Were hotel room-block attrition and cancellation penalties subject to Florida sales, surtax, or tourist development tax?

Subject

Cancellation Fees and Attrition Fees

Plain-English summary

The hotels' room-block attrition and cancellation charges were not taxable because they were penalties, not payment for the use or guaranteed availability of rooms. The sample agreement released unreserved rooms after a cutoff date, and the charges compensated the hotels for unused rooms or cancellation rather than securing accommodations for the customer.

Because the charges were outside Florida sales tax, they were also outside discretionary sales surtax and tourist development tax. The Department also concluded that a county auditing locally administered tourist taxes had to follow the Department's rules on taxable transient-rental charges.

What this means for you

The label "cancellation fee" is not decisive. A charge can be taxable if it guarantees the right to use accommodations for a specified period; this ruling covered contract penalties that did not provide that right.

Common questions

Q: Were the attrition and cancellation fees subject to sales tax? No.

Q: Were they subject to discretionary surtax or tourist development tax? No.

Q: Could a county use a different transient-rental tax rule in its audit? No; the cited statutes required it to follow Department regulations.

Citations and references

• Fla. Stat. §§ 212.02(15)(b) and 212.03(1) — taxable transient accommodations
• Fla. Stat. §§ 212.054(2)(a) and 212.055 — discretionary sales surtax
• Fla. Stat. §§ 125.0104(3)(a) and (10)(c), 125.0108(2)(a), and 212.0305(5)(c) — tourist taxes and county administration
• Fla. Admin. Code r. 12A-1.061(5) — deposits and prepayments for transient accommodations
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-008

Original ruling text

SUMMARY

QUESTION 1: Are room block attrition and cancellation fees
collected by the Hotels exempt from Florida sales and use
tax?

ANSWER 1 - Based on Facts Below: Subsection 212.03(1),
F.S., imposes sales tax at the rate of six percent on the
total rental charged for living quarters or sleeping or
housekeeping accommodations, by the person charging or
collecting the rental. Rule 12A-1.061(5)(a), F.A.C.,
states, in part, that deposits or prepayments that do not
guarantee the use or possession of transient accommodations
are not rental charges. The taxability of a deposit or
prepayment is contingent on whether the taxpayer merely
holds a reservation for a guest's arrival by a certain
time, or instead guarantees that an accommodation will be
held available to the guest, during the length of the
guest's planned stay. The attrition and cancellation fees
imposed by the Hotels, pursuant to the sample contract, are
in the nature of a penalty, and not in the form of a
prepayment or deposit. These attrition and cancellation
fees do not guarantee the use or possession of the hotel
rooms for the planned length of the guest's stay.
Therefore, these charges are not subject to sales tax.

QUESTION 2: Are room block attrition and cancellation fees
collected by the Hotels exempt from discretionary sales
surtaxes and the tourist development tax?

ANSWER 2 - Based on Facts Below: Because the charges are
not subject to sales tax, the charges are not subject to
discretionary sales surtaxes and the tourist development
tax. See paragraphs 212.054(2)(a), and 125.0104(3)(a), F.S.
Additionally, because the charges are in the nature of a
penalty, and are not for the use or possession of living
quarters or accommodations, the charges are not subject to
the tourist development tax. See paragraph 125.0104(3)(a),
F.S.

ISSUE 2: Whether the Department's regulations are to be

followed in the audit of local options taxes by a county.
STATUTE CITE(S): Sections 125.0104(10)(c), 125.0108(2)(a),
and 212.0305(5)(c), F.S.

QUESTION: Is a county that audits local option taxes
required to follow the Department's regulations, regarding
what constitutes a taxable charge for the use of transient
rental accommodations?

ANSWER - Based on Facts Below: Paragraph 125.0104(10)(c),
F.S., pertaining to local government administration of the
tourist development tax; paragraph 212.0305(5)(c), F.S.,
pertaining to local administration of convention
development taxes; and paragraph 125.0108(2)(a), F.S.,
relating to the tourist impact tax clearly state that
county governments that audit local option taxes must
follow the Department's regulations, when determining the
taxability of charges that constitute the use of transient
rental accommodations.

Jan 29, 2001

Re: Technical Assistance Advisement 01A-008
Sales and Use Tax - Cancellation Fees and Attrition Fees
For Transient Rental Accommodations, Discretionary Sales
Surtax, Tourist Development Tax, and County Audits and
Department's Regulations
Sections 125.0104(10)(c), 125.0108(2)(a), 212.03,
212.0305(5)(c), 212.054(2)(a), 212.055, F.S.
Rule 12A-1.061(5), F.A.C.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated August 18, 2000, in which you asked for a
technical assistance advisement concerning the applicability of
sales tax, discretionary sales surtax and tourist development
tax on room block attrition fees and cancellation fees charged

by the XXX and the XXX (Hotel A and Hotel B).

