Does a Utah motel owe sales tax on soap, shampoo, and continental-breakfast items it gives free to guests?

Plain-English summary

A newly opened motel's investor asked whether items purchased for guests' free use in their rooms — bar soap, shampoo, coffee, hot chocolate, cups, shower caps, toilet paper, tissues, and a continental breakfast (with its paper products) — were tax-exempt to the motel on the theory that the guest, not the motel, is the real "ultimate consumer" of those items.

The Commission disagreed. Under Utah Admin. Rule R865-19S-68, whoever purchases an item of tangible personal property and gives it away is the consumer of that item for tax purposes. Because the motel doesn't actually sell the soap, shampoo, or breakfast items to guests — it just makes them available with the room at no separate charge — there's no taxable sale between the motel and the guest at all. Instead, the taxable transaction happens earlier, when the motel buys those items from its own vendor. The room rate absorbing the cost doesn't change that.

The taxpayer had argued by analogy to an auto body shop, where materials that become part of the finished repair (paint, wax) are exempt while materials consumed doing the work (rags, solvent) are taxed — arguing the guest amenities were like the exempt "ingredient" materials. The Commission rejected the comparison, citing Sine v. State Tax Commission, 390 P.2d 130 (Utah 1964), which held that a business renting housing accommodations is not a "fabricator or manufacturer" for purposes of the ingredient-or-component-part exemption. The manufacturing/ingredient exemption simply doesn't apply to a lodging business. The Commission drew the same line for other businesses too — a grocery store owes tax on free samples/premiums it gives away, and a sports arena owes tax on giveaway t-shirts — the motel industry isn't treated any differently.

What this means for you

Hotel and motel operators

Budget sales tax into the cost of every complimentary item you buy for guest rooms and continental breakfasts — soap, shampoo, coffee, paper products, and similar amenities are all taxable to you at purchase, not tax-free just because your guest is the one who ultimately uses them. You cannot escape the tax by folding the cost into an undifferentiated room rate.

Other businesses giving away items with a sale or service

The same "purchaser who gives it away is the consumer" rule reaches beyond hotels — a grocery store's free samples/premiums and a venue's giveaway merchandise work the same way. If you're not making a genuine separate sale of an item to the end customer, you're the taxable consumer of it when you buy it.

Accountants and tax professionals

The key statutory hook is Rule R865-19S-68, and the key case authority ruling out a manufacturing/ingredient-exemption argument for lodging businesses is Sine v. State Tax Commission, 390 P.2d 130 (Utah 1964). This is a useful precedent whenever a client tries to extend the ingredient/component-part exemption (normally reserved for manufacturers) to a service business that merely provides consumable items alongside its service.

Common questions

Q: Does a motel have to charge its guests sales tax on the free soap and shampoo?
A: No — there's no separate sale to the guest, so nothing is charged to the guest for those items. Instead, the motel itself owes sales tax when it buys those items from its supplier.

Q: Can a motel avoid the tax by not separately listing these items on the guest's bill?
A: No — whether or not the items are separately stated on a bill to the guest is irrelevant. What matters is that the motel, as purchaser-and-giver-away, is the taxable consumer at the point it buys the items.

Q: Does the manufacturing "ingredient or component part" exemption apply to a lodging business?
A: No. Per Sine v. State Tax Commission, a business renting housing accommodations is not a fabricator or manufacturer, so that exemption (which lets manufacturers buy ingredient materials tax-free) doesn't apply here.

Q: Can I rely on this 1997 ruling today?
A: Not directly — it binds the Commission only for the taxpayer and facts it addressed, and Utah's rules have been renumbered and amended repeatedly since. Verify the current text of Rule R865-19S-68 (or its successor) before relying on it.

Citations and references

Rules:

• Utah Admin. Rule R865-19S-68 (a purchaser who gives away tangible personal property is the consumer of it)

Case law:

• Sine v. State Tax Commission, 390 P.2d 130 (Utah 1964) (a lodging business is not a "fabricator or manufacturer" for the ingredient/component-part exemption)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/97-037.htm

Original ruling text

97-037

Response
June 24,1 997

May
30, 1997

Re: Request for advisory opinion.

Dear
Ms. Rees:

I talked with Commissioner McKeown
today regarding a sales tax issue and he suggested that the best way to get my
concerns addressed is to request an advisory opinion.

A group of investors, of which I am
one, has just opened a COMPANY A here
in CITY. I thought that certain items
-we purchased for the use of our guests in their rooms would be tax exempt to
us because our guest is the ultimate consumer of the items. Among those items would be bar soap,
shampoo, hot chocolate, coffee, cups, shower caps, toilet paper, Kleenex, and
the continental breakfast that is served (including paper products associated
with it).

However, when I checked with the Tax
Commission to see if this was correct, I was told that items that are given
away are considered taxable to the motel, which is considered the ultimate
consumer. I disagree.

One of my clients, an autobody
repair shop, went through a sales tax audit several years ago. The concept addressed in this situation was
that if an item is used up by the body shop in doing the repair work, it is
taxed to the shop (rags, cleaning solvent, etc.), if an item becomes part of
the finished product, it is exempt (paint, wax, etc.).

My view is that the items I have
listed for our motel guests use are part -of our finished product, consumed by
our guest and not used' up -by the- -motel. The items are part of the service
we- charge for and taxed by the room rate we charge.

If our business should pay sales tax
on items that we give away as part of our service, then I see inconsistencies
in the application of that line of reasoning.
What about the restaurant the �gives away'' napkins, paper cups, after
dinner mints, etc. The grocery store that has multiple items in the store buy
one, get one free." The free item
is not taxed unless a coupon is necessary.

If our motel gave away a free
�bear" (the ##### mascot) as part of a promotion, then I could see having to
pay sales tax on those. But where the
items I have listed are for our guests and will be �consumed by them'' I view
those items as included in the room rate we charge, even though not separately
stated (just like the restaurant doesn't list the paper products separately).

Some of this information is a bit
hit and miss but it gives you my general view on the issue. I will be looking forward to your advisory
opinion on the matter.

Sincerely,

NAME

June
24, 1997

NAME

ADDRESS

CITY
STATE ZIP

Advisory
Opinion - Application of sales tax to items given to hotel or motel guests.

Dear
NAME,

We have received your request for
tax advice concerning purchases by your motel of items that are given to motel
guests. We offer the following:

Purchases of items that are given
away to motel guests taxable at the time of purchase by the motel. Under Utah Administrative Rule R865-19S-68,
the person who purchases an item of tangible personal property and gives that
item away is the consumer of the item for tax purposes.

The motel undoubtedly sets its room
rates to absorb for all of its business overhead, but it is not selling soap,
shampoo or other disposable items to its guests. Instead, it is making these items available to guests with the
room at no additional charge. With
regard to these items, there is no sales transaction between the motel and the
guest; hence no taxable transaction.
The taxable transaction takes place when the motel purchases these items
from the vendor.

The motel industry is not treated
differently in this regard than other business. For instance, a grocery store must pay tax on items that it
consumes in the operation of the store or gives away as premiums or free
samples to draw shoppers to the store.
A sports arena must pay tax on its purchase of the t-shirts that it
gives away to the first 500 fans through the gate.

We disagree that there is any
comparison between a motel�s business of renting lodging and an auto body shop or any operation that
manufacturers or compounds an item of tangible personal property. In fact, that argument was addressed to the
Utah Supreme Court more than 30 years ago.
In Sine v. State Tax Commission, 390 P.2d 130 (Utah 1964), the
court stated that one who deals in housing accommodations is not a fabricator
or manufacturer for purposes of the ingredient or component part exemption.

In conclusion, the COMPANY A is liable for sales tax on all items that it
purchases and consumes in the operation of the motel or that it gives to
customers at no charge. Please let us
know if you have other questions.

For
the Commission,

Joe
B. Pacheco,

Commissioner