Did an Illinois hotel owe Hotel Operators' Occupation Tax when a guest redeemed loyalty points for a complimentary room?

Plain-English summary

A hotel-chain subsidiary operated a loyalty fund supported by participating hotels. Guests earned points on paid stays and redeemed them for complimentary rooms; the fund then compensated the hotel based on occupancy levels.

IDOR said participating hotels generally did not incur Hotel Operators' Occupation Tax again when guests redeemed reward points, provided the operator had remitted the tax on the original stays and the reimbursement fund was wholly owned by the national franchisor. The conclusion could change if a third party paid the reimbursement or the original stays were not taxed.

Separate tangible personal property remained subject to sales and use tax rules. Food, drinks, or condiments sold to the occupant were taxable retail sales. If the hotel gave those items to the guest free, the hotel owed Use Tax as a donor. The response did not separately decide the tax treatment of the hotels' administrative contributions to the loyalty program.

Common questions

Was the reward-night reimbursement itself hotel-taxable? Generally no under the described franchisor-owned fund structure.

Were complimentary food or drinks tax-free too? No. Free property caused donor Use Tax; sold property remained taxable.

Citations and references

• 35 ILCS 145/3(a)
• 86 Ill. Adm. Code 150.305(c)
• 2 Ill. Adm. Code 1200.110(a)(3)(D) and (a)(4)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0043.pdf

Original ruling text

ST 13-0043-GIL 08/23/2013 HOTEL OPERATORS’ TAX
Redemption of a hotel chain’s “rewards points” for stay at one of its hotels is not subject to Hotel Operators’
Tax liability. See 35 ILCS 145/1 et seq. (This is a GIL.)

August 23, 2013

Dear Xxxxx:
This letter is in response to your letter dated April 12, 2013, in which you request information. The
Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the Department in
response to specific taxpayer inquiries concerning the application of a tax statute or rule to a particular fact
situation. A PLR is binding on the Department, but only as to the taxpayer who is the subject of the request for
ruling and only to the extent the facts recited in the PLR are correct and complete. Persons seeking PLRs must
comply with the procedures for PLRs found in the Department’s regulations at 2 Ill. Adm. Code 1200.110. The
purpose of a General Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not a statement of
Department policy and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our
website at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with a GIL.
In your letter you have stated and made inquiry as follows:
XYZ, a wholly owned subsidiary of ABC, operates a loyalty program designed to promote and
increase hotel occupancy within the ABC brands. ABC is a global hotel company that owns,
operates, and franchises hotels throughout the world, and has extensive interests in the state of
Illinois. This program is funded by the hotels (owned, managed and franchise). Basically, the
hotels contribute into a fund and when loyalty members stay at their hotels, the hotels are
reimbursed from the fund including the applicable taxes that relate to the stay at a hotel. The
purpose of this letter is to request a private letter ruling on the taxability of the following:
a.
b.
c.

Are the amounts paid to the participating hotel, from the XYZ Program, for the XYZ
members’ redeemed hotel stay taxable to the hotel?
Are the amounts paid to the participating hotel, from the XYZ Program, for the XYZ
members’ redeemed hotel stay taxable to the XYZ program?
Are the fees paid by the participating hotels to the XYZ Program taxable to XYZ?

Facts:
As part of its corporate promotional plan, XYZ, a wholly owned subsidiary of ABC, operates a
rewards program called XYZ for frequent guests of its hotels. XYZ does not own the hotels or
the franchise rights to the hotels which participate in its loyalty rewards program. The program
gives these frequent guests reward points when they stay at any ABC hotel. These points can be
exchanged for complimentary lodging. The points have no dollar value to a hotel guest; the
guest cannot resell the points on the open market.

