Was a nominal hotel fee for cancelling after a deadline subject to Virginia retail sales tax?

Subject

Nominal late-cancellation fee was not a taxable hotel-room charge

Plain-English summary

Virginia ruled that a nominal fee for missing a hotel cancellation deadline was not subject to retail sales tax. The hotel took advance reservations and imposed the fee only when a guest cancelled too late.

Hotel charges made in connection with an actual room rental were generally part of the taxable room charge. Here, however, the guest was never charged the room price and never received a right to possess the room after cancellation.

The fee was therefore a penalty for failing to meet the cancellation deadline, not an additional charge for lodging.

What this means for you

• A fee's label is less important than what the customer receives.
• No room rental occurred under the facts presented.
• The ruling involved a nominal penalty, not the full room price.
• Different no-show or forfeiture terms could change the analysis.

Common questions

Did the guest pay for the room?

No.

Did the guest retain any right to use the room?

No.

Why was the fee exempt?

It penalized a late cancellation rather than charging for lodging.

Citations and references

• 23 VAC 10-210-730.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-3

Original ruling text

January 13, 2010

Dear *:

This is in response to your letter submitted on behalf of the * (the "Taxpayer") in which you request a ruling regarding the application of Virginia's retail sales and use tax to hotel cancellation fees.

FACTS

The Taxpayer rents individual hotel rooms and takes advance reservations. If the customer wishes to cancel the reservation, a fee is charged if the customer does not do so by a specified date and time. The fee is nominal and at no time after the cancellation is the customer charged the full price for the room.

DETERMINATION

Title 23 of the Virginia Administrative Code 10-210-730 states that any additional charges made in connection with the rental of a room are deemed to be part of the charge for the room and are subject to the sales tax. In this case, however, because the customer is never charged for the room and has no right to its possession, the cancellation fee cannot be considered an additional charge made in connection with the room rental. The cancellation fee is merely a penalty charge to the customer for failure to comply with an established deadline. In accordance with the above regulation, the hotel cancellation fee is not subject to the retail sales and use tax.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The regulation cited above is available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3816408669.M