FACTS

Your request states, in part:

... The [Hotel A] and [Hotel B] are hotels located in...,
Florida that provide transient rental accommodations.
Customers include individuals or groups[,] such as
corporations or organizations[,] that may reserve a large
block of guest rooms for conferences or meetings. When
groups make reservations that require a large block of
guest rooms, the [Hotel A] and [Hotel B] will generally
execute a written agreement to formalize arrangements
including the number of guest rooms, room rates, room
upgrades, meeting rooms, food and beverage policies,
billing arrangements, deposits and damages. We have
enclosed for the Department's review, a sample Second
Option Agreement ("Agreement") executed by the [Hotel A]
and [Hotel B].

Attrition Fees and Cancellation Fees

To prevent the [Hotel A] and [Hotel B] from suffering
monetary losses due to room cancellations or room block
shrinkage, attrition fees may be imposed in certain
situations. As contained in the Agreement's section
entitled "Room Block Attrition for [Hotel A]" (see page
12), fees will be imposed for room block attrition. The
customer is entitled to a one-time reduction in the
reserved room block up to 5% of the total room nights,
provided the reduction is received in writing more than 12
months prior to arrival. Attrition fees equal to 130% of
the confirmed group average room rate for all unused room
nights for the committed room block will be due and added
to the customer's master account. Attrition fees will not
be applied if, for the applicable room nights, the [Hotels
sell] all available rooms[,] including unused rooms in the
committed room block.

In addition, the section of the Agreement entitled

"Cancellation" (see page 17), includes a provision for the
payment of liquidated damages[,] should the customer cancel
the Agreement. The cancellation fees that can be imposed
are percentages of the total lost revenue[,] based on the
date the [Hotel A] and [Hotel B receive] written notice of
cancellation. The cancellation fees are as follows:

After the date of the agreement, but more than 12 months
prior to arrival date: 50% of total anticipated room
revenue.

9-12 months prior to arrival date: 75% of total anticipated
room revenue.

Less than 9 months prior to arrival date: 100% of total
anticipated room revenue.

According to the sample contract provided, the Hotels agree to
hold a room block for a customer until a date certain. The
contract further states, in part:

... At that time, rooms not covered by a rooming list or
individual reservations will, subject to the terms hereof
concerning guarantees, deposits, room block attrition and
cancellation, be released from your room block so that we
may attempt to sell them to other consumers. We will
continue to accept reservations from your attendees after
this date[,] at prevailing room rates, subject to
availability. Reservations that are made after the cut-off
date[,] and consumed during your meeting[,] will be
attributed to your overall group room block performance[,]
when such reservations can be identified. However, any such
rooms[,] which are released from your block[,] shall be
subject to the attrition provision and any such release
will not relieve you of your obligation to pay attrition
fees for such released rooms.

Additionally, the contract provides for one complimentary single
standard room accommodation per fifty cumulative accommodation
nights paid for during the meeting. The contract also provides
for meeting and banquet space on a complimentary basis, food and

beverage sales, and catering services.

According to the "Pre-Registration Provision" of the contract,
all individuals attending the meeting will be responsible for
their own room, tax and incidental charges upon check-out.

Upon clarification, you stated that the Hotels do not collect
consideration in connection with the provision of any
complimentary room; they reserve blocks of rooms by specific
type, and not by specific rooms; they usually do not overbook
rooms; and there is no deposit guarantying a room involved in
the transaction. Furthermore, you stated that the Agreement is
the only documentation involved in the transaction.

REQUESTED ADVISEMENT

From your request:

1. Are room block attrition and cancellation fees
   collected by the Hotels exempt from Florida sales and
   use tax?

2. Are room block attrition and cancellation fees
   collected by the Hotels exempt from discretionary
   sales surtaxes?

3. Are room block attrition and collection fees collected
   by the Hotels exempt from the tourist development tax?

4. Is a county that audits local option taxes required to
   follow the Department's regulations, regarding what
   constitutes a taxable charge for the use of transient
   rental accommodations?

