Was a hotel's full contract charge for canceled rooms and meals taxable when the agreement labeled it liquidated damages plus applicable taxes?

Subject

Full hotel cancellation charge for rooms and meals was taxable

Plain-English summary

Virginia treated the cancellation balance as taxable payment for unused rooms and meals, not as an unrelated cancellation penalty. The contract required the customer to pay 100% of the rooms, food, and beverages when it canceled within 89 days, expressly calling the amount liquidated damages plus applicable taxes.

The hotel credited the customer for classes provided in lieu of part of the payment. Virginia found sales tax properly applied to the remaining balance.

What this means for you

• Tax treatment turns on what the cancellation contract requires the customer to pay for.
• A full charge tied to reserved rooms and meals can remain taxable even when the event never occurs.
• A nominal fee unrelated to the contracted accommodations may be treated differently.
• Apply credits before calculating tax when the contract and facts support them.

Citations and references

• 23 VAC 10-210-730.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-140

Original ruling text

August 12, 2014

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which you request a ruling regarding the application of the Virginia retail sales and use tax to cancellation charges made by * (the "Taxpayer") in the event a customer (the "Customer") cannot fulfill its obligations for rooms and meals. I apologize for the delay in responding to your request.

FACTS

The Taxpayer was under contract with the Customer to provide rooms and meals for a five night stay for a set fee. Under the terms of the contract, if the Customer did not cancel by a certain date prior to the event, the Taxpayer would charge the Customer the entire contract amount. The contract between the Taxpayer and the Customer states that the Taxpayer has removed the reserved block of rooms from its saleable inventory, and that in the event of cancellation, the Customer will be charged the entire amount for the rooms and meals as liquidated damages, not as a penalty, plus applicable taxes. The contract also provides a pricing list for meals in the event of cancellation.

In the present case, the Customer cancelled its event and was charged the entire amount stated in the event contract, minus a credit for classes the Customer provided to the Taxpayer in lieu of payment. The Taxpayer charged the Customer for the remaining balance, plus the 5.3% Virginia sales tax. The Customer takes exception to the additional charge for sales tax, and the Taxpayer requests a written ruling confirming this is the proper tax application.

RULING

Title 23 of the Virginia Administrative Code 10-210-730 provides that, "the tax applies to the sale or charge for any room or rooms, lodgings or other accommodations furnished to transients by any hotel, motel, inn... or other similar place." In the present case, it must be determined whether the charge to the Customer upon cancellation of rooms and meals qualifies as payment for the rooms and meals, or the charge is a nominal cancellation fee not associated with the Customer's contractual obligations.

The contract between the Taxpayer and the Customer addresses charges the Customer will incur in the event of a cancellation. The contract provides that in the event of cancellation, the Customer is contractually obligated to pay to the Taxpayer amounts specifically set forth in the contract "as liquidated damages and not as a penalty... plus applicable taxes." In the event the Customer cancels within 89 days of the scheduled event, the Customer is obligated to pay 100% of the contracted amount to cover all rooms, food and beverages.

Based on the cited regulation and the contract language, I find that in this case the charge to the Customer for cancellation of the event is clearly a charge for unused rooms and meals, and not an unrelated cancellation fee or penalty. The Taxpayer is also obligated contractually to pay the full amount of the contract, plus applicable taxes, in the event of a cancellation. The public document cited by the Customer, P.D. 10-3 (1/13/2010) addresses a nominal cancellation fee that is clearly different than the cancellation terms charged in this instance. In addition, the Taxpayer properly credited to the Customer amounts associated with services rendered by the Customer, resulting in the proper application of the Virginia retail sales tax to the remaining balance.

I trust that the foregoing responds to your inquiry. The regulation and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department's website. If you have any questions concerning this ruling, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5686692884.P