When a marketplace law applies to ‘lodging’ but not ‘hotels’ – Wacky Tax Wednesday

Marketplace facilitator laws require marketplace facilitators to collect, remit, and report tax on third-party sales. Marketplace facilitator laws always pertain to products, and increasingly, states are holding marketplaces liable for the tax due on other sales, such as accommodations or restaurant meals. As more states expand or clarify their marketplace facilitator laws, it could become more challenging for marketplaces facilitators and sellers to keep track of which taxes they’re responsible for.

For example, although Kansas requires marketplace facilitators to collect and remit tax on third-party lodging, marketplaces are not responsible for the tax due on facilitated sales of hotel accommodations.

It seems an odd place to draw a line in the sand, but Kansas isn’t alone.

Kansas Senate Bill 50 (2021) established an economic nexus threshold for remote sellers and a marketplace facilitator tax collection obligation, effective July 1, 2021.

Section 1 of the bill specifies that “marketplace facilitator” includes “a person that provides a platform through which unaffiliated third parties offer to rent to and collect consideration from occupants for rental, for a period of less than 29 consecutive days, of rooms, lodgings, accommodations, homes, apartments, cabins or residential dwelling units that are intended to be used as a room, lodging or sleeping accommodation by one person or by two or more persons maintaining a common household, to the exclusion of all others.”

You might think “rooms, lodgings, accommodations” would include hotels and motels — but no. Section 1 continues: “A person is not a marketplace facilitator with respect to the sale or charges for rooms, lodgings or sleeping accommodations, if such rooms, lodgings or sleeping accommodations are provided by a hotel.” (Emphasis added.)

Kansas Department of Revenue Notice 21-24 (January 7, 2022) drives the point home. A person or entity that facilitates the sale, rental, or charges for hotel rooms “is not a marketplace facilitator” (emphasis theirs) and therefore “will not collect, report, and remit sales or transient guest tax on behalf of the hotel (seller).” The hotel (seller) must collect, report, and remit all applicable taxes itself.

By contrast, “a person or entity that facilitates the sale, rental, or charges for rooms that are not hotel rooms is a marketplace facilitator” (emphasis theirs) and is therefore responsible for collecting, remitting, and reporting the tax due on sales, rentals, or charges for “rooms that are not hotel rooms.” Such marketplaces are also responsible for collecting and remitting any tax due on additional charges, such as pet fees or no-show charges.

Thus, Airbnb, Vrbo, and similar businesses are marketplace facilitators responsible for tax in Kansas, but Expedia, Hotels.com, and similar businesses are not.

Note: Unless they have a physical presence in the state, marketplace facilitators are liable for applicable Kansas taxes only if their sales into Kansas meet or exceed the Sunflower State’s $100,000 economic nexus threshold. Marketplace facilitators must include both direct and third-party sales when calculating the threshold and start collecting and remitting tax “as soon as they cross the threshold” (though they have up to 30 days after crossing the threshold to register).

Though remote marketplaces selling beneath the $100,000 threshold aren’t required to collect and remit applicable taxes in Kansas, the Department of Revenue encourages them to do so. Additional information can be found in Notice 21-24 and Notice 21-14.  

West Virginia’s marketplace requirement may be a bit broader than the one in Kansas due to the enactment of Senate Bill 270 (2021) — but just a bit.

Starting January 1, 2022, marketplace facilitators meeting West Virginia’s economic nexus threshold must collect and remit hotel occupancy tax on behalf of hotels or hotel operators. The term “hotel” includes, but is not limited to, “boarding houses, hotels, motels, inns, courts, condominiums, lodges, cabins, and tourist homes,” as well as “state, county, and city parks offering accommodations.”

The inclusion of “tourist homes” suggests the collection requirement extends to accommodations such as those facilitated by Airbnb and Vrbo. However, “hotel” doesn’t include “any facility providing fewer than three rooms in private homes, not exceeding a total of 10 days in a calendar year, not any tent, trailer, or camper campsites.” Furthermore, “hotel room” doesn’t include sleeping accommodations rented for 30 days or longer or on a month-to-month basis, nor does the term include charges for hotel banquet or meeting rooms.

This requirement complicates compliance for facilitators because, once collected, hotel occupancy tax must be remitted to counties and municipalities rather than to the state tax authority. The West Virginia State Tax Department doesn’t administer hotel occupancy tax.

According to Oliver Hoare, general manager of lodging at Avalara, applying marketplace facilitator collecting requirements to lodging is surprisingly common in some states. “When a jurisdiction covers a marketplace law, there is regularly a parallel bill that is specific to lodging.”

For example:

Georgia

Georgia’s marketplace facilitator law required marketplaces to collect applicable state sales and use tax on behalf of hotels and short-term rental hosts as of April 1, 2020, and applicable state hotel-motel fees as of July 1, 2021.

House Bill 317 (effective July 1, 2021) revised the definition of “innkeeper” to include marketplace facilitators and also extended the hotel-motel fee to short-term rentals. Prior to July 1, 2021, the state hotel-motel fee applied only to a building with five or more hotel rooms under common ownership.

Applicable local accommodations excise taxes generally remain the responsibility of guest rental owners, not the marketplace. Additional details can be found in Department of Revenue FET-2021-01 and SUT-2018-02.

Indiana

Indiana has required marketplace facilitators to collect and remit applicable taxes on short-term rentals and other accommodations since July 1, 2019. Marketplaces are liable for applicable county innkeeper’s taxes and food and beverage taxes in addition to applicable sales and use taxes. Additional information is available at the Indiana Department of Revenue.

Virginia

Under Virginia’s marketplace facilitator law, “sale at retail” specifically includes “the sale or charges for any room or rooms, lodgings, or accommodations furnished to transients for less than 90 continuous days by any hotel, motel, inn, tourist camp, tourist cabin, camping grounds, club, or any other place in which rooms, lodging, space, or accommodations are regularly furnished to transients for a consideration.”

The Virginia Department ofTaxation reminds that “accommodations provider” includes any person or business “providing similar short-term lodgings” as hotels, motels, inns, etc. Accommodations intermediaries (i.e., businesses that handle reservations for the accommodations provider) are responsible for collecting and remitting applicable taxes.

New Jersey

States where marketplace facilitator laws don’t address accommodations will likely introduce legislation in the coming year or two. To wit, New Jersey Senate Bill 505 seeks to extend the Garden State’s marketplace facilitator collection requirement to accommodation “accepted through a means provided by the marketplace or travel agency, regardless of whether payment for the accommodation is made through a means provided by the marketplace or travel agency.” Current law holds that payment must be made through a marketplace or travel agency for the marketplace facilitator provision to apply. If signed by Governor Phil Murphy, SB 505 will become effective immediately.

New York

Governor Kathy Hochul would like to extend the sales tax to short-term rentals. Under her budget proposal, any vacation rental marketplace provider that facilitates the occupancy of a vacation rental would be responsible for collecting and remitting applicable state and local sales taxes, plus the New York City hotel unit fee.

New marketplace regulation notwithstanding, explains Hoare, this is only half of the story because large marketplaces in the lodging space typically have voluntary compliance agreements (VCAs). Pam Knudsen, senior director of compliance services at Avalara, adds that with VCAs in place, marketplace laws likely have no impact on lodging marketplaces.

Yet Scott Peterson, vice president of government relations at Avalara, suspects most states would believe changing their laws would overrule a VCA. In other words, a legislative change could potentially undermine a VCA specifying the marketplace seller is liable for the tax.

Avalara for Hospitality helps lodging businesses manage tax compliance in the face of changing regulations and requirements.

Cover photo by Canva