Hotel or Club—State Rules on What Is Being Taxed

Published Date:
Jan 28, 2014

As the old saying goes, in real estate, the three most important things are location, location and location. It can be the same thing in sales tax rulings: exactly where is the sale occurring? Novel business models can make answering that question difficult. The tax department's Office of Counsel had to address that in Advisory Opinion TSB-A-13(28)S: not only was the "where" in question, but also the "what."

The petitioner is a New York-based company that runs travel programs in the form of a club. Customers pay about $4,000 for a two-year membership, during which they can claim three one-week vacations at certain hotels and resorts and a seven-night cruise run by an unaffiliated cruise line. The customers can get other discounted hotel stays as well. The petitioner notes that although it has a presence in New York, none of the hotels in its program are located in the state.

Also involved in the program is "Company B," a subcontractor that handles reservations and related responsibilities, although the petitioner remains liable under its agreement with the customers. The petitioner pays Company B a flat fee for each customer, and Company B takes care of all the details related to the travel club. Company B agrees to have an exclusive relationship with the petitioner, as part of its arrangement to make sure the customers will have the hotel rooms they're entitled to. Even though their agreement is with the petitioner, the customers provide all payments for the hotel reservations directly to Company B.

So is any sales tax owed here? And if so, who has to collect it—the petitioner or Company B? But what is being sold here anyway, since the $4,000 membership fee is not directly for a particular hotel room?

Ruling Turns Out to Be Simple

First, Deputy Counsel Deborah R. Liebman found that there was no need to apportion responsibility between the two companies or figure out how much was being spent on club dues, cruises or hotels. The main point was that sales tax on hotel room occupancy in New York, which is governed by state tax law section 1105(e)(1), applies only to occupancy in New York. Since the petitioner and Company B have no deals with New York hotels, the other questions are moot.

What about the cruises? Does it matter if the cruises are to the Caribbean, for example, or in New York waters, such as Long Island Sound? Liebman said a 1998 advisory opinion already took care of that, ruling that cruises are generally not subject to sales and use tax no matter where they are. (That ruling is lengthy and complex and worth a read for CPAs with clients or employers in the hospitality industry.) The bottom line? No sales or use tax is due in the petitioner's travel club.

Of course, the word "club" itself can be a red flag, as some club memberships do generate a taxable event: Section 1105(f)(2) explains that membership fees to social or athletic clubs are taxable. However, the petitioner has not created a club under the meaning of the law. If there was any doubt, Liebman cited 20 NYCRR § 527.11[b][5], which made it clear that the petitioner's members are really customers and not members of a club in a traditional sense: they do not possess any proprietary interest in the petitioner, control any social or athletic activities, or participate in the selection of members or club management, she noted.

Like all advisory opinions, this one applies only to this particular instance. Nevertheless, it has a strong general lesson in paying attention to the relevant facts. As is typical in sales tax cases, there are a lot of issues to sift through, but Liebman's ruling showed the importance of keeping your eye on the ball: what's significant is that a hotel room is being sold and that hotel room isn’t in New York, so everything else is largely irrelevant. 

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