DD 06-7 modifies and replaces DD 99-2

Issue:

Under certain circumstances, further delineated in the examples given below, a hotel, motel or lodging house [hereinafter, a "hotel"] may permit some of its rooms to be occupied on a complimentary or discounted basis. Are rooms provided on a complimentary or discounted basis by a hotel subject to the room occupancy excise, and how is the excise determined?

Directive:

The room occupancy excise must be collected if: (1) the place in which the complimentary or discounted room is located is a hotel; (2) there is a transfer of occupancy; and (3) there is consideration (in money or otherwise, including services) for the transfer valued at $15.00 or more. All three of the elements listed above must be present before a complimentary or discounted room may be taxed. When a hotel receives no benefit beyond the actual rent paid in money, the excise is computed on the amount actually paid for the occupancy. When the hotel receives a benefit, either direct or indirect, beyond the actual rent paid in money, the excise is based on the fair market value of the room received.

Discussion:

Under G.L. c. 64G, § 3, the room occupancy excise must be paid whenever:

  1. the operator of a hotel

  2. transfers a room or rooms to an occupant

  3. for a "rent" $15.00 or greater. "Rent" is defined as: "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, and also any amount for which credit is allowed by the operator to the occupant, without any deduction therefrom whatsoever." G.L. c. 64G, § 1(h).

Thus, the room occupancy excise must be collected by any operator of a hotel whenever he or she receives sufficient consideration in any form for the right to occupy a complimentary or discounted room.

Because "rent" within the meaning of G.L. c. 64G includes the total consideration received for occupancy, whether received in money or otherwise, including services of any kind or nature "without any deduction therefrom whatsoever," the excise is not calculated on the actual price paid by the occupant for the room whenever a hotel receives indirect consideration beyond the actual rent paid for the room, such as employees' services, or travel or lodging for its employees from another entity, as is the situation in examples 2, 10-13, and 15, below. See G.L. c. 64G, § 1(h). Instead, the excise is to be computed on the fair market value of the room, defined as the lowest negotiated room rental rate unless otherwise specified in the examples, below.

The lowest negotiated room rental rate is defined as the lowest room rate quoted or made available and accepted by guests for the right to occupy a hotel room or rooms, and includes rentals to individuals, groups such as government and airline employees, private corporations or businesses and the like. Not included are package deals that may include goods or services in addition to the room rental. When a hotel receives no benefit beyond the actual rent paid, as in Example 8, the excise is computed on the amount actually paid for the occupancy.

The lowest negotiated room rental rate must be computed by one of the following methods. A taxpayer electing method 2 or 4 must use that method consistently for all hotels in a brand under a common ownership or management group.

1. The average yearly lowest negotiated room rental rate during the prior year for an individual hotel in Massachusetts. The average yearly lowest negotiated room rental rate is calculated by taking the average of the lowest negotiated room rental rate for each month, excluding any months that the room was not available for rent for a period of one week or longer because the property was closed.

2. The average yearly lowest negotiated room rental rate in Massachusetts during the prior year for a brand of hotels, e.g., Westin, Sheraton, Hilton, Hampton Inn. To make this calculation, the hotel must first determine the average yearly lowest negotiated room rental rate for each property in Massachusetts, as provided in method #1, and then average those rates for all hotels in Massachusetts in the brand.

3. The lowest negotiated room rental rate in Massachusetts during the equivalent month of the prior year for an individual hotel, i.e., the lowest negotiated room rental rate during October 2005 would be used to compute the tax base for October 2006.

4. The average lowest negotiated room rental rate in Massachusetts during the equivalent month of the prior year for a brand of hotels.

Examples:

I. Travel Agents, Familiarization Tours, Tour Guides

Example 1: A hotel furnishes a complimentary room to a travel agent, with no commitment by the travel agent to promote the hotel. The occupancy is a marketing effort based on the prospect of generating goodwill, but the hotel receives no present benefit. No excise is imposed.

Example 2: A hotel furnishes a complimentary room to a travel agent, with a promise by the travel agent to promote the hotel. The hotel is receiving advertising services as a direct result of offering the room, which is consideration. The excise is imposed on the fair market value of the room.

Example 3: A hotel offers complimentary rooms to visitors on "familiarization trips." Those visitors are deciding whether Massachusetts is an appropriate venue for future business. There is no commitment by the visitors (or those who initially request that the rooms be made available) to bring future business. The hotel receives no present consideration, and the excise is not imposed.

Example 4: A hotel furnishes a complimentary room to the tour guide traveling with a group booked at the hotel. The only benefit realized by the hotel is the rent received from the paying group members. No additional excise is imposed.

II. Rooms Donated to be Used For Charitable Purposes

Example 5: A hotel donates a room to an organization that will sell or auction the room and use all of the proceeds from the sale for charitable purposes, or will otherwise use the room for charitable purposes. The hotel receives no benefit from the organization or the occupant of the room for the transfer. No excise is imposed.

III. Guests

Example 6: The organizers of a convention rent multiple rooms and are given an additional complimentary room. The only benefit realized by the hotel is the rentals received from the paying group members. No additional excise is imposed.

Example 7: A hotel gives a complimentary room for a night for multiple nights stayed as part of a "frequent traveler" program. The hotel receives no rent beyond that already paid for occupancy during the previous stays. There is no additional excise imposed.

Example 8: An unaffiliated [1] company contracts with a hotel to provide rooms at a reduced rate to the company's employees. The only benefit received by the hotel is the actual rent received from the company employees. The excise is imposed, and is calculated on the discounted price paid for the room.

Example 9: A guest complains that accommodations at a hotel are unsatisfactory and is not charged for a night's stay. The hotel receives nothing from the guest; no excise is imposed.

IV. Exchange of Goods & Services

Example 10: A hotel permits employees of Company A to stay free of charge at its facilities on a "space available" basis while they are on business for Company A; employees of the hotel while on business may fly free of charge on an airline owned Company A. Because the hotel will receive an indirect benefit from Company A, there is consideration for provision of the complimentary lodgings. The excise is imposed on the fair market value of the room.

Example 11: A hotel permits employees of Company B to stay free of charge at its facilities on a "space available" basis while they are on vacation or for other leisure activities; employees of the hotel may stay free at hotel facilitates of Company B on the same basis. Because the hotel will receive an indirect benefit from Company B, there is consideration for provision of the complimentary lodgings. The excise is imposed on the fair market value of the room.

V. Employees

Example 12: A hotel permits its employees to use a room free of charge on a "space available" basis. This fringe benefit is additional compensation given in consideration of the employee's services. Since the hotel receives indirect consideration in the form of the employee's services, the excise is imposed on the fair market value of the room. In this circumstance the employee is not actively engaged in furthering the hotel's business interests, and is not acting as agent for the hotel.

Example 13: A hotel permits its employees, employees of affiliated [2] hotels, and certain designated family members of these employees to use a room at a discounted rate. This fringe benefit is additional compensation given in consideration of the employee's services, and the excise is imposed on the fair market value of the room.

Example 14: An employee of the hotel must remain overnight there because of his duties and is provided with a room. The employee receives a room for the convenience of the employer and the employer is making use of its own facilities through its agent, the employee. In this situation, the employee and the operator of the hotel form a single unit for purposes of the room occupancy excise, and the hotel is both the "operator" and the "occupant" of the room. There is no transfer of occupancy. Accordingly, the room occupancy excise does not apply.

VI. Construction Workers

Example 15: A hotel provides free rooms to a construction crew or other service providers during hotel renovations. The cost of this lodging would ordinarily be borne by the contractor or service provider and passed on to the hotel in the form of a higher price for renovations. The lower price paid by the hotel to the contractor or service provider reflects the additional consideration in the form of services received for the complimentary rooms. The excise is therefore imposed on the fair market value of the room.

Example 16: A partially completed hotel project lodges construction workers or other service providers free of charge in useable parts of the building under construction. Although consideration may be present in the form of a lower construction cost, the building is not yet a hotel, registered or required to be registered. Consequently, the room occupancy excise does not apply.

REFERENCE: G.L. c. 64G, §§ 1(h), 3.

/s/ Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:MTF:ecl

DOCs 213009v3

December 12, 2006

DD 06-7



[1] For purposes of this directive, "unaffiliated" means that the parties have no business relationship beyond a contract to provide rooms at a specified rate.

[2] For purposes of this directive, an "affiliated" company means the parties have a business relationship beyond a contract to provide rooms at a specified rate and is not restricted to entities with a common ownership.