|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
I. Issue: Are mandatory service charges imposed by a hotel included in the rental charge subject to the room occupancy excise?
II. Directive: Separately stated amounts designated as gratuities or service charges added to the price of a hotel room will not be included in the rental charge subject to the room occupancy excise if the operator meets the following requirements:
(1) The operator segregates the exact amount of any gratuity or service charge in a separate fund (shown separately in its business records supported by invoices) for the employees actually providing the services, and
(2) The operator directly distributes the service charge monies in their entirety to those employees almost immediately.
If the gratuities or service charges are paid only in part to the service personnel, or are used in whole or in part to pay their wages, the charges are included in the rent for the room subject to tax.
(1) Background. G.L. c. 64G, § 3, imposes an excise on the transfer of occupancy of any room or rooms in a bed and breakfast establishment, hotel, lodging house, or motel in Massachusetts by an operator at the rate of 5.7 percent  of the total amount of rent for each such occupancy. No excise is imposed if the total amount of rent is less than fifteen dollars per day.
Generally, the "sales price" of a meal subject to tax includes labor or service costs, whether or not such charges are separately stated to the retail customer. G.L. c. 64H, § 1. Similarly, the "rent" subject to the rooms occupancy tax is "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…without any deduction therefrom whatsoever." G.L. c. 64G, § 1.
Notwithstanding these general rules, the Department has historically permitted meals tax vendors to exclude separately stated mandatory service charges from the sales price of the meal subject to tax if certain criteria were met. Under these circumstances, the Department treated the service charges as a tip or gratuity rather than the cost of labor, i.e., wages paid to the vendor's employees. See 830 CMR 64H.6.5(7)(a).
However, the Department had taken the position that similar service charges imposed in connection with renting a hotel room were subject to the room occupancy excise. See LR 83-88. This directive alters that position, adopting a policy for mandatory service charges in connection with the rental of hotel rooms that parallels the treatment of mandatory service charges in connection with the sale of meals. DD 99-6 supersedes and revokes LR 83-88.
(2) The Decision in Chatham Bars Inn. The taxpayer in Chatham Bars Inn, Inc. v. Commissioner of Revenue, A.T.B. Docket No. F225093 (April 29, 1998), charged a 17% service charge on prepared food and beverages served as meals at the Inn. Although the vendor separately accounted for the service charge revenue, the revenue was not distributed to employees "almost immediately" within the meaning of 830 CMR 64H.6.5(7)(a). Instead, the vendor held some of the fund back for distribution in the off-peak season so that employees would receive a more consistent flow of income despite the seasonal nature of the vendor's business. As a result of the vendor's formula for distributing the service charges, these funds were not always directly distributed to the employees who had performed services for the retail customer paying the charges.
The Commissioner's position in the Chatham Bars Inn case was that the vendor had not met the requirements of the Department's regulation and that the vendor's payments from the fund should therefore be characterized as wages rather than tips or gratuities. Therefore, tax was assessed tax on the full sales price of the meals including the mandatory service charges.
(3) The Department's Response.The Commissioner will continue to require a vendor or operator ("the employer") to distribute mandatory service charges, including those charged in connection with renting a room, promptly to its employees, notwithstanding the Chatham Bars Inn decision. Generally, mandatory service charges distributed with an employee's next regular pay following the receipt of the tip or gratuity by the employer will meet the requirement of being "almost immediately" distributed within the meaning of 830 CMR 64H.6.5(7)(a) and DD 99-6. The Department will, however, assess applicable sales or room occupancy tax on service charges if these charges are retained by the employer or held by the employer for distribution at some later time. In the opinion of the Commissioner, allowing the employer to control mandatory service charge receipts for substantial periods of time indicates that the charges represent a separately stated cost of labor that is included in the sales price or room rent subject to tax. In contrast, a waiter or hotel maid customarily receives a gratuity or tip at or near the time a service is performed.
Further, allowing the employer the discretion to hold service charges for long periods of time may put employees at risk in the event of the employer's financial difficulties and complicates both the employer's accounting and the Department's audit procedures. The purpose of the requirements in 830 CMR 64H.6.5(7)(a) is to permit an employer to collect and immediately pay over to employees gratuity or tip income that results from a mandatory service charge, not to allow an employer with a seasonal business to create a plan for compensating service employees in off-peak periods.
(1) Hotel A imposes a separately stated 15% service charge on rent for guest rooms. The hotel pays its employees a higher hourly rate than the prevailing wage paid by similar employers in the area and retains the service charge to offset this cost. The 15% service charge is subject to the room occupancy excise because it is being used to pay the wages of the hotel's employees.
(2) Hotel B imposes a separately stated 18% service charge on rent for guest rooms. The charge is segregated in a separate fund. The hotel distributes 15% of the service charge directly and immediately to the employees providing the services, and retains 3% to offset other expenses of the hotel's business. The 18% service charge is subject to the rooms occupancy tax because it is not entirely distributed to the employees actually providing the services.
(3) Hotel C imposes a separately stated 15% service charge and an additional separately stated 3% administrative charge on rent for guest rooms. The 15% charge is segregated in a separate fund for the employees and is distributed directly and immediately to the employees providing the services. The 15% charge is not subject to the rooms occupancy tax. The 3% administrative charge retained by the hotel is subject to tax.
/s/Frederick A. Laskey
Frederick A. Laskey
Commissioner of Revenue
May 5, 1999