- Posts by Michelle DeLappePrincipal
Michelle represents businesses ranging from small ventures to some of the world’s largest companies in a variety of state and local tax matters, including strategic planning, transactions, audits, administrative appeals ...
Michelle DeLappe is a guest author, and a member of GSB's State and Local Tax, and Property Tax Practice Groups. She can be reached at email@example.com or at 206.816.1403.
Washington lawmakers have decided that all types of lodging in King County should participate in funding the Washington State Convention Center. Since the advent of King County’s convention center tax in 1982, hotels and motels with 60 or more units have had to collect from guests not only the retail sales tax, but also the convention center tax. In Seattle, the convention center tax is 7 percent; in the rest of King County it is 2.8%. As smaller lodging facilities and short-term rentals have increased in popularity, it has become clear that exempting them from the convention center tax has been giving them an unfair basis for competing against larger facilities.
It is not every day that Washington’s Department of Revenue issues a determination in which the taxpayer wins. In fact, it is a rare occasion when the Department decides that it was wrong; it is perhaps even rarer for it to publish that it was wrong. Happily, one of these rare occasions recently touched the hospitality industry—specifically, the very hospitable practice of giving free meals to guests.
The taxpayer in question is an extended-stay hotel that provides guests free breakfasts and dinners during their stay. The hotel does not have a restaurant and does not serve meals to the public. The Department audited the hotel and assessed it use tax on the food and beverages used in the meals based on the argument that the hotel uses them in their business.
Washington imposes sales tax on tangible property that a business uses. For hotels, this includes furnishings and amenities provided for guests’ use; hotels even have to pay sales tax on those little bottles of shampoo because they are deemed to have “used” them by simply placing them in the guests’ rooms. And in Washington, as in most other places with a sales tax, if you use something and don’t pay sales tax on it, then you still owe tax: hence, the “use tax.”
Here, when the taxpayer bought food ingredients and beverages, it paid no sales tax. The Department’s auditor, however, argued that the taxpayer was using the food and beverages just as it uses the little bottles of shampoo—even more so because it manipulates the ingredients into meals in the hotel kitchen. The Appeals Division disagreed based on Washington’s sales and use tax exemptions for food and food ingredients and for certain beverages.
So here’s the lesson for hotels and restaurants: if you are providing complimentary food, even prepared meals, you do not need to pay sales or use tax on the food or food ingredients or on exempt beverages. Note that sales or use tax apply to alcoholic beverages and soft drinks, though. There’s still no such thing as a tax-free glass of wine!
Kudos to the Department of Revenue for recognizing the error and publishing a taxpayer-friendly decision that provides helpful guidance.
Greg Duff founded and chairs Foster Garvey’s national Hospitality, Travel & Tourism group. His practice largely focuses on operations-oriented matters faced by hospitality industry members, including sales and marketing, distribution and e-commerce, procurement and technology. Greg also serves as counsel and legal advisor to many of the hospitality industry’s associations and trade groups, including AH&LA, HFTP and HSMAI.