Does a utility company have to charge sales tax on utilities it sells to hotels, motels, and other transient accommodation establishments?

Subject

Taxability of Utilities Purchased by a Hotel

Plain-English summary

The Missouri Department of Revenue ruled that Applicant, a utility company, should NOT charge sales tax to hotels, motels, or other transient accommodation establishments on utilities used to heat, cool, or provide water or power to guests' accommodations -- but Applicant should continue charging sales tax on utilities used in those establishments' common areas.

Before 2022, this wasn't the case: sales of utilities to hotels, motels, and similar establishments were subject to sales tax, as the Department had explained to Applicant in an April 29, 2021 letter following the Missouri Supreme Court's decision in D.I. Supply I LLC v. Director of Revenue, 601 S.W.3d 195 (Mo. banc 2020). That decision meant hotels could no longer use exemption certificates to buy utilities tax-free, and Applicant had stopped accepting those certificates.

That changed with the 2022 State Legislative Session. Senate Bill 745 added a new exclusion to the list found in Section 144.011.1, RSMo. Under Section 144.011.1(12), RSMo, the purchase by hotels, motels, or other transient accommodation establishments of electricity, water, and gas (natural or artificial) used to heat, cool, or provide water or power to guests' accommodations -- including sleeping rooms, meeting and banquet rooms, and any other customer space rented by guests -- is excluded from sales tax, so long as the utility charge is included in the charge for the accommodations. The statute even entitles anyone who was required to remit sales tax on such purchases before August 28, 2022 to a refund of that tax.

Because this is now a statutory exclusion rather than an exemption, Applicant no longer needs to keep exemption certificates on file to support not charging the tax. The exclusion doesn't cover everything, though -- utilities used in common areas of a hotel or motel remain taxable. The Department also confirmed that Applicant may rely in good faith on utility studies that hotels, motels, or other transient accommodation establishments provide showing what percentage of their utilities go toward guest accommodations versus other uses.

What this means for you

Utility companies serving hotels, motels, and similar establishments

If you sell electricity, water, or gas to hotels, motels, or other transient accommodation establishments, stop charging sales tax on the portion of utilities used to heat, cool, or power guests' sleeping rooms, meeting and banquet rooms, or other rented guest space, as long as that utility cost is included in what the establishment charges its guests. You should still charge sales tax on utilities used in common areas (lobbies, hallways, back-of-house space, and similar areas not rented to a specific guest). You no longer need to collect or retain exemption certificates from these customers for the excluded utilities, since the exclusion now comes directly from the statute. You may accept, in good faith, a utility study from a hotel/motel customer that breaks down what share of utilities serves guest accommodations.

Hotels, motels, and transient accommodation establishments

This ruling confirms that, since August 28, 2022, utilities used to serve your guest rooms and other guest-rented spaces should not be taxed, and if you were charged sales tax on those utilities before that date, you may be entitled to a refund. Utilities used in your common areas remain taxable, so expect your utility provider to continue charging tax on that portion.

Accountants and tax professionals

When advising a utility company or hospitality client on this exclusion, confirm the utility charges being excluded are actually tied to guest accommodations (and included in the accommodation charge) rather than common areas, since the statute draws that line explicitly. Also flag the potential refund claim for sales tax remitted on qualifying utilities before August 28, 2022, and consider whether a utility study apportioning guest-area versus common-area usage would help support the split going forward.

Common questions

Q: Should Applicant charge sales tax on utilities sold to hotels and motels?
A: It depends on where the utilities are used. No tax should be charged on utilities used to heat, cool, or provide water or power to guests' accommodations (sleeping rooms, meeting and banquet rooms, and other guest-rented space) when that cost is included in the accommodation charge. Utilities used in common areas remain taxable.

Q: Why did this change?
A: Senate Bill 745, passed during the 2022 State Legislative Session, added this exclusion to the list in Section 144.011.1, RSMo, effective August 28, 2022. Before that, sales of these utilities were taxable, as the Department had explained following D.I. Supply I LLC v. Director of Revenue, 601 S.W.3d 195 (Mo. banc 2020).

