How to Avoid Tax Penalties on Complimentary Hotel Breakfasts
By Mark Feldstein
When is a free meal not really free? When a New York State hotel is offering a complimentary breakfast to its guests.
While complimentary breakfasts are free – in a sense – to your guests, if your hotel is audited, you could get a tax bill. And the tax penalties for months – or years – of presumed “tax-free” food can add up.
New York sales tax and occupancy tax returns are, in most circumstances, subject to audit for up to three years, longer if fraud is suspected. While your errors and omissions could go undetected for years, when the taxing agencies catch up with you, you’ll have to pay for the denied exemptions taken, interest on the tax payments missed and other fees and penalties. There is also the cost of enlisting accounting and legal counsel to respond and defend your position.
If you operate a hotel, here is what you need to understand about New York state and local taxation rules as they apply to complimentary hotel breakfasts and other meals.
When it’s free — and when it’s not
Sales tax is applied to the products and services you purchase for use in your hotel, except when those products will be resold. If they’re resold, it’s the buyer who will pay the sales tax. For example, you’ll be charged sales tax for cleaning supplies, but not for food to make the meals that are purchased and consumed in your hotel restaurant.
That’s where complimentary meals pose a problem. If you don’t directly charge your guests for the morning’s pastries and coffee, but the cost of the food is included as part of the occupancy fee, you may assume that you don’t have to pay taxes on those food items. However, you would be wrong.
In the case of Washington Hotel LLC, the hotelier claimed an exemption for use taxes on the purchase of certain food products. It argued that although the food was presented as complimentary, its cost was included in the occupancy fee, so guests were actually paying for the “free” continental breakfast regardless of how it was presented. Because it was free, the hotel didn’t charge customers sales tax on the breakfast. Because the hotel used the food products for resale, it claimed that no use tax was due on the food products it purchased.
The New York State Division of Tax Appeals disagreed, responding that the hotelier could not claim a credit for use tax related purchases when it did not specifically identify the later sale to hotel guests. In other words, guests were not specifically charged for the breakfast and so they didn’t pay sales tax. As a result, use tax exemption was not permissible.
The state further ruled that the sales tax exemption could not be taken for items purchased for resale when the revenue is rolled up into occupancy fees.
Uniquely New York
The Washington Hotel ruling may surprise those who run hotels in multiple states because they probably haven’t seen similar rulings elsewhere. But this nuance of the New York state tax code highlights the importance of establishing a relationship with an accounting firm that thoroughly understands the New York state tax code and that is knowledgeable about regulations in other states where you have hotel locations. Otherwise, you could find yourself paying a hefty charge for the incorrect assumptions you are currently making on your sales and use tax returns filed.
Mark Feldstein is partner-in-charge of the New York City office of Wiss & Company LLP. He has more than 20 years of public accounting experience and handles diverse practice areas, including the hospitality industry.