All ABC hotels are required to participate in this reward points program by terms of their license
or management agreement. Each hotel pays a fee on the room revenue charged by members into
a ABC reward points program fund each month. The fee is approximately 4% (or another
agreed-to percentage) of revenue generated from the rewards members stay at that hotel. The
cost of administering, managing, and marketing the reward points program is paid from each
hotel’s monthly contributions. XYZ is a marketing company that is not intended to make a
profit.
When a guest redeems points for a complimentary night’s stay at a ABC brand hotel, that hotel is
paid an amount to cover the guest’s stay at the hotel. The staff managing the fund handles all
reward point redemption reservations. To redeem points for a complimentary stay, members
must either contact a central rewards reservation desk set up specifically for the program or book
online. No guest can make arrangements directly with the hotel to redeem points for a
complimentary stay. The rewards desk makes the reservation for the member and then issues an
electronic confirmation to the hotel.
The amount the hotel is compensated for redemption is based on hotel occupancy level during
the members stay. Total award compensation for the month will be subtracted from the monthly
assessment invoice total in order to determine the amount of payment from the hotel to the
central fund.
a.
b.

If the member hotel owed the XYZ program $750, and XYZ program owed the member
hotel $500, the member hotel would pay the XYZ program $250 for that period.
If the member hotel owed XYZ program $500, and XYZ program owed the member
hotel $750, the member hotel would receive $250 from XYZ for that period.

The reimbursement from the fund to the hotel includes the applicable occupancy and sales taxes
that relate to the stay at that hotel.
General Information
1.
2.
3.

4.

ABC is not currently engaged in litigation or audit with the Department with regard to
this or any other tax matter.
The Department has not previously ruled regarding this matter for ABC Hotels
Corporation.
This private letter ruling is not requested with regard to hypothetical or alternative
proposed transactions. This private letter ruling is requested to determine the Hotel
Operators’ Occupation Tax consequences of the actual business practices of ABC owned,
ABC Managed and Franchised Hotels.
ABC requests that certain information be deleted from the private letter ruling prior to its
dissemination. ABC requests that its name and the name of any and all related entities be
deleted.

Illinois Law
The Hotel Operators' Occupation Tax Act (‘the HOOT’) (35 ILCS 145/1 et seq.) is imposed
upon persons engaged in the business of renting, leasing or letting rooms in a hotel. The tax is
imposed on the gross rental receipts from such renting, leasing or letting, (35 ILCS 145/3)
Section 2 of the HOOT sets for the definitions of various terms. The term ‘hotel’ means: ... any
building or buildings in which the public may, for a consideration, obtain living quarters,
sleeping or housekeeping accommodations. The term includes inns, motels, tourist homes or
courts, lodging houses, rooming houses and apartment houses.

Section 2 of the HOOT also defines the term ‘occupancy.’ The term ‘occupancy’ means: ... the
use or possession, or the right to the use or possession, of any room or rooms in a hotel for any
purpose, or the right to use or possession of the furnishings or to the services and
accommodations accompanying the use and possession of the room or rooms.
In addition, it also defines the term ‘rent.’ The term ‘rent’ means:
... the consideration received for occupancy, valued in money, whether received in money or
otherwise, including all receipts, cash, credits and property or services of any kind or nature.
The Department has adopted rules governing the HOOT at 86 Ill. Adm. Code 480. Section
480.101 of the Department’s rules sets forth rules governing the nature, rate and scope of the tax.
Section 480.101(b)(1) provides:
Since the Hotel Operators' Occupation Tax is imposed on receipts from renting rooms for living
quarters, or for sleeping or housekeeping accommodations, the tax does not apply to the receipts
from the renting of rooms for other purposes, such as for the use as display rooms or sample
rooms, as meeting rooms, as offices or as private dining rooms.
Section 480.101(b)(6) prohibit taxpayers from separating out charges associated with the rental
of rooms in an attempt to lower the tax base. In addition, the rule provides examples of types of
receipts that are not for the right to occupy a room and are, therefore, not taxable under the
HOOT:
If an operator should make a separate and specific charge for the use of bedding or other
facilities furnished in connection with the use of a room as living quarters or for sleeping or
housekeeping accommodations, the operator’s additional receipts from this source are subject to
The Hotel Operators' Occupation Tax. However, that tax does not apply to the operator’s
receipts from selling food, beverages or other tangible personal property, nor to receipts from the
selling of tickets to theatre performances or other similar activities nor to other receipts which
are not in any way reasonably connected with or attributable to the renting, leasing or letting of
rooms for use as living quarters or for sleeping or housekeeping accommodations:
Provided that exemption for such nontaxable receipts cannot be claimed unless supported by
proper books and records as provided for in Section 4 of the Hotel Operators' Occupation Tax
Act and in Section 480.115 of this Part.
Analysis
1.
Complimentary nights in hotels received through the redemption of reward points are not
subject to the HOOT.
As noted above, the rewards point program is a customer appreciation tool used by ABC to
benefit guests that make repeated visits to its hotels. The members of the program are rewarded
with points for each paid stay at any ABC hotel. The points may be redeemed for
complimentary nights at any ABC hotel.
The HOOT Tax is imposed on the gross rental receipts from the renting of hotel rooms. (35
ILCS 145/3) No gross rental receipts are received from a guest when a complementary room is
received by the redemption of reward points.
The gross rental receipts associated with redeemed points are the gross rental receipts that were
paid for rooms on which the points were earned.

