Does a nonprofit charitable hospital that runs a hotel owe Connecticut room occupancy tax on the rooms it rents?

Plain-English summary

A nonprofit charitable hospital plans to run a hotel near the hospital, primarily for the convenience of "Priority Guests" — its patients and their families, visiting medical personnel, and recruitment candidates — who are referred by the hospital and identified as Priority Guests at check-in. The hospital pays the room rental for most visiting medical personnel and recruits. Priority Guests get preference, but any rooms not reserved for them are opened to the general public. The hospital asked whether room occupancy tax applies to the rent it collects.

DRS drew a line by guest type:

• Rent from Priority Guests — exempt. Connecticut exempts sales of property or services to and by nonprofit charitable hospitals for the hospitals' exclusive purposes (Conn. Gen. Stat. § 12-412(5)(A)), and that exemption reaches the room occupancy tax because the § 12-412 exemptions apply to the taxes in Chapter 219. Housing patients, their families, visiting medical staff, and recruits falls within the hospital's exclusive charitable purpose, so those transfers of occupancy are exempt. DRS analogized to Hartford Hospital v. Hartford, where a hospital-owned building used to house medical personnel was held used exclusively for hospital purposes.
• Rent from the general public — taxable. Renting rooms to the general public is not within the hospital's exclusive purpose, so those stays are subject to room occupancy tax. DRS noted this parallels the federal treatment of unrelated business income: the IRS treats a tax-exempt hospital's lodging for patients/relatives as related, but lodging for the general public as an unrelated trade or business.

So the same hotel produces both exempt and taxable room rentals, sorted by whether the guest ties to the hospital's charitable mission.

What this means for you

Nonprofit hospitals and other charitable institutions

Running an ancillary hotel doesn't automatically make all of its room rentals taxable — or all of them exempt. Rooms provided for people connected to your charitable mission (patients, their families, staff, recruits) can be exempt from room occupancy tax under the § 12-412(5) hospital exemption, while rooms rented to the general public are taxable. Build check-in and billing systems that reliably distinguish mission-related guests from the public so you charge tax on the right stays.

Hotel and lodging operators partnering with nonprofits

If you operate lodging tied to a charitable institution, expect a split result: mission-related occupancy can be exempt, general-public occupancy is taxable. Track guest categories carefully; the exemption is about the purpose of the stay, not the building.

Accountants and tax professionals

The room occupancy tax is imposed under Conn. Gen. Stat. § 12-407(a)(2)(H) (occupancy of 30 days or less; "hotel" defined in § 12-407(a)(16), "rent" in § 12-407(a)(21)). The exemption flows from § 12-412(5)(A), which — because Chapter 219 taxes are covered by the § 12-412 exemptions — reaches room occupancy tax. The "exclusive purpose" analysis borrows from Hartford Hospital v. Hartford, 160 Conn. 370 (1970), and the federal UBI line (26 U.S.C. §§ 511–512; IRS TAM 9847002) is cited as parallel support.

Common questions

Q: Does a nonprofit hospital's hotel owe Connecticut room occupancy tax?
A: Partly. Rent from the general public is taxable, but rent from Priority Guests — patients, families, visiting medical personnel, and recruits — is exempt as a sale by the hospital for its exclusive charitable purpose.

Q: Why are patient/family stays exempt but public stays taxed?
A: Housing people tied to the hospital's mission is within the hospital's "exclusive purpose" (exempt under § 12-412(5)(A)), while renting to the general public is not — a distinction that mirrors the federal unrelated-business-income rules.

Q: Does the hospital exemption really apply to room occupancy tax?
A: Yes. DRS explained that the § 12-412 exemptions apply to taxes imposed in Chapter 219, which includes the room occupancy tax.

