State considers expanded definition of ‘hotel’ for tax purposes

TRENTON – The state is considering changes to laws affecting hotels that could increase instances  when sales taxes should be applied.

Although  taxes are assessed on hotel occupancies, the changing nature of what qualifies as a hotel and how occupancies are arranged has prompted the state Division of Taxation to propose updated language.

In essence, traditional hotels would not be affected, but a temporary rental arrangement between a property owner and a guest may necessitate collection of a tax in the future.

“This kind of caught everybody a little bit by surprise,’’ said one industry spokesperson who did not want to be identified because the potential impact of the proposal is still being assessed. “I think what they’re doing is trying to define what a hotel operation is.

“They’ve drilled down so far that if an individual owner rents property out and provides maid service all kinds of trouble will happen,” the spokesperson said. “It seems to get into a situation where you can provide linens as long as you don’t change the beds.

“Making sure a true hotel pays the tax is something they should be concentrating on as opposed to trying to define a hotel.”

But Treasury spokesman Andy Pratt pointed out that there are other types of facilities leasing rooms but not assessing occupancy taxes.

He said that “If someone is competing with someone who is a hotel, that gives them a competitive advantage. The idea is to define closely what is a hotel and what is not.’’

The general sales tax in the state is 7 percent. Right now the occupancy tax is a combination of state and municipal taxes.  The state tax is 5 percent, and the local tax can be up to 3 percent.

Just looking solely at the state’s share of revenue from occupancy taxes, Pratt said that for fiscal year 2010, the state anticipated $76 million from the occupancy tax, and for the fiscal year 2011 that just ended, $74.5 million.

Assessing how much revenue an expanded definition of hotels could generate is unclear.

An economic impact statement accompanying the proposal states that “The Division believes that there are a small number of property owners that may be currently unaware that they are subject to the collection of sales tax.

“The Division anticipates that some property owners or operators will begin to collect sales tax on rentals that they previously had not taxed.

“Some businesses that are not currently in compliance with the Division’s policies may experience some economic impact in facilitating new sales tax collection and return filing.”

The state believes that changing times require a new look at this whole issue.

“In recent years, the Division has found that the line between what is commonly understood as non-taxable short-term leases of real property and taxable hotel occupancies has become less clear to the industry and the consumer at large.

“The introduction of the Internet as a mechanism to solicit, arrange for and contract with renters has been equally embraced by both the real estate and hotel industries. Private property owners that may once have needed the services of Realtors to solicit renters are able to do so independently online.”

The Division of Taxation also references a relatively new “hybrid’’ facility, the “condotel.’’

“In essence, it is a condominium that is operated as a hotel, offering individually-owned units coupled with the conventional hotel and resort amenities and services,” the Division stated.

State considers expanded definition of ‘hotel’ for tax purposes