The redemption of points earned by previous paid stay at a ABC for a complimentary room
cannot be differentiated from ABC providing a promotion that offers a fourth night free when a
guest pays for three nights stay. In such a situation, the consideration received for the four nights
have been paid by the guest. It is just a reduction in price per room, since the cost of the fourth
night has been borne by price paid for the three nights. Similarly, when a guest obtains a free
night in exchange for accumulated reward points, the consideration for the free night has been
paid by the guest at the time the points were earned.
2.

Transactions between the hotels and the XYZ program fund are not taxable.

As noted earlier, each hotel pays a percentage of money into the marketing fund. When a
member gets a complimentary stay at a hotel and the fund pays, it is the money that the hotel had
contributed to the marketing fund that is being sent back to the hotel. This is not a third party
payment or reimbursement. The money in the marketing fund is money held on the individual
hotels behalf in proportion to payments into the fund. This can be compared to someone
depositing money into a bank. When the depositor withdraws the money from the bank, the
bank is not reimbursing the depositor. The depositor is reclaiming deposits that have been made
previously. Transactions between the fund program and the hotels are, therefore, not taxable
under HOOT.
Conclusion
The Illinois law, as noted above does not address the issues mentioned above. We respectfully
request guidance as to the taxability of our issue.
Please contact me if you have further questions or need additional information. Thank you in
advance for your help.

DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of the
Department. The Department will respond to all requests for private letter rulings either by issuance of a ruling
or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm. Code 1200.110(a)(4).
Further, the Department’s regulations regarding Private Letter Rulings provide that “[i]f there is case law or
there are regulations dispositive of the subject to the request, the Department will decline to issue a letter ruling
on the subject." 86 Ill. Adm. Code 1200.110(a)(3)(D). The Department declines to issue a Private Letter
Ruling.
A tax is imposed upon persons engaged in the business of renting, leasing or letting rooms in a hotel at
the rate of 5% of 94% of the gross rental receipts from such renting, leasing or letting, excluding, however,
from gross rental receipts, the proceeds of such renting, leasing or letting to permanent residents of that hotel
and proceeds from the tax imposed under subsection (c) of Section 13 of the Metropolitan Pier and Exposition
Authority Act. 35 ILCS 145/3(a).
In regard to hotel rewards points programs, it is our understanding that Hotel Operators’ Occupation Tax
is remitted by the operator upon the initial stay, with a percentage of that amount put into the separate fund,
wholly owned by the hotel’s national franchisor, for reimbursement of gross charges by persons utilizing the
rewards points program. Under these circumstances, the franchised hotels would not generally incur Hotel
Operators’ Occupation Tax liability on the redemption of the reward points by the customer. This
determination is subject to change should a third party pay any reimbursement of the gross charges to the
franchised hotels or if the operator upon the initial stay or stays did not remit Hotel Operators’ Occupation Tax.

However, Retailers’ Occupation Tax or Use Tax liability would be incurred on tangible personal
property transferred incident to a person’s stay under the rewards program. Tangible personal property, such as
food, drinks, and condiments, would be subject to Retailers’ Occupation Tax liability if sold to the occupant. If
the tangible personal property were provided to the occupant free of charge, then the hotel would incur Use Tax
liability as a donor in a gift situation. See 86 Ill. Adm. Code 150.305(c).
I hope this information is helpful. If you require additional information, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Richard S. Wolters
Associate Counsel

RSW:ls