After a lengthy battle, the Arizona Supreme Court held that a Marriott-branded hotel in Arizona owned by Dove Mountain Hotelco LLC (Dove Mountain) is liable for tax paid on rooms booked through the Marriott customer loyalty program. The complimentary rooms at issue were booked using loyalty points accumulated by customers through Marriott’s reward program.
“... a Member’s stay at Dove Mountain pursuant to the
Rewards Program is a sale.”
Background
Marriott owned Dove Mountain participates in the Marriott Reward Program, which is operated and administered by Marriott. As part of the program, customers earn and accumulate “Marriott Points,” which can be exchanged for complimentary stays at any participating Marriott hotel. When a customer redeems points for a complimentary stay, Marriott issues a reimbursement payment to the hotel.
In 2016, Dove Mountain requested a refund of over $162,000 it paid of transaction privilege tax (TPT) from 2012- 2016 on rooms booked through the Marriott rewards program. Although similar to sales tax, Arizona’s transaction privilege tax is “understood as ‘a tax on business’s gross receipts’ and ‘not a sales tax.’”
In its claim for refund, Dove Mountain presented several arguments. First, the hotel argued that no TPT was due because customers did not pay money for the rooms. Instead, customers redeemed points in exchange for the listed price of the rooms. Further, Dove Mountain argued that the purchase of the complimentary stays was included in the original hotel price so that the payments amounted to double taxation because the rewards points used by customers to book rooms had already been taxed during their initial transaction. The Arizona Department of Revenue (Department) denied the request and a long legal dispute began.
Analysis
Dove Mountain argued that taxing the revenue from loyalty rewards essentially resulted in double taxation, stating that “the underlying free stays were mere redemptions of reward points from prior transactions on which tax was previously paid.” However, the Arizona Court of Appeals held that reimbursements are within the statutory definition of gross receipts and gross income in Arizona, and thereby subject to TPT. The appellate court’s dissenting justices argued that the money reimbursed to Dove Mountain by Marriott Rewards was similar to “a disbursement of post-tax reserves.”
Ultimately, the Arizona Supreme Court agreed with the judgement against Dove Mountain noting that unlike a bank distributing “post-tax reserves,” no hotel in the Marriott Rewards Program has an account or account balance. The distribution of funds is solely based on the “reasonable discretion” of Marriott Rewards.
The state Supreme Court further highlighted that the rewards program involves numerous hotels that remit payments to Marriott Rewards, so it is not guaranteed that points-earning transactions at Dove Mountain will necessarily lead to complimentary stays at the same hotel. Thus, the customer might not have paid TPT at the time of the original points-earning activity.
comparison
Referencing the Arizona Supreme Court’s 1960 opinion in State Tax Commission v. Consumers Market Inc. to support its argument, Dove Mountain noted that the Court ruled trading stamps issued by a supermarket chain, which were redeemable at the same store, did not represent an additional transaction subject to tax.
Disagreeing, the Supreme Court noted that the trading stamps in Consumers Market could be directly traced to gross receipts from sales where the stamps were used. The same could not be said for the Marriott rewards program, where reimbursements for room rentals could not be directly traced back to specific points-earning transactions.
Dove Mountain also argued that the reimbursements from Marriott Rewards should not be considered taxable revenue but rather a post-tax savings held by Marriott Rewards. Again siding with the Department, the Court stated that once the hotel remitted funds to Marriott Rewards, the money was no longer its property and it was not specifically held for its benefit.
Takeaway
Arizona imposes a transaction privilege tax similar to a sales tax. However, this tax is more all-encompassing in that it is actually a tax on vendors for the “privilege of doing business” in its state. As such, your tax responsibilities with Arizona will likely differ than those with other states.
Understanding the nuances of each state’s laws is imperative for each business’ successful tax compliance. For assistance in determining your Indirect Tax obligations, contact us today.