Q: Does this ruling apply to my facility?
A: Not automatically. A Connecticut Ruling binds DRS only for the taxpayer and facts it addressed. A different ownership structure or guest mix could change the result.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(a)(2)(H) (room occupancy tax on occupancy of 30 days or less)
• Conn. Gen. Stat. § 12-412(5)(A) (exemption for sales to and by nonprofit charitable hospitals for their exclusive purposes)
• Conn. Gen. Stat. § 12-407(a)(16) (definition of "hotel"); § 12-407(a)(21) (definition of "rent")

Cases and federal guidance:

• Hartford Hospital v. Hartford, 160 Conn. 370 (1970) (property used exclusively for hospital purposes)
• 26 U.S.C. §§ 511–512; IRS Technical Advice Memorandum 9847002 (lodging for the general public as unrelated business income)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2012-1

Original ruling text

Ruling 2012-1 Room Occupancy Tax

FACTS:

A nonprofit charitable hospital as the term is used in Conn. Gen. Stat. §12-412(5) (“Hospital”) intends to operate a hotel, as defined in Conn. Gen. Stat. §12-407(a)(16), primarily for the convenience of its patients and their families, visiting medical personnel, and recruitment candidates (“Priority Guests”). Priority Guests will be referred to the hotel by the hospital, and at the time that a guest checks in, the hotel will be able to identify the guest as either a Priority Guest or a member of the general public.  With respect to most visiting medical personnel and recruitment candidates, the Hospital will pay for the room rental. Although Priority Guests will be given preference for all the rooms in the hotel, to the extent rooms have not been reserved for Priority Guests, the rooms will be made available to the general public.

It is represented that income derived from the transfer of room occupancy in the hotel to priority guests is not unrelated business taxable income, as defined in 26 U.S.C. §512, while income derived from the transfer of room occupancy in the hotel to guests other than Priority Guests may constitute unrelated business taxable income.

ISSUE:

Does the room occupancy tax apply to the rent, as defined in Conn. Gen. Stat. §12-407(a)(21), received from hotel guests?

RULING:

The room occupancy tax applies to the rent received from members of the general public, but not to the rent received from Priority Guests.

DISCUSSION:

Room occupancy tax is imposed on the transfer for a consideration of the occupancy of any room or rooms in a hotel or lodging house for a period of 30 days or less.  Conn. Gen. Stat. § 12-407(a)(2)(H).

Sales of tangible personal property or services to and by nonprofit charitable hospitals for the exclusive purposes of the hospitals are exempt from sales and use taxes. Conn. Gen. Stat. § 12-412(5)(A). This exemption also applies to the room occupancy tax, because the exemptions under Conn. Gen. Stat. § 12-412 apply to taxes imposed in Chapter 219.

In a case concerning the property tax, the Connecticut Supreme Court reviewed Conn. Gen. Stat. § 12-88, which provided in pertinent part, “The real property belonging to, or held in trust for, any [hospital], not used exclusively for carrying out [hospital] purposes but leased, rented or otherwise used for other purposes, shall not be exempt.” Hartford Hospital vs. Hartford , 160 Conn. 370 (1970). Stating this law in the affirmative, as “Property belonging to or held in trust for a hospital which is used exclusively for carrying out hospital purposes shall be exempt,” Hartford Hospital at 376-7, the Court held that a building owned by a hospital and used to rent apartments to hospital medical personnel and staff was used exclusively for hospital purposes and was thus exempt from property tax.

Applying a similar analysis to the comparable language of Conn. Gen. Stat. § 12-412(5)(A), the room occupancy tax does not apply to rent received from Priority Guests of the hotel, because such transfers of occupancy are sales by a nonprofit charitable hospital for its exclusive purpose.  Such sales to Priority Guests are within the “exclusive purposes” of the Hospital because Priority Guests include Hospital patients, patients’ families, medical personnel and recruitment candidates.  On the other hand, transfers of occupancy to members of the general public are not within the “exclusive purpose” of the Hospital and do not come under this exemption.  Similarly, the position of the Internal Revenue Service is that income from providing lodging to members of the general public is taxable as unrelated business income under 26 U.S.C. §511; for example, in IRS Technical Advice Memorandum 9847002, a tax-exempt hospital’s maintenance of a nearby motel was not an unrelated trade or business to the extent patients or their relatives were guests, but that income from providing lodging to members of the general public was an unrelated trade or business.

LEGAL DIVISION

January 19, 2012