DISCUSSION, ANALYSIS, AND CONCLUSION OF LAW

Subsection 212.03(1), F.S., provides, in pertinent part:

It is hereby declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of renting, leasing, letting, or granting a

license to use any living quarters or sleeping or
housekeeping accommodations in, from, or a part of, or in
connection with any hotel, apartment house, roominghouse,
or tourist or trailer camp.... For the exercise of such
taxable privilege, a tax is hereby levied in an amount
equal to 6 percent of and on the total rental charged for
such living quarters or sleeping or housekeeping
accommodations by the person charging or collecting the
rental. Such tax shall apply to hotels, apartment houses,
roominghouses, or tourist or trailer camps whether or not
there is in connection with any of the same any dining
rooms, cafes, or other places where meals or lunches are
sold or served to guests.

Paragraph 212.054(2)(a), F.S., states, in part:

The tax imposed by the governing body of any county
authorized to so levy pursuant to s. 212.055 shall be a
discretionary surtax on all transactions occurring in the
county which transactions are subject to the state tax
imposed on sales, use, services, rentals, admissions, and
other transactions by this chapter.... (Emphasis supplied)

Section 125.0104, F.S., states, in part:

(3)(a) It is declared to be the intent of the Legislature
that every person who rents, leases, or lets for
consideration any living quarters or accommodations in any
hotel, apartment hotel, motel, resort motel, apartment,
apartment motel, roominghouse,... is exercising a privilege
which is subject to taxation under this section, unless
such person rents, leases, or lets for consideration any
living quarters or accommodations which are exempt
according to the provisions of chapter 212.

Rule 12A-1.061, Florida Administrative Code, provides, in
pertinent part:

(5) DEPOSITS AND PREPAYMENTS.
(a) The following deposits or prepayments paid by guests or
tenants to the owner or owner's representative of transient
accommodations are NOT rental charges or room rates and are
not subject to tax;

1.a. Deposits or prepayments that are required to be paid
to secure a potential guest or tenant the right to rent,
lease, let, or license a transient accommodation by a time
certain. Such deposits do not guarantee the transient guest
or tenant the use or possession, or the right to the use or
possession, of transient accommodations. b. Example: A
potential tenant reserves a beach house for a specific week
from a management company. The management company requires
a $100 reservation deposit to hold the beach house until a
time certain, such as 6:00 p.m., the first night of the
reserved week. The tenant is unable to use the beach house
for the reserved week, but fails to cancel the reservation
with the management company. The management company retains
the $100 deposit. Because the $100 charge does not provide
the tenant the right to the use of the beach house, the
$100 deposit is not subject to tax.

c. Example: A potential guest makes reservations at a hotel
for a designated night. The hotel requires a deposit equal
to the room rate to hold a room until a time certain, such
as 6:00 p.m., on the designated night. The guest does not
arrive at the hotel and fails to cancel the reservation.
The hotel retains the deposit. Because payment of the
deposit did not provide the potential guest the right to
the use of the room and the hotel did not collect any tax
from the potential guest, the room deposit is not subject
to tax.

(b) Rental charges or room rates include deposits or
prepayments that guarantee the guest or tenant the use or
possession, or the right to the use or possession, of
transient accommodations during a specified rental period
under the provisions of an agreement with the owner or
owner's representative of transient accommodations. The
owner or owner's representative is required to provide

transient accommodations to any guest or tenant that enters
into such an agreement and pays the required prepayment or
deposit, even when the guest or tenant does not occupy the
accommodation.

1. Example: A potential tenant enters into an agreement
   with the owner of a condominium unit to reserve the unit
   for a specified week. In exchange for the required
   deposit, the tenant is guaranteed that the unit will be
   available for use during the specified week. The tenant is
   permitted to cancel the reservations and receive a full
   refund of the required deposit provided that the
   cancellation is received 48 hours prior to the scheduled
   arrival date. The tenant makes the required prepayment by
   issuing a credit card authorization for the amount of the
   weekly rental charges. Even though the tenant is unable to
   use the unit during the specified week, the tenant fails to
   cancel the reservation. The condominium owner charges the
   tenant's credit card for the unit. The weekly rental
   [charge] paid by the tenant for the condominium unit is
   subject to tax, even though the tenant does not use the
   unit.

2. Example: A hotel guarantees that it will provide room
   accommodations on a designated date to potential guests
   that make reservations and pay a required room deposit. To
   receive a refund of the required room deposit, the
   potential guest must cancel his or her reservations by 4:00
   p.m. of the designated date. A potential guest that has
   made reservations and has paid the required room deposit
   fails to cancel the reservations and fails to arrive at the
   hotel on the designated date to use the reserved room
   accommodations. Because the potential guest fails to cancel
   the reservations, the guest forfeits the room deposit.
   Even though the guest did not occupy a room at the hotel,
   the forfeited room deposit is subject to tax.

