LONG-TERM LODGING EXEMPTION

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LONG-TERM LODGING

EXEMPTION

EVALUATION SUMMARY

EPTEMBER 2018

2018-TE8

THIS EVALUATION IS INCLUDED IN COMPILATION REPORT SEPTEMBER 2018

YEAR ENACTED 1959

REPEAL/EXPIRATION DATE None

REVENUE IMPACT $12.3 million (CALENDAR YEAR 2017)

NUMBER OF TAXPAYERS Could not determine

AVERAGE TAXPAYER BENEFIT Could not determine

IS IT MEETING ITS PURPOSE? Yes, but it may not be applied

consistently

WHAT DOES THIS TAX

EXPENDITURE DO?

The Long-

Term Lodging Exemption

excludes

tax stays of 30 days or more at

lodgings, such as hotels, home shares, and

campgrounds from state sales.

WHAT DID THE EVALUATION FIND?

We determined that this exemption is likely

accomplishing its purpose for a substantial

portion of long-term stays; however, some

lodging providers may not consistently

apply the exemption.

WHAT POLICY CONSIDERATIONS

DID THE EVALUATION IDENTIFY?

The General Assembly could consider

amending statute to clarify the exemption’s

eligibility requirements and clarify its

applicability to third-party payers.

WHAT IS THE PURPOSE OF THIS

TAX EXPENDITURE?

Statute does not explicitly

state the

purpose of this exemption. Because it

was created at the same time that the

State established a sales tax on lodgings,

we inferred that the purpose was to

establish

the maximum length of stay

for which lodging sales would be subject

to the tax and ensure that individuals

who purchase long-

term housing from

lodging providers, such as hotels or

home s

hares, are treated the same as

individuals who purchase long-term

housing through traditional apartment

or home lease agreements since these

types of agreements are also not subject

to state sales tax.

TAX EXPENDITURES REPORT

LONG-TERM LODGING

EXEMPTION

EVALUATION RESULTS

WHAT IS THE TAX EXPENDITURE?

In 1959, the General Assembly established a sales tax on temporary

lodgings and created the Long-Term Lodging Exemption at the same

time. The exemption has remained substantially unchanged since that

time. According to Section 39-26-104(1)(f), C.R.S., sales of lodgings that

are typically used for short-term stays, such as hotels, home shares,

guesthouses, and trailer parks, are generally subject to state sales tax.

However, under the Long-Term Lodging Exemption [Section 39-26-

704(3), C.R.S.], sales of lodgings for stays of 30 consecutive days or more

are tax exempt. In addition, eligible lodging purchases are exempt from

local sales taxes, including lodging taxes, in cities and counties that have

their local sales taxes collected by the State on their behalf. This is because

statute [Section 29-2-105(1)(d)(I), C.R.S.] mandates that these local

governments apply most of the State’s sales tax exemptions, including the

Long-Term Lodging Exemption. Home-rule cities established under

Article XX, Section 6 of the Colorado Constitution that collect their own

sales taxes have the authority to set their own tax policies independent

from the State and are not required to exempt long-term lodging from

their local sales tax, although many choose to do so.

For a sale to be eligible for the exemption, there must be a written

agreement for occupancy between the purchaser and lodging provider,

which can include a receipt or a hotel registration, and the same payee

must pay for the duration of the stay, which must be at least 30

consecutive days. If the price of the stay is not paid in full up-front, or

is paid up-front but is refundable, Department of Revenue guidance

indicates that lodging providers can either not collect the sales tax, in

which case they would be liable for the sales tax if the customer does

not complete at least a 30-day stay, or collect the tax and then refund it

LONG-TERM LODGING EXEMPTION

after the customer has stayed at least 30 days. In some cases, the

customer may have to apply to the Department of Revenue for a refund

if they stay for at least 30 days, but the lodging provider collