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American Airlines Case in New York Highlights Problems with Hotel Taxes

4 min readBy: Joseph Bishop-Henchman

If you’ve stayed in a hotel room in the United States, you probably paid taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on it. Not just your share of the hotel’s property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. and income taxes (embedded in the price), and not even the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. imposed on the transaction. Virtually every city (or other local government unit) imposes a separate (higher) tax on hotel stays.

Today at the National Conference of State Legislators in New Orleans, one speaker referred to raising hotel taxes as a great way to raise new revenue “without taxing your own folks.” That’s certainly true in a narrow parochial sense. But when everyone imposes a huge tax on hotel rooms, we’re all taxing each other.

Take New York City for instance, according to an editorial in yesterday’s New York Sun:

A $200 a night hotel room in the city is already subject to an 8.375% city and state sales and use tax – $16.75. There’s a $1.50 a room tax on top of that to pay for the “Javits Center Expansion,” which has not happened and doesn’t have much prospect of happening. Add in the current 5% tax and the $2 flat fee and it brings the total current tax on a $200-a-night Manhattan hotel room to $30.25.

That’s over 15 percent! Even though this tax is grossly disproportionate to the tax on other transactions (in New York’s case, nearly twice as much), the people paying it are not residents so they can’t vote the bums out of office. Indeed, hotel taxes can often be imposed by hazy unelected entities that dedicate the money to pet projects that probably otherwise wouldn’t survive legislative scrutiny and weighing of competing uses for scarce taxpayer dollars.

States often make this tax exporting to out-of-staters explicit by exempting residents from paying hotel taxes. In Mississippi, for instance, state legislators recently raised the hotel tax in Jackson, but exempted stays longer than 30 days (state legislators often rent hotels for the 90-120 day legislative sessions).

Besides the artificiality of the line-drawing (why are stays of 29 days less valuable than stays of 31?), it opens up a loophole to avoid the tax, as American Airlines recently did in New York City:

A body that decides city tax issues, the Tax Appeals Tribunal, ruled earlier this summer that American Airlines did not have to pay more than $200,000 in hotel taxes because of its permanent resident status, meaning it keeps rooms at a hotel for 180 or more consecutive days.[…]

“If a person rented one room at the Waldorf-Astoria for six months, and then invited 150 guests to the hotel for a wedding party, he wouldn’t have to pay hotel taxes on any of their rooms,” an official involved with the case, who requested anonymity because it is ongoing, said. “I think it leads to an unreasonable result.”

Basically, American rented a bunch of rooms (the number varied by month), but because it had at least one room for 180 days, it becomes exempt from paying hotel tax on all the rooms. This strange result occurred for two reasons. First, there was bad draftsmanship on the part of the city-essentially if you rent one hotel room for 180 days, you (as a person, or corporate person) are then exempt for any other hotel rooms you rent for the rest of the year. That may not have been the intent of the law’s drafters, but it’s how they wrote it.

Second, and more importantly, the city has decided that some hotel stays should be subject to a punitive tax, while other hotel stays should be tax-free. Instead of treating like transactions alike, and taxing them as the same activity, New York and other localities try to shift tax burdens to out-of-staters and create exploitable exceptions for in-staters:

Mr. Henchman said the law is part of a larger trend by cities and states to broaden their tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. by redefining the term “resident,” and is not sound tax policy. “States should tax residents and try not to tax nonresidents,” and the permanent resident clause in the hotel tax deliberately attempts to do the opposite, he said.

Advice that will probably go unheeded. Unfortunately, New York may think unimaginatively and just close this loophole, restricting American Airlines to being exempt only on those rooms it continuously occupied for 180 days. New York would do better to tax all hotel rooms at the same rate, no matter who is staying in them. Or even junk the tax altogether:

The outcome seems unfair – why should the parents of Columbia students in town for their children’s graduation, or the relatives of cancer patients being treated at Memorial Sloan-Kettering, or parents visiting from out of town, have to pay the hotel tax, while big companies like American can be exempt from all their hotel taxes merely by booking one room for 180 nights a year? The instinct of lawmakers, Mr. Rowe reports, is to change the law so that the companies would have to keep paying the tax. Here is a better idea: why not get rid of the bed tax of $2 plus 5% altogether, for tourists, relatives of New Yorkers, and American Airlines pilots alike?[…] Let the corporate tax lawyers’ win be a victory for everyone checking in for a night in New York.