Hotel Occupancy Taxes and Sales Tax Audits: Dual Exposure Risks

Hotels face unique challenges in state and local tax compliance in Texas. While hotels must pay state and local hotel occupancy taxes, they must also pay state and local sales taxes. Noncompliance with either of these obligations can trigger interest and penalties; and, in the event of an audit, targeted hotel operators can face substantial liability.

Understanding What Qualifies as a “Hotel” for Purposes of Texas State Tax Compliance

Before we discuss the risks of noncompliance, we should first define what qualifies as a “hotel” under Texas law. For purposes of enforcement of the state’s hotel occupancy tax, “hotels” include:

• Hotels and motels
• Bed and breakfasts
• Commercially rented apartments, condominiums and houses
• Short-term rentals offered through platforms like VRBO and Airbnb

As the Texas Comptroller’s Office makes clear, “[p]ersons leasing their houses must collect hotel occupancy tax from their customers in the same way a hotel or motel collects the tax from its guests.” As the Comptroller’s Office also makes clear, “[p]roperty management companies, online travel companies and other third-party rental companies may also be responsible for collecting the tax.” Property owners can get into trouble when they make assumptions about who is responsible for collecting and remitting hotel occupancy tax (and sales tax). But, while this is a common issue, this is not an excuse for noncompliance.

Texas Hotel Occupancy Tax Compliance

Hotels in Texas are subject to hotel occupancy tax compliance at the state and local levels. Crucially, not only do the rates of state and local hotel occupancy taxes differ, but their applicability differs as well. Specifically, there are certain circumstances in which hotels will owe state tax only:

• State Hotel Occupancy Tax: Texas’ state hotel occupancy tax applies whenever a hotel rents a “room or space in a hotel” costing more than $15 per day. Thus, the state hotel occupancy tax applies not only to hotel room rentals but also to conference room rentals and other rentals.
• Local Hotel Occupancy Tax: Local hotel occupancy taxes apply when a hotel rents a room for sleeping only. Local taxing authorities can charge a hotel occupancy tax for any covered rental costing $2 or more.

Exceptions apply in various circumstances (including rentals lasting 30 or more consecutive days), and a one-percent discount applies when hotels pay the tax owed by the due date. However, penalties and interest apply as well:

• A $50 penalty for each report filed after the due date
• A five-percent penalty for tax that is up to 30 days past due
• A ten-percent penalty for tax that is more than 30 days past due
• Interest begins to accrue 61 days after the due date

The costs of noncompliance can add up quickly—particularly when hotels fail to collect hotel occupancy taxes on multiple rooms or spaces on a recurring basis. Thus, prioritizing compliance is essential, and when facing scrutiny from the Texas Comptroller’s Office, hotels must ensure they make informed and strategic decisions about their defense.

Texas Sales Tax Compliance for Hotels

In addition to collecting state and local hotel occupancy taxes, hotels in Texas must also collect sales tax under various circumstances. Transactions that can trigger the obligation to collect state and/or local sales tax include (but are not limited to):

• Renting a space that is not “in a hotel”
• Selling food and beverages to guests
• Billing guests for parking or Internet access
• Billing guests for taxable services

Determining whether amenities or services offered to guests are subject to sales tax is not always straightforward. As a result, hotel operators need to prioritize compliance here as well and work with their tax counsel to ensure they are charging their guests appropriately. As with all types of tax obligations (local, state, and federal), an informed approach to compliance is key, and hotel operators must take a tailored approach focused on the spaces they rent, the goods and services they offer, and the unique aspects of their operations.

Defending Against a Texas State Tax Audit Involving Combined Hotel Occupancy Tax and Sales Tax Liability

Due to these dual exposure risks, hotels that are facing Texas state tax audits need to work efficiently to develop and execute comprehensive defense strategies. This starts with gaining a clear understanding of whether they are currently in compliance with all applicable state and local tax obligations.

For hotels that are in full compliance, successfully defending against a Texas state tax audit should involve using the documentation they have on hand to affirmatively demonstrate that they have timely collected and remitted all applicable taxes. If a hotel lacks the documentation needed to affirmatively demonstrate compliance, avoiding additional liability will be more challenging. Additionally, while hotels that have met their state and local tax obligations shouldn’t be at risk of facing interest and penalties, flawed assumptions and methodologies during the audit process can lead to flawed conclusions.

For hotels that are not fully compliant, defending against a Texas state tax audit will require a very different approach. In this scenario, hotel operators must generally focus on mitigating their liability exposure—though liability may still be avoided entirely in some cases. With the right approach, it is often possible to negotiate a settlement that limits the amount owed (although there are no guarantees), and proactive measures, such as committing to a corrective action plan, can help facilitate a favorable resolution.

Request a Confidential Consultation with a Texas State Tax Attorney at Brown PC

At Brown PC, we assist hotels across Texas with all aspects of state and local tax compliance. We also provide representation in audits and other tax enforcement matters. To request a confidential consultation with one of our experienced Texas state tax attorneys, please call 888-870-0025 or tell us how we can reach you online today.