Whether it’s called a tourist tax, room tax or a transient occupancy tax, the levy on lodging remains a key part of a city’s general fund. For decades municipalities have used it to deliver both essential services for residents, and to host special events that attract money-spending tourists.
In the coming years, as cities face a future with higher expected costs for infrastructure, employee retirement programs and general services, the tax and its application need scrutiny.
City managers and finance directors now operate in an environment where travelers have new lodging options. This puts pressure on the cities to review ordinances and ensure fair collection of the tax. They often do this with limited resources and systems not designed to process a broader application of the tax. This guide offers local government professionals considerations for managing lodging tax assessment and collection amidst new challenges.
Lodging Tax History and Future
First used in the mid-20th century, lodging taxes supported festivals, sporting events and other activities that entice visitors needing a short-term stay. As the role of government and costs have grown, cities have used the tax to fund other needs. And there’s no slowdown with that redistribution given the amount of money at stake: hotels will deliver a record-breaking $170 billion in gross bookings this year, according to consulting firm Deloitte. This falls in line with CBRE’s finding that 2018 marks the 9th consecutive year of rising occupancy with increases in average daily room rates (ADR) and revenue per available room (RevPAR). For cities and counties, that’s a lot of associated tax revenue that can be designated for capital projects, equipment maintenance, hiring and service delivery. But how much of your city’s fair share are you collecting?
Know the Regulatory Requirements
Ordinances are not timeless, so every few years look for areas to update, especially if they contain sunset clauses. A great first step is for cities to require lodging providers to register before collecting a tax.
Surprisingly, not all of them do. Once registered, the business becomes the fiduciary trust for collecting and remitting the tax to the city. Working within their state’s statute, cities can review hotel records to ensure compliance. Another revenue enhancer is for cities to require a monthly remittance, which historically means more revenue because of the greater scrutiny that comes with more frequent payments. Even if some sections of the ordinance need to pass a legal review, it’s worth the effort because health, safety and requirements elsewhere in the code will be aligned and eliminate ambiguity.
Establish a Compliance Process
Like all businesses in your city, the hotels benefit from the government’s investments in public safety, infrastructure, tourism and other functions. They want to pay the taxes and fees they owe, but sometimes don’t remit the full amount because of errors or the funds are paid but not categorized correctly. Sometimes nonpayment occurs because of hotel staff turnover and a lack of training about payment processes. To help your city’s hotels become compliant, outline a repeatable, defensible process that stands up to scrutiny. Conduct on-site audits, and clearly communicate the reporting requirements and due dates. A best practice is to clarify the allowable exceptions and policies for penalties and interest, and know that monthly reporting helps encourage compliance.
Use the Audit to Find Helpful Trends
Basic audits should include a review of a variety of documentation. Bank statements, profit and loss statements, housekeeping reports and guest folios are all good places to start. It’s also important to use the same sources to collect the data and review it against what has been paid.
Hotels systems also use different data formats, requiring you to have technology that makes it compatible it and prepares it for analysis and eventual reporting. However, consider taking a deeper look at your city’s tax return and see what needs revision. The document itself can provide municipal leaders a helpful view of their business environment and that of neighboring jurisdictions. Taking full advantage of that means going beyond the requirement for hotels to state taxable room rent. Request that lodging providers list gross room rent, regular exempt rent (if allowed under statute), long-term exempt rent for travelers staying more than 30 consecutive nights, and the number of rentable rooms at the property. These details allow cities to have more accurate numbers on which to base occupancy tax collections.
Equally important, however, is that cities can use them to analyze trends in occupancy rates, determine how competitive they are, and decide whether the sector needs investment. Also, have your reviewers look for reasons behind the underpayment of tax. Were there overpayments somewhere el se made by mistake? Is there exempt rent, ownership or franchise changes, or successor liability? All of these can support a lower tax payment or lead to a conclusion that more tax is owed.
Close the Loop and Collect the Tax
Once you’ve determined that your city is owed more hotel tax, ensure there’s a process for collection. Your systems may require adjustments to notify delinquent tax payers. A potentially escalating series of notifications and invoices must be sent, and tax payers need an easy way to file and pay via a web portal.
Conduct Reviews on a Regular Basis
Coupled with strong hotel tax returns, a regular review program by city personnel or third-party inspectors builds a long-term compliance ethic within a city’s lodging community. Examine a designated percentage of properties each year, and review each property once every four years to demonstrate your city’s commitment to fairness and support the community’s well-being. The most productive reviews are not simply a comparison of tax returns with property management records. The tedious nature of the task and lag time in updating property management records just won’t yield as many results as a data-intensive, forensic process.
Conclusion: Enhance Revenue to Build a Thriving City
The hospitality industry benefits from clean, healthy, safe and vibrant cities. They join residents, other businesses and tourists who support that objective. Whether it’s a hotel chain, a single franchise or a single-family owner renting out a room, every lodging provider wants to do their part in creating and living with a sense of community. Local governments can use the considerations offered in this guide to enhance their revenue, have a greater measure of predictability in their budgets, as well as help lodging providers understand how to plan for their future as part of a community.