Q: Do hotels need to give Applicant an exemption certificate to buy these utilities tax-free?
A: No. Because Senate Bill 745 made this a statutory exclusion from tax rather than an exemption, exemption certificates are no longer required to be retained by the seller.

Q: Can a hotel get a refund for sales tax paid on these utilities before the law changed?
A: Yes. Section 144.011.1(12), RSMo, states that any person required to remit sales tax on such purchases prior to August 28, 2022, is entitled to a refund of the tax remitted.

Q: How does Applicant figure out what percentage of utilities goes to guest accommodations versus common areas?
A: The Department said Applicant can accept, in good faith, utility studies presented by hotels, motels, or other transient accommodation establishments showing what percentage of utilities are used to heat, cool, or provide water or power to guests' accommodations.

Q: Can another utility company rely on this ruling for its own hotel customers?
A: Not automatically. This is a Missouri letter ruling, binding on the Department only with respect to the requesting Applicant, only for three years from its date, and only so long as the facts and underlying law remain unchanged. A different utility company should confirm its own facts match and consult a tax professional before relying on this result.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8221

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated October 20, 2022.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is a utility company that provides public services. On April 29, 2021, Applicant received a letter from the Department of Revenue stating that hotels may no longer purchase utilities exempt from sales tax as a result of the decision in D.I. Supply I LLC, v. Director of Revenue, 601 S.W.3d 195 (Mo. banc 2020). As a result, Applicant was notified that exemption certificates submitted by hotels relating to exempt utilities should no longer be accepted.

In August of 2022, Applicant received a letter from one of their customers explaining that a bill was passed during the 2022 State Legislative session, SB 745. The letter details that utilities used by guests in hotels, motels, or other transient accommodation establishments are not subject to sales tax.

ISSUE :

Is Applicant required to charge sales tax to hotels, motels, and other transient accommodation establishments for sales of utilities?

RESPONSE :

No, Applicant should not charge sales tax to hotels, motels, and other transient accommodation establishments for sales of utilities used to heat, cool, or provide water or power to the guests' accommodations of such establishments, including sleeping rooms, meeting and banquet rooms, and any other customer space rented by guests, and which are included in the charge made for such accommodations. However, Applicant should charge sales tax for sales of utilities used in common areas.

Prior to the passing of Senate Bill 745 during the 2022 State Legislative Session, sales of utilities to hotels, motels, and other transient accommodation establishments were subject to sales tax, as explained in D.I. Supply I v. Director of Revenue . With the passage of SB 745 in 2022, sales of these utilities were added to the list of exclusions from sales tax found in section 144.011.1, RSMo.

Section 144.011.1(12), RSMo, provides, in relevant part:

The purchase by persons operating hotels, motels, or other transient accommodation establishments of electricity, electrical current, water, and gas, whether natural or artificial, which are used to heat, cool, or provide water or power to the guests' accommodations of such establishments, including sleeping rooms, meeting and banquet rooms, and any other customer space rented by guests, and which are included in the charge made for such accommodations. Any person required to remit sales tax on such purchases prior to August 28, 2022, shall be entitled to a refund on such taxes remitted.

Applicant is no longer required to collect and remit sales tax on sales of utilities to hotels, motels, or other transient accommodation establishments, as long as the utilities are used to heat, cool, or provide water or power to the guests' accommodations of such establishments, including sleeping rooms, meeting and banquet rooms, and any other customer space rented by guests, and which are included in the charge made for such accommodations. The exclusion does not apply for utilities used in common areas, only in guest accommodations and guest-rented spaces, as explained in section 144.011.1(12), RSMo. Because Senate Bill 745 added sales of these utilities to the list of exclusions from tax, exemption certificates are no longer required to be retained by the seller.

Applicant can accept, in good faith, utilities studies presented by hotels, motels, or other transient accommodation establishments that show what percentage of utilities are used to heat, cool, or provide water or power to the guests' accommodations of such establishments, including sleeping rooms, meeting and banquet rooms, and any other customer space.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford