When a Texas hotel pays money into its loyalty-rewards fund for issuing points to guests, are those 'Marketing Promotions' contributions administrative charges or charges for issuing reward points?

Plain-English summary

A company that owns, operates, and franchises Texas hotels runs a frequent-stay rewards club (RC). Guests earn points they can redeem for free rooms or upgrades. The mechanics:

• On an original (paid) stay, the hotel collects full state and local hotel taxes from the guest and reports/pays them.
• The hotel then pays the rewards fund an agreed percentage of the folio (a "contribution"), treated as a cost of doing business and built into the room price.
• When a guest redeems points for a free stay, the fund reimburses the hotel at an annually set rate.
• Contributions owed by hotels and reimbursements paid by the fund are netted against each other.

Within RC is a "Marketing Promotions" feature: hotels contribute a fixed dollar amount tied to the points awarded (e.g., a Level One member gets 300 points → hotel contributes $1.50; a bonus package of 2,000 points → $9.50). The hotel asked whether those Marketing Promotions payments are administrative charges or contributions for issuing points.

The ruling: the Marketing Promotions payments are charges for issuing reward points — not administrative charges. The Comptroller explained that an administrative charge is a charge for the initial setup or the cost to operate and administer the program, and RC does not assess administrative charges on members or hotels. The Marketing Promotions payments instead move in a fixed ratio to the points given to the guest, so they are contributions made in conjunction with issuing points.

Why the label matters: A prior Comptroller letter (STAR Accession No. 200405570L, May 10, 2004) excludes administrative charges from the calculation used to determine whether the reimbursements a hotel receives from a rewards fund are subject to hotel occupancy tax. Because the Marketing Promotions contributions are not administrative charges, they are not excluded from that calculation.

What this means for you

Hotels and hotel groups running loyalty/rewards programs

How you characterize payments into a rewards fund affects your hotel occupancy tax math. Money paid because points were issued is a contribution tied to the reward, not an administrative charge — and only genuine administrative charges (setup/operating/administration costs) get carved out of the taxable-reimbursement calculation. Don't assume a payment into the rewards fund is a nontaxable administrative item just because it's an internal program cost.

Guests and members

This ruling is about the hotel's tax accounting for its rewards program, not about extra tax charged to you on a points redemption. Full state and local hotel taxes are collected on your paid stays.

Common questions

Q: What's the difference between an administrative charge and a Marketing Promotions contribution?
A: An administrative charge covers setup or the cost to operate/administer the program. A Marketing Promotions contribution is a fixed amount the hotel pays into the fund in proportion to the points issued to a guest — a charge for issuing points, not administration.

Q: Why does the classification matter for tax?
A: Under prior guidance (STAR 200405570L), administrative charges are excluded when calculating whether the reimbursements a hotel receives from the rewards fund are subject to hotel occupancy tax. Non-administrative contributions like these are not excluded.

Q: Does the hotel still collect tax on the original paid stay?
A: Yes. The facts state the hotel collects full state and local hotel taxes on the guest's original stay and reports and pays them.

Q: Can another hotel rely on this ruling?
A: No. A Texas private letter ruling binds the Comptroller only as to the taxpayer who requested it and its specific facts; it cannot be relied on by any other taxpayer, and only prospectively.

Citations and references

• 34 Tex. Admin. Code Rule 3.1 — the authority under which this private letter ruling was issued.
• 34 Tex. Admin. Code Rule 3.10 — Taxpayer Bill of Rights, under which detrimental-reliance relief is provided.
• STAR Accession No. 200405570L (May 10, 2004) — prior Comptroller letter excluding administrative charges from the calculation of whether rewards-fund reimbursements to a hotel are subject to hotel occupancy tax.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/201911014L

Original ruling text

November 22, 2019

RE: Private Letter Ruling No. 20190405131927

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated April 2, 2019 and supplemental correspondence dated April 17 and April 18, 2019, and conference call on Aug. 5, 2019. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether a hotel’s contributions to a fund in conjunction with issuing rewards points to customers under Taxpayer’s Marketing Promotions are administrative charges.

Facts Presented

** is the trademark name for COMPANY (Taxpayer) and Taxpayer owns, operates, and franchises hotels that are engaged in the rental of rooms in Texas. Taxpayer operates a marketing program, referred to as Taxpayer Rewards Club (RC). RC is a frequent stay program designed to reward members who stay at participating hotels, all of which Taxpayer either owns, manages, or franchises. Points earned by members may be redeemed for free lodging or upgrades at the hotels.

Funding received by the RC program during a calendar year equals the operating cost of the program. RC is not designed to make a profit and does not have administrative charges to the members or the hotels. RC points are awarded to the guest only for the room rate and generally not for taxes, gratuities, or any incidentals.

When a hotel guest who is an RC member purchases an original stay at a participating hotel, full state and local taxes are received from the member and those taxes are reported and paid on the hotel’s tax returns. Under the terms of the program, based on the RC members stay, the hotel is required to pay RC an agreed upon percentage of the total hotel folio (contribution calculation). This contribution calculation is treated as a cost of doing business and is reflected in the price charged to the guest.

RC is obligated to reimburse hotels for the occupancy obtained through member’s redeemed points. A reimbursement rate calculation is performed annually which determines the hotel’s reimbursement rate for the following year and varies depending on the volume of redemptions. For all reporting periods, contributions due from the hotel and payments by the RC are netted against each other.

One of the programs within the RC program is Marketing Promotions. In one portion of the Marketing Promotions, hotels contribute revenue to the fund for awarding points to members in conjunction with a stay based on the members reward level. For example, a Level One member would receive 300 points and the hotel contributes $1.50 to the fund; a Level Two member would receive 500 points and the hotel contributes $2.50 to the fund. Another portion of the Marketing Promotions is a Bonus Point Package where a hotel can contribute anywhere from 1000-5000 points to a member in addition to the points the member already earns on their stay. For example, a hotel that gives 2,000 bonus points to a member would contribute $9.50 to the fund; and a hotel that gives 6,000 bonus points to a member would contribute $28.50 to the fund.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Would the amount paid by a hotel into the rewards fund for issuing points described as Marketing Promotions be considered a contribution into the fund or be considered administrative charges for the rewards program?

Ruling: The contributions described as Marketing Promotions are charges for issuing reward points and are not administrative charges.

Analysis: Generally, an administrative charge is a charge for the initial set up or for the cost to operate and administer the program. RC does not assess administrative charges on club members or participating hotels.

The Marketing Promotions give members a fixed amount of points for staying with a participating hotel and, in turn, the hotel makes a contribution to the RC based on the amount of points given to the member. There is a fixed ratio for the contribution amount the hotel gives to RC based on the amount of points given to the hotel guest. This contribution is not an administrative charge, but is a contribution made in conjunction with the issuing of reward points.

STAR Accession No. 200405570L (May 10, 2004) excludes administrative charges from the calculation to determine whether reimbursements to a hotel from a rewards program fund are subject to hotel occupancy tax. The contributions to the Marketing Promotions are not administrative charges as described by this letter and are not excluded from the calculation.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20190405131927.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.