Which hotel group-contract fees (early departure, room and food-and-beverage attrition, cancellation, no-show, meeting-room cancellation) are subject to Colorado sales/lodging tax, and is the tax on an online-travel-company booking figured on the lower contract rate or the higher website rate?

Plain-English summary

A hotel management company that runs a Colorado hotel asked how to tax a series of fees in its group-sales agreements, plus how to figure tax on rooms booked through online travel companies. Colorado taxes charges for living accommodations (rooms rented 30 days or less) and meals, so the question for each fee is whether it's really a charge for a taxable room/meal — or for something else. The Department sorted them into three buckets.

Bucket 1 — cancellation-type fees judged by the "50% rule." Department Rule 1 CCR 201-5, Special Regulation 22 sets a bright line for deposit forfeits and cancellation charges: if the charge is more than 50% of the daily reservation room rate, it's treated as payment for the room and is fully taxable; if it's 50% or less, it's a nontaxable cancellation charge. The Department put the early departure fee and the no-show fee in this bucket — each is essentially the guest cancelling all or part of a reservation. The cancellation fee also fits here, but because it lumps room and meal revenue together, the hotel must make a reasonable determination of how much is for lodging and apply the 50% rule to that portion. (The Department expressly declined to address the meal portion of a cancellation fee in a GIL.)

Bucket 2 — attrition fees, which are NOT cancellations. Room attrition and food-and-beverage attrition fees apply when a group books fewer room-nights or buys less food/beverage than the contracted minimum. The Department characterized these as a volume-discount pricing mechanism: the hotel offers a discounted rate for hitting a volume threshold, and the attrition fee just claws the price back up to the non-discounted rate when the group falls short. The rooms and meals weren't cancelled — they were simply bought below the discount tier. So the cancellation rule doesn't apply; instead, tax on the rooms and meals is calculated by including the attrition fees (the fee is part of the taxable price, even though the group, not the guest, pays it).

Bucket 3 — meeting-room charges, which aren't lodging at all. A meeting room is not a living accommodation, and under Special Regulation 22 a room used exclusively for a banquet, meeting, or sales/display room isn't subject to sales tax (a room with beds can't qualify). Because the meeting-room charge itself isn't taxable, the meeting-room cancellation fee is also not taxable.

Online travel companies (OTCs). The facts describe a merchant-model arrangement: the hotel charges the OTC a lower Contract Rate, and the OTC resells the room to the public at a higher OTC Website Rate, keeping the spread. Colorado taxes "the entire amount charged to any person for rooms or accommodations" for stays of 30 days or less (§ 39-26-704(4)). In a merchant-model deal the OTC is the merchant of record, so the OTC's sale to the consumer is the taxable transaction, the tax is due on the OTC Website Rate (what the customer actually pays), and it's the OTC's duty to collect, report, and remit that tax.

What this means for you

Hotel operators with group contracts

Don't tax every group fee the same way. Run early-departure, no-show, and cancellation charges through the 50% rule — over half the daily room rate is taxable room revenue, half or less is a tax-free cancellation charge. Treat attrition fees the opposite way: they're part of the taxable price of the rooms and meals, so include them in your tax base even though the group organizer (not the guest) pays them. Keep meeting/banquet-room charges — and their cancellation fees — out of the lodging tax base, as long as the room is used exclusively for meetings and has no beds.

Online travel companies and channel managers

Under the merchant model, you (the OTC) are the merchant of record and owe Colorado tax on the full website rate the guest pays, not the wholesale contract rate you remit to the hotel. Collect and remit on the marked-up amount.

Accountants advising hospitality clients

The dividing question throughout is whether a fee is a charge for a taxable room/meal. Cancellation-type fees get the SR 22 50% test; attrition fees are a price adjustment that stays in the room/meal tax base; non-lodging space (meeting rooms) and its cancellation fees fall out. Note two open edges the Department left: the meal portion of a cancellation fee (declined in a GIL) and anything administered by self-collected home-rule cities.

Common questions

Q: Is a hotel cancellation or no-show fee taxable in Colorado?
A: It depends on size. Under Special Regulation 22's 50% rule, a deposit forfeit or cancellation charge that exceeds 50% of the daily room rate is taxable as payment for the room; one that is 50% or less is a nontaxable cancellation charge. Early-departure, no-show, and cancellation fees all run through this test.

Q: How are room and food-and-beverage attrition fees taxed?
A: They're taxable. The Department treats attrition fees as a volume-discount pricing adjustment, not a cancellation, so the rooms and meals are taxed with the attrition amounts included — even though the group organizer pays the fee rather than the guest.

Q: Is a meeting-room cancellation fee taxable?
A: No. A meeting room isn't a living accommodation, and an exclusively-used meeting/banquet room is exempt under Special Regulation 22, so the charge — and the fee for cancelling it — is not subject to sales tax.

Q: For an online travel company booking, is tax figured on the contract rate or the website rate?
A: On the higher OTC Website Rate the customer actually pays. In a merchant-model transaction the OTC is the merchant of record and must collect and remit Colorado tax on the entire amount charged to the customer.