Questions 1, 2 and 3:

Paragraph 212.02(15)(b), Florida Statutes, defines "sale" as

including:

The rental of living quarters or sleeping or housekeeping
accommodations in hotels, apartment houses or
roominghouses, or tourist or trailer camps, as hereinafter
defined in this chapter.

Subsection 212.03(1), F.S., imposes sales tax at the rate of six
percent on the total rental charged for living quarters or
sleeping or housekeeping accommodations, by the person charging
or collecting the rental. Rule 12A-1.061(5)(a), F.A.C., states,
in part, that deposits or prepayments that do not guarantee the
use or possession of transient accommodations are not rental
charges. The taxability of a deposit or prepayment is
contingent on whether the taxpayer merely holds a reservation
for a guest's arrival by a certain time, or instead guarantees
that an accommodation will be held available to the guest,
during the length of the guest's planned stay.

Page 11 of the contract states, in part:

The Hotel agrees to hold the above-noted room block until
Friday, May 26, 2000. At that time, rooms not covered by a
rooming list or individual reservations will,... be
released from your room block so that we may attempt to
sell them to other consumers. (Emphasis supplied)

As to the room block attrition fees charged for those unused
rooms within the reserved room block that are not resold for
such nights, the contract, on page 12, states that "... payment
must be received from you for each unused room night at 130% of
the confirmed group average rate for your committed room block."
Page 17 of the contract states that the cancellation fee is a
liquidated damages fee, consisting of a percentage of the total
lost revenue.

The attrition and cancellation fees imposed by the Hotels,
pursuant to the sample contract, are in the nature of a penalty,
and not in the form of a prepayment or deposit. These attrition
and cancellation fees do not guarantee the use or possession of
the hotel rooms for the planned length of the guest's stay.

Therefore, these charges are not subject to sales tax. Because
the charges are not subject to sales tax, the charges are not
subject to discretionary sales surtax. See paragraph
212.054(2)(a), F.S. Also, because the charges are in the nature
of a penalty, and are not for the use or possession of living
quarters or accommodations, the charges are not subject to the
tourist development tax. See paragraph 125.0104(3)(a), F.S.

Question 4:

Paragraph 125.0104(10)(c), F.S., pertaining to local government
administration of the tourist development tax, states, in part:

A county adopting an ordinance providing for the collection
and administration of the tax on a local basis shall also
adopt an ordinance electing either to assume all
responsibility for auditing the records and accounts of
dealers, and assessing, collecting, and enforcing payments
of delinquent taxes, or to delegate such authority to the
Department of Revenue. If the county elects to assume such
responsibility, it shall be bound by all rules promulgated
by the Department of Revenue pursuant to paragraph (3)(k),
as well as those rules pertaining to the sales and use tax
on transient rentals imposed by s. 212.03.... (Emphasis
supplied)

Paragraph 212.0305(5)(c), F.S., pertaining to local
administration of convention development taxes, states, in part:

A county adopting an ordinance providing for the collection
and administration of the tax on a local basis shall also
adopt an ordinance electing either to assume all
responsibility for auditing the records and accounts of
dealers, and assessing, collecting, and enforcing payments
of delinquent taxes, or to delegate such authority to the
Department of Revenue. If the county elects to assume such
responsibility, it shall be bound by the rules promulgated
by the Department of Revenue pursuant to paragraph (3)(f),
as well as those rules pertaining to the sales and use tax
on transient rental imposed by s. 212.03.... (Emphasis
supplied)

Paragraph 125.0108(2)(a), F.S., states, in part:

The person receiving the consideration for such taxable
privilege and the person doing business with such area or
areas of critical state concern shall receive, account for,
and remit the tourist impact tax to the Department of
Revenue at the time and in the manner provided for persons
who collect and remit taxes under chapter 212. The same
duties and privileges imposed by chapter 212 upon dealers
in tangible property, respecting the collection and
remission of tax; the making of returns; the keeping of
books, records, and accounts; and compliance with the rules
of the Department of Revenue in the administration of that
chapter shall apply to and be binding upon all persons who
are subject to the provisions of this section....

It is clear, from the above cited provisions of the Florida
Statutes, that county governments that audit local option taxes
must follow the Department's regulations, when determining the
taxability of charges that constitute the use of transient
rental accommodations.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the department
only under the facts and circumstances described in the request
for this advice, as specified in Section 213.22, F.S. Our
response is predicated upon those facts and the specific
situation summarized above. You are advised that subsequent
statutory or administrative rule changes or judicial
interpretations of the statutes or rules upon which this advice
is based may subject similar future transactions to a different
treatment from that which is expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,

the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Isabel Nogues
Attorney
Technical Assistance and Dispute Resolution
850/488-9669

Control #43302