. Spot the added layer of complexity?

For instance, what is known as ‘lodging tax’ in Colorado with a rate of around 2.9% might be referred to as ‘occupancy tax’ in New York City with rates as high as 14.75%, and ‘transient occupancy tax’ in Los Angeles, where the rate is approximately 12%. Even though these terms refer to a similar type of tax imposed on short-term accommodations, the specific name and rate can vary significantly depending on the location.

Is hospitality tax the same as lodging tax?

While both hospitality tax and lodging tax impact the hospitality industry, they serve different purposes and are applied differently. Hospitality tax usually targets services like prepared meals and beverages, whereas lodging tax specifically focuses on guest room accommodations. Confusing them can lead to misfiling and financial discrepancies.

Getting hotel tax rates and lodging tax obligations right can be a hassle

Having a general understanding of rates and tax obligations is one thing if you only have one property. But what happens if you manage multiple properties, such as hotels in different cities? That’s when you might be served a buffet of different hotel tax rates and rules based on local jurisdiction, including variations in length of stay and exemptions.

For hoteliers and hospitality business managers, it’s important to keep rates accurate across all properties. Ensuring guests are charged correctly at the point of sale not only makes your guests happy but streamlines financial reporting and avoids possible audits down the line. Getting this right from the start helps maintain the financial integrity of your operations and simplifies the process when you need to pull together reports later.

As a hotelier or hospitality business manager, you must get well acquainted with specific hotel tax rates and rules for each property you manage. What if a property manager manages a dozen short-term rentals across several towns? He could have different rates in each town. He could even have different rates within the same town. This can quickly make reporting and filing a complicated mess. It’s that kind of attention to detail you must adhere to for accurate tax calculations and to avoid costly penalties.

Hotel tax compliance means staying right with cities, counties, and states

Managing tax compliance definitely gets more complicated as a hotel chain spreads across different cities, counties, and states. Each location might have to follow its own set of tax laws, making the reporting and filing for lodging taxes quite the puzzle. For hotel managers, this means juggling a bunch of challenging tasks: manually preparing detailed tax reports, keeping track of multiple filing deadlines, and figuring out different tax requirements and how each jurisdiction prefers taxes filed. Some may be digital while others are still doing things the old-fashioned paper way.

All this paperwork and keeping tabs on details can really eat into time that could be better spent on other important aspects of hotel management, like making sure your guests are happy. Managing tax compliance can be a tall order for even the most organized teams if they don’t have the right tools to help them out.

Staying on good terms with each city and state is more than just a good idea — it’s integral to maintaining smooth operations and ensuring your hospitality business thrives in a competitive market.

By bringing in automated systems, the heavy lifting of tax management gets a lot easier, freeing up hotel managers to focus on what really matters: running a great hotel and giving guests an unforgettable experience.

Avalara helps hospitality businesses stay hotel tax compliant and keep customers happy

As responsibilities increase and often with fewer hands to manage them, hoteliers and hospitality business managers find themselves stretched thin, balancing both guest services and intricate administrative tasks like tax compliance. As the landscape unfolds and the demand for accurate tax management grows, the process can become overwhelming. This is where technology steps in to lighten the load.

Avalara for Hospitality is a turnkey solution designed to automate and simplify the hospitality tax management process, allowing hospitality businesses to focus more time on enhancing guest satisfaction and less time tangled in backend calculations.

Check out our 5-step guide to managing sales tax compliance for hospitality businesses along with a handy checklist making every step clear and manageable. With Avalara’s help, your hotel operations can remain as guest-focused as the service at your front desk, keeping your business not just up to date, but compliant and ahead in a competitive market.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.