Were hotel charges to federal employees taxable when the employee paid personally and was later reimbursed by the government?

Plain-English summary

South Carolina Revenue Ruling 88-8 addressed whether hotel and motel charges to federal employees were taxable when the employee was billed directly and later reimbursed by the government. Some federal employees had been presenting a "Room Tax Exemption Certificate" to Charleston-area hotels, which then stopped remitting tax on those stays.

South Carolina taxes transient accommodations at a combined 7% (a 4% tax under Section 12-35-1120, an additional 1% under Section 12-35-515, and a 2% accommodations tax under Section 12-35-710). Two exemptions were at issue: Section 12-35-550(1), for sales the state is barred from taxing under federal law, and Section 12-35-550(42), for sales to the federal government. Exemptions are construed strictly against the taxpayer.

Applying federal intergovernmental-tax-immunity precedent — Alabama v. King & Boozer, the Maryland Court of Appeals decision in Comptroller of the Treasury v. World Inns, and Keystone Auto Leasing v. Norberg — the Commission focused on where the legal incidence of the tax falls. When a federal employee contracts for and pays for the room personally (by personal check or credit card) and is only later reimbursed, the legal incidence falls on the employee; the government is not a party to the rental, and the sale is to the employee. Those stays are subject to the 7% tax, and neither exemption applies. But when the government is billed directly, or the employee uses a government credit card or a government check so the government is billed, the rental is a sale to the federal government, exempt under Section 12-35-550(42).

Common questions

Q: Were federal-employee hotel stays automatically exempt? No. A room-tax exemption certificate did not by itself make a stay exempt.

Q: What was the deciding factor? Who actually bore the legal incidence of the tax — that is, who was the purchaser of the room.

Q: An employee paid personally and was reimbursed. Taxable? Yes. The sale was to the employee, so the 7% accommodations tax applied.

Q: When was a stay exempt? When the government was billed directly, or the employee used a government credit card or check, making the sale one to the federal government under § 12-35-550(42).

Citations and references

• S.C. Code Ann. §§ 12-35-1120, 12-35-515, 12-35-710 (7% total transient accommodations tax)
• S.C. Code Ann. § 12-35-550(1) and (42) (federal-law and sale-to-federal-government exemptions)
• Alabama v. King & Boozer, 314 U.S. 1; Comptroller of the Treasury v. World Inns, 528 A.2d 477 (Md. 1987); Keystone Auto Leasing v. Norberg, 486 A.2d 613 (R.I. 1985)
• Information Letter IL-88-11 (referenced in the ruling)

Subject

Hotel Accomodations for Federal Employees

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR88-8.pdf

Original ruling text

SC REVENUE RULING #88-8

SUBJECT:

Hotel Accomodations for Federal Employees
(Sales Tax)

EFFECTIVE DATE: June 1, 1988
SUPERSEDES:

All previous documents and any oral directives in conflict
herewith.

REFERENCE:

S.C. Code Ann. Section 12-35-1120 (supp. 1987)
S.C. Code Ann. Section 12-35-515 (Supp. 1987)
S.C. Code Ann. Section 12-35-710 (Supp. 1987)
S.C. Code Ann. Section 12-35-550(1) (1976)
S.C. Code Ann. Section 12-35-550(42) (Supp. 1987)

AUTHORITY:

S.C. Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of
how tax law is to be applied to a specific set of facts. A Revenue
Ruling is public information and remains a permanent document
until superseded by a Regulation or is rescinded by a subsequent
Revenue Ruling.

Question:
Are charges for hotel and motel accommodations to federal employees subject to taxation
when the employees are billed directly and reimbursed by the federal government?
Facts:
Certain federal employees have been presenting a "Room Tax Exemption Certificate" to
Charleston area hotels. Based upon this certificate, the hotels have not been remitting the
tax on the gross proceeds on such accommodations.
1

S.C. Code Section 12-35-1120 imposes a tax of 4 percent on the gross proceeds derived
from the rental or charges for any rooms, campground spaces, lodgings or
accommodations. Section 12-35-515 imposes an additional tax of 1 percent.
Code Section 12-35-710 ("Accommodations Tax") imposes a tax of 2 percent on the
gross proceeds from the rental of transient accommodations. Further, all provisions of the
sales tax law, except Section 12-35-520, are applicable to this section. Therefore, the total
tax rate imposed on the furnishing of accommodations to transients is 7 percent.
Code Section 12-35-550, subsections (1) and (42), exempt from the sales, use and
accommodations taxes:
(1) The gross proceeds of the sale of tangible personal property or the gross
receipts of any business which the state is prohibited from taxing under the
Constitution or laws of the United States of America or under the constitution of
this state.