Q: Can I rely on this letter?
A: Only as general guidance. A General Information Letter is not binding on the Department, makes no specific determination, and here expressly declined to address the meal portion of a cancellation fee. For a binding answer, request a private letter ruling.

Citations and references

Statutes and rules:
- § 39-26-104(1)(e), (f), C.R.S. (tax on meals and living accommodations)
- § 39-26-102(11), C.R.S. (rooms/accommodations)
- § 39-26-102(5), C.R.S. (gross taxable sales include all revenue for taxable goods/services)
- § 39-26-105, C.R.S. (retailer's duty to collect)
- § 39-26-704(4), C.R.S. (tax on the entire amount charged for rooms rented 30 days or less)
- 1 CCR 201-5, Special Regulation Sales 22 ("Hotels and Motels"; deposit forfeits/cancellation 50% rule; banquet and meeting rooms)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-16-006.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-16-006
May 18, 2016
XXXXXXXXXXXXXXX
Attn:XXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Hotel Fees and Online Travel Companies
Dear XXXXXXXXXXX,
You submitted on behalf of your client (“Company”) a request for guidance to determine whether
certain hotel related fees and hotel rooms reserved online via online travel companies are subject
to Colorado state and local sales tax.
The Colorado Department of Revenue (“Department”) issues general information letters and
private letter rulings. A general information letter provides a general overview of the relevant tax
issues and is not binding on the Department. A private letter ruling provides a specific
determination for a specific set of facts, is binding on the Department but not on the taxpayer, and
requires payment of a fee. For more information about general information letters and private
letter rulings, please see Department Rule 1 CCR 201-1, 24-35-103.5.
The Department treats your request as a general information letter. It is important to remember
that general information letters, such as this one, are general discussions of tax law and are not a
determination of the tax consequence of any particular action or inaction. If you would like the
Department to issue a private letter ruling on the issues you raise, you must submit a new request
and provide the fee in compliance with Department Rule 1 CCR 201-1, 24-35-103.5.
Issue
1. Are certain hotel related fees subject to state and local sales tax?
2. Are hotel rooms reserved online via online travel companies subject to Colorado sales and
use tax at the Contract Rate or OTC Website Rate?
Background
Company is a hotel management company that operates a hotel facility in Colorado. Company will
enter into group sales agreements (“Agreement”) that include various fees to be charged in certain
circumstances. The following are six fees that may be charged by the hotel:

●

Early departure fee: A fee is charged to a guest in the event that a guest who has reserved a
room within a group’s1 block of rooms checks out prior to the guest’s reserved checkout date,
unless the guest advises the hotel at or before check in.
● Room attrition fee: A rate for each room night utilized below the number of nights reserved
pursuant to the Agreement. The amount is a reasonable estimate of the harm the attrition will
cause Company, and Company agrees that, after receiving payment of this fee, will not seek
additional damages. Any early departure fees will be deducted from any amount owed by the
group for sleeping room attrition.
● Food and beverage attrition fee: Each Agreement sets forth a minimum food and beverage
revenue as part of an event. If the group consumes less food and beverage than the minimum,
the group must pay Company a fee in the amount of the difference between what was actually
spent on food and beverage and the food and beverage minimum.
● Cancellation fee: If a group decided to cancel the event at any time after the execution of the
Agreement, the following cancellation charges apply:
Time
Percentage
❏ Date of signature to 190 days prior to arrival
25% total revenue
50% total revenue
❏ 189 days to 120 days prior to arrival
75% total revenue
❏ 119 days to 90 days prior to arrival
100% total revenue
❏ 89 days to arrival
●

●

No-show fee: Company’s guests must put a deposit in the amount of the room rental rate plus
applicable taxes to reserve a room. Failure to cancel the room within the prescribed period of
time or failure to occupy the room results in a forfeiture of this deposit as a no-show fee.
Meeting room cancellation fee: Hotel requires a deposit in order to reserve a meeting room.
Failure to cancel the room within the prescribed period of time or failure to occupy the room
results in a forfeiture of this deposit as a cancellation fee.

In addition, Company will enter into contracts with online travel companies (“OTC”) in which
Company agrees to charge the online travel company a certain room rate (“Contract Rate”) for
each room reserved via the OTC’s website. The OTC then offers rooms to the public on its website
at a rate above the Contract Rate (“OTC Website Rate”). Customers who reserve a room on the
OTC’s website pay the OTC Website Rate and applicable sales or lodging taxes on the Contract
Rate. The OTC then remits the Contract Rate amount and the applicable sales or lodging taxes to
Company and keeps the excess.
Structure of Analysis
To determine whether certain hotel related fees and hotel sales are subject to tax, the Department
will examine the following questions:
1. Are the items taxable under § 39-26-104(1), C.R.S.?
a. Are the items a charge for a room or accommodation as defined in § 39-26-102(11),
C.R.S.?
i. Is a charge greater than 50% of the daily reservation room rate pursuant to 1
CCR 201-5, SR 22?
b. Is the item food or drink served or furnished in or by restaurants, cafes, lunch
counters, cafeterias, hotels, social clubs, nightclubs, cabarets, resorts, snack bars,
caterers, carryout shops, and other like places of business?
1

