The Tax Man Cometh: How HIGHER Tax Rates Affect Hotel Performance

June 28, 2011

Feature Tax1By Lisa Lance

The spring 2011 issue of MM&E featured an article about the impact an increase in hotel taxes can have on hotel business and local economies. This article will further explore how taxes affect hotel performance.

In fall 2010, three municipalities in St. Louis and St. Charles counties proposed measures on the November ballot to increase hotel taxes, and all were defeated. In an official statement, Vicki Boyer, executive director of the St. Louis Area Hotel Association, wrote: “The St. Louis Area Hotel Association opposes unwarranted taxation. Hotels are always interested in working with cities on projects and initiatives they believe beneficial to the city and its residents, but in last year’s case where Clayton, Richmond Heights and St. Peters proposed measures to increase hotel taxes, there was no discussion or outreach by the cities before their hotel tax proposal received city government approval. The St. Louis Area Hotel Association will continue to monitor this type of legislative activity, and regulatory measures at the local and state level.”

Tom Lyons is vice president of sales and marketing for Lodging Hospitality Management (LHM), which has 15 hotels in the St. Louis area, including the Hilton St. Louis at the Ballpark, Hilton St. Louis Airport, Sheraton Westport Plaza, Sheraton Westport Lakeside Chalet, the Seven Gables Inn
and the Cheshire Inn, which is scheduled to reopen in July 2011. Lyons said his team worked on defending Richmond Heights’ existing tax rate last year, and the outcome of the election influenced the company’s decision to purchase the Cheshire Inn.

Lyons said he gets a lot of questions from meeting planners, especially those from other cities, asking why rates in certain municipalities are higher. “If the tax rates continue to go up, we’re at a competitive disadvantage because meeting planners do look at that,” he said.

Tim Drury, president of Drury Development Corp., which owns some Drury Hotels, said his company had an issue with a hotel in St. Peters. “We had several cancellations from sports teams and other customers when they found out the tax was more than 17 percent,” he said. “Customers will notice the tax rate, and if it is higher than other hotels in the market you will lose business.”

Joe Franey, an accountant with Franey and Associates in St. Louis, has been representing clients in matters regarding state and local taxes for more than 20 years. “It [the tax increase] does filter through the whole economy in a region if the tax burden is higher in a municipality as little as 10 miles down the road,” he said.

Property Taxes

In addition to hotel tax rates, property taxes also can have an impact on the hotel industry.

Steven May, a property tax attorney in St. Louis, explained that while hotel taxes are billed to guests as a charge added to the room rate, property taxes are a fixed cost for the owner. “The owner may need to charge more per room to afford to pay his taxes at the end of the year, but it is not an item charged directly to the guest,” he said. “At least with hotel taxes and sales taxes, the operator can show that he or she is not the recipient of the tax paid by the guest. With an increase in property taxes, the owner may have to charge more per room to account for the increase in his annual property taxes.” And hotel taxes may vary market to market, but property taxes can vary from property to property.

May began practicing law in 1989 as a trial lawyer. Since 2001, his practice has concentrated on real estate. He has been a licensed real estate broker since 2002 and turned his focus to hotel transactions about seven years ago. “As I came to understand the economics of hotel operations, I noticed that in many cases, the burden of property taxes is disproportionate to the value of the real estate portion of the hotel,” he said. “Often, local assessors do not understand the true market value of a hotel. They apply a value per room over the entire market without taking into account specific characteristics of an individual property.”

Franey agreed. “Many localities are trying to pass lodging taxes on top of local sales taxes,” he said. “Real estate taxes— the real personal property taxes—are not decreasing as much as they should.”

“Since property taxes are an expense item that does not increase occupancy, daily rate or guest satisfaction, the property tax increase is a drain upon the bottom line,” said May.

Drury expressed a similar feeling regarding hotel tax rates. “In general, taxes on any products or services are going to be detrimental to your business,” he said. “You either eat it or pass it on to your customers.”

What Can Hotel Owners Do?

May said there are two factors in the amount of property taxes paid by a property owner: the assessor’s determination of the appraised value of the property, and the levy rate. The levy rate is multiplied by the assessed value (32 percent of appraised value) to arrive at the tax. “We cannot fight the levy,” he said. “Levy rates have been trending upward, therefore it is imperative that hotel owners not get hit double by an appraised value that is higher than actual value and a higher levy rate.”

May said property taxes have increased, and from 2005 to 2009 this was mostly due to increased appraisals by assessors. In 2010, levy rates increased. “I don’t expect local assessors to voluntarily reduce most values,” he said. “I expect that most hotel properties owners will find that their 2011/2012 assessor appraised values are the same as their 2009/2010 values. However, most property values have decreased and their appraised value for tax assessment purposes should also decrease.”

According to the Missouri State Tax Commission, real property is assessed January 1 of odd-numbered years, and that value is used the following even-numbered year. An owner must be notified only if there is any increase in assessment value of a property. Owners can appeal property tax assessments in any odd numbered year. More information about property tax assessments, including forms to appeal an assessment, can be found on the Missouri State Tax Commission Web site (www.stc.mo.gov).

When the town of Sullivan included a proposed four percent lodging tax increase on its ballot in April 2009, one local hotel decided to fight it by educating residents. Christie Krueger, general manager of the Baymont Inn and Suites in Sullivan, put an ad in the local papers asking residents not to vote for the tax increase. She also wrote a letter to the editor of the Sullivan Independent News. The letter was addressed to the citizens of Sullivan, and it included a list of tax rates in nearby towns. She asked readers to think of the impact on local workers and businesses if travelers chose to drive farther down the road to a town with a lower tax rate. Fewer customers might result in a reduction in hotel staff hours, as well as lost business to restaurants and gas stations. “It’s not just transient guests,” she said in a phone interview. “It also affects the community from a business standpoint.”

On the day of the election, Krueger said she stood outside a polling place all day to talk to people about the issue on their way to the ballot box. The tax increase failed to pass.

The Bottom Line

Are hotels in cities with higher tax rates offering more services to customers?

Drury hotels provide free hot breakfasts, evening beverages and snacks, wireless Internet and long distance at all their locations. “What we provide in one hotel, we provide in all hotels,” Drury said.

Lyons said he answers questions about higher tax rates by talking about what the taxes pay for. “St. Louis offers a variety of options for free,” he said, pointing to the Saint Louis Zoo, the Saint Louis Art Museum and the Missouri History Museum.

Both hotel taxes and property taxes have an effect on the final room rates of any hotel, and meeting planners should take this into account when researching venues. “All the tax to the hotel gets passed through to the consumer,”said Franey. “They have to get passed through to the consumer or the hotel is out of business.” MM&E

Feature HotelTaxChart2

 

(Lisa Lance is a contributor from Towson, Md.)

Every effort has been made to ensure the accuracy of this information, and it is intended for general comparison. Some rounding up may have occurred in the calculations. Consult your tax or legal advisor before acting on any information provided in this chart. Tax rates were compiled from Missouri tax rate tables, direct marketing organizations (DMOs) and individual hotel operators from August 2010 to February 2011. Please note that in the spring 2011 issue of Missouri Meetings & Events, this chart ran incorrectly showing the total tax for Hermann as 3.000. The total tax rate for Hermann is 11.100, as seen above.

About the author

The MEET® Family of Publications

The MEET® Family of Publications produces regional and national publications that keep corporate, association, medical, education, independent, and religious meeting and event planners informed about relevant industry suppliers, news, tech innovations, and resources that impact and influence how and where they plan their upcoming company function(s).