Know your lodging tax exemptions: government agencies

For short-term vacation rental owners, part of getting lodging taxes right is knowing when your guests are exempt from lodging taxes and not required to pay them. The rules on who is exempt from lodging taxes vary from jurisdiction to jurisdiction, but one of the most common exemptions is for government agencies.

There are all kinds of rules around these kinds of exemptions. In most states, federal government agencies are exempt from state taxes on lodging (with certain conditions), but other state or local government agencies may be exempt as well. Every state and locality has different exemption rules, so check your local jurisdictions.

In New York State, for example, federal government agencies and “any state agencies, instrumentalities, public corporations, or political subdivisions,” including school districts, are exempt from sales taxes on lodging, although this does not include “locally imposed and administered hotel occupancy taxes, also known as bed taxes.” However, government agencies from other states are not exempt from these taxes in New York.

While different government agencies are exempt from lodging taxes in different places, all jurisdictions require certain protocols to be followed in order for government agencies to get exemptions. A common requirement is proof of government affiliation, such as government identification or authorization of travel from the agency. The stay must also be related to government business.

In many jurisdictions, government agencies will only receive a tax exemption when the lodging is paid for directly by the agency. For example, in Connecticut, exemptions are granted to qualifying government agencies under certain conditions:

• The host must directly charge the agency.
• The agency must directly pay the host with a check drawn on its own account or with a credit card issued in its own name.
• The exempt agency must not be reimbursed for payment of the lodging by those consuming the lodging.

In addition, the host must be presented with an exemption certification form pre-approved by the Connecticut Department of Revenue Services, and the lodging must be paid for before the exemption certificate expires. Exemption certificates are also required in many other states to qualify for lodging tax exemptions.

If a federal agency pays for lodging in Connecticut with certain kinds of government-affiliated GSA SmartPay cards that are charged directly to the federal government, an exemption certificate is not required. Each state has its own rules about exemptions involving lodging paid for with GSA SmartPay cards.

Not all jurisdictions require lodging to be paid directly by the government agency in order to qualify for exemption. New York State, for example, offers state lodging tax exemptions for government employees, even if they pay for the lodging with their personal funds, as long as they fill out and sign an exemption form. Users who pay directly with government vouchers or credit cards do not have to submit the exemption certificate.

Vacation rental owners also need to know the rules for keeping records of tax-exempt transactions. They’ll need to be included on your lodging tax return, and you’ll probably be required to keep proof of exemption certificates and other documents for a certain length of time. In Connecticut, for example, the host is required to keep records of these kinds of exempt transactions for at least six years.

It’s important to become familiar with the rules that apply to your rental property, not only state regulations, but local ones as well. That way, you can be confident you’re in compliance when it comes to exempting lodging taxes for government guests.