2

We assume that the reference to “group” is to a person or entity that entered into the Agreement and not
to guests. We also assume that the group organizer, not the guest, pays the Attrition rates and the guest,
not the group organizer, pays the Cancellation and No Show fees.
DR 4010A (06/11/14)

2. Is the item eligible for any exemptions?
Discussion
Fees
Colorado levies sales tax on charges for living accommodations and meals.2 The Department has
issued guidance on cancellation fees in connection with living accommodations in Department
Rule 1 CCR 201-5, Special Regulation Sales Tax 22, Hotels and Motels, which provides, in part:
Deposit Forfeits and Cancellation Charges: Charges made by a hotel or entity listed
under §39-26-102(11), C.R.S. shall be classified for taxation as follows:
a) When the charge is greater than 50% of the daily reservation room rate, as a
payment for the room and therefore fully taxable under §39-26-102(11), C.R.S.
unless the room would be fully exempt for charitable, government or school use
b) When the charge is 50% or less of the daily reservation room rate, it shall be
classified as a cancellation charge not subject to sales tax.
Early departure fee: The early departure fee appears to be a cancellation fee because the guest
has essentially cancelled all or part of their reservation. As a result, the 50% rule, as set forth
above, applies to such charges.
Room attrition fee and Food and beverage attrition fee: The attrition fees are not cancellation
charges. Attrition fees are more accurately characterized as a pricing mechanism by which a
retailer adjusts for a volume discount. A volume discount is a lower per unit charge if the buyer
purchases a specified number of units. For example, a retailer may offer to sell one shirt for the
full price or three shirts for 70% of the full price. In the context of the hotel rooms and meals, the
hotelier offers a volume discount rate if the group books rooms and meals in excess of a certain
threshold. Attrition fees are a way of adjusting the price to the higher, non-discounted rate when
the group does not purchase rooms and meals at the specified volume threshold. When attrition
fees are applied, the purchase of rooms and meals are not cancelled but, rather, these are not
purchased at the volume at which the hotelier provides a discount. Thus, the rule regarding the
cancellation charge does not apply. Instead, tax is calculated on the price paid by the guests plus
any additional amount paid by the group organizer (i.e., the attrition rate).3 Therefore, tax on meals
and lodging must be calculated by including the attrition fees.
Cancellation fee: Revenues from the cancellation fee presumably include both room and meal
revenues. Company must make a reasonable determination of how much of the revenue is related
to the price for living accommodations and then apply the 50% rule, set forth above, to those
revenues. The Department does not have guidance on the treatment of cancellation fees to the
extent that they apply to meals. The Department declines to address this specific issue in the
context of a general information letter.
No-show fee: The no-show fee appears to be a cancellation fee because the guest has essentially
cancelled all or part of their reservation. As a result, the 50% rule, as set forth above, applies to
such charges.
Meeting room cancellation fee: A meeting room is not a living accommodation and, therefore, is
not subject to tax. Department Rule 1 CCR 201-5, Special Regulation 22, sets forth, in part:

2
3

3

§§ 39-26-104(1)(e) and (f) and 102(11), C.R.S.
It does not matter that the fee is paid by the group rather than the guest. A retailer’s sales tax liability is
based on its “gross taxable sales” and includes all revenues received for taxable services and goods. §§
39-26-102(5) and 105, C.R.S.
DR 4010A (06/11/14)

BANQUET AND MEETING ROOMS: A room used exclusively for a banquet, meeting or
sales/display room is not subject to Colorado sales tax on charges for these uses. A room or suite
with beds cannot qualify as exclusively used for any of the above exempt purposes.
Because the charge for banquet or meeting rooms is not subject to tax, the cancellation fee also is
not subject to tax.
OTCs
Colorado levies sales tax on the entire amount charged to any person for rooms or
accommodations for a period of thirty days or less (emphasis added).4 Sales tax is calculated on
the price paid by the customer.5
The background information provided appears to describe ‘merchant model’ transactions in which
the OTC is the merchant of record. In merchant model transactions, the sale by the OTC to the
consumer is the taxable transaction and it is the OTC’s duty to collect, report, and remit sales tax
on that transaction. The Colorado sales tax is due on the OTC Website Rate, as that is the entire
amount charged to the customer for the right to occupy a room or accommodation.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule
counties. You may wish to consult with local governments which administer their own sales or use
taxes about the applicability of those taxes. Visit our web site at www.colorado.gov/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within
that 60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

4
5

4

§ 39-26-104(1)(f), C.R.S. and § 39-26-704(4), C.R.S.
§ 39-26-104(1), C.R.S.
DR 4010A (06/11/14)