(42) The gross proceeds of the sale of tangible personal property to the federal
government, not including gross proceeds subject to the tax under [Section] 12-351140 and [section] 12-35-1150 of the 1976 Code."
Discussion:
The courts have consistently held that exemptions must be strictly con- strued against the
exemption and in favor of the tax. Therefore, to fall within the exemption provided for at
12-35-550, subsections (1) and (42), the taxing of the sales must be prohibited "under the
Constitution or laws of the United States" or the sales must be "to the Federal
Government."
The U.S. Supreme Court, in Alabama v. King & Boozer, 314 U.S. 1, 62 S.Ct. 43, ruled,
"We think, as the Supreme Court of Alabama held, that the legal effect of the
transaction which we have detailed was to obligate the contractors to pay for the
lumber. The lumber was sold and delivered on the orders of the contractors which
stipulated that the government should not be bound to pay for it. It was in fact paid
for by the contractors who were reimbursed by the government pursuant to their
contract with it." (Emphasis added.)
It appears that the facts in this instance are analogous to Aabama v. King & Boozer. The
federal employees are billed directly; they pay with a personal check or credit card; and,
at some later date, are reimbursed by the government.
2

A recent Maryland Court of Appeals case, Comptroller of the Treasury v. World Inns,
Inc. t/a Best Western Motels, 528 A.2d 477 (1987) is more on point. The case involved
the same issue, taxing accommodations provided to federal and state government
employees. The court held that:
It is clear from United States Supreme Court precedent that constitutional
intergovernmental tax immunity is only properly granted when the legal
incidences of a state tax falls directly on the United States. It is also clear that
when a state statute requires a seller to collect a sales tax from a purchaser, the
legal incidence of that tax falls on the purchaser. The Maryland Retail 4/87 Sales
Tax Act defines "purchasers" as "any person...to whom services are rendered."
[Section] 324(c). The act requires the "vendor to collect from the purchaser" a 5
percent sales tax on the rental of any hotel room. [Sections] 325, 324(f)(5). In the
case at bar, the federal employees were the "purchasers" within the meaning of the
act. They contracted directly with World Inns for the rental of rooms and paid for
the rooms and with their personal funds. The federal government was in no sense a
party to the room rental arrangement. Consequently, the legal incidence of the tax
fell on the employees and not on the United States. (emphasis added)
The Maryland statute exempts from the sales tax "sales to the state of Maryland or any of
its political subdivisions." With respect to accommodations provided to state government
employees the court held that "[t]he `sale' of the room was to the state employee, and not
to the state of Maryland.... Therefore, the exemption does not apply."
In addition, the Maryland court cited the case of Keystone Auto Leasing, Inc. v. Norberg,
486 A.2d 613 (R.I. 1985). In that case the question presented was whether a federal
employee who pays for the rental of an automobile with personal funds, while on
government business, may be required to pay the state's sales tax. The Rhode Island
Supreme Court concluded that when federal employees lease automobiles and pay for
them with cash or personal credit cards, the legal incidence of the tax does not fall on the
federal government. Like Maryland, Rhode Island's sales tax is a vendee tax which
requires the seller to collect the tax from the purchaser.
In summary,the court held that the legal incidence of the tax did not fall upon the federal
or state government and that the transaction was between the hotel and the government
employee. The federal and state governments were not "a party to the room rental
arrangement[s]."

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Conclusion:
The transactions in question are between the hotel and the federal employee. The legal
incidence of the tax does not fall upon the federal government whether the sales tax is a
vendor or vendee tax. The exemption found in Section 12-35-550(1) therefore does not
apply. In addition, since the federal government is not a party to the transactions, the
exemption found in Section 12-35-550(42) is not applicable. The transactions in question
are therefore subject to the 7 percent tax on transient accommodations.
However, where the federal government is billed directly or the employee uses a
government credit card whereby the government is subsequently billed or the employee
uses a government check, the rental constitutes a sale to the federal government, which
would be exempt pursuant to Code Section 12-35-550(42). (June 1, 1988)
NOTE: See Information Letter IL-88-11.

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/John M. Rucker
John M. Rucker, Commissioner

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner
Columbia, South Carolina
, 1988
June 1

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