Source: Robin Roth, Senior Contracts Editor, Conferon, Inc.
E-Specs: June 3, 2002

A number of groups that have not had to deal with attrition charges in the past are finding themselves forced to pay up these days. Oftentimes groups are further requested to pay occupancy and sales tax for rooms that were not occupied. A solution that we recommend is to agree to pay the tax only after the hotel provides documentation that contract or liquidated damages are taxable as required by state and/or local law. The good news is that we have not found many hotels that have been able to provide the necessary documentation.

This still leaves open the question of whether charges such as attrition, cancellation, and F&B performance fees that are defined as liquidated damages are legally taxable. Does the taxability question hinge on whether the charges are defined as liquidated damages, or are all "contract damages" or "fines" such as retained deposits for individual room cancellations, early departure fees, and late check-out fees lumped together with defined liquidated damages and treated the same tax-wise? What kinds of taxes apply? Does taxability depend upon how the hotel credits the revenue? If so, how much discretion does an individual hotel have in the accounting practices that determine how the revenue is credited? These are some of the myriad of questions that arise when we scratch the surface of this issue.

There are not many firm answers. The most obvious answer is that it depends upon the applicable state and/or local law but that is often difficult to determine. The states’ tax codes can be researched on the Internet. One state, Florida, has ruled specifically that liquidated damages and other charges like forfeited room deposits that are "in the nature of a penalty and not a charge for transient rentals" are not subject to sales or use tax. (See Florida Dept. of Revenue Technical Assistance Advisement 00A-015). These charges do not have to be defined as liquidated damages in the contract to be tax-free. Rarely are other states’ rulings as clear as this one. This is a vague and confusing area of tax law and we can only hope that the future will bring more clarification of the relevant tax regulations.

(Note: This information is not intended to be "legal advice." A qualified attorney should be consulted to review all contract issues.)