Source: Robin Roth, Senior Contracts Editor, Conferon, Inc.
E-Specs: November 3, 2003

If you’re billed for charges for attrition, cancellation, forfeited deposits, early departure fees, no-shows or late checkout fees ("penalty" charges); it is burdensome enough without another hit from added taxes. Some hotels attempt to tax such charges, but the tax laws are often vague and each state’s regulations are different. Cities may also have tax rulings in effect, where there is no state ruling.

Taxability can hinge on many factors but the most important appears to be the distinction between room revenue and damages or "penalties." It is important that attrition and cancellation charges are clearly indicated in your contract as being "liquidated", or "contractual damages", since if they are considered room revenue and coded by the hotel as such, they are much more readily taxable. Contracts normally stipulate that liquidated damages are to be calculated using unused rooms, but this does not mean that the rooms are being paid for.

Florida is one of the few states that has a clear tax regulation about "penalty" charges. That regulation clearly states that no tax is permitted on any of the above-mentioned "penalty" charges. It considers attrition and cancellation charges to be liquidated damages and as such are in the nature of a penalty (and therefore NOT taxable) as opposed to a charge for transient rentals. See Florida Technical Assistance Advisement 00A-015.

The confusion can create problems for groups trying to budget for their meetings. Since many tax regulations are unclear, the hotels themselves often make the decision about taxation. We recommend that you not pay any tax on "penalty" charges until the hotel can produce documentation that the tax applies to the specific facts and is required by law. If it appears that you must pay the tax, consider writing a separate check for the tax directly to the taxing body rather than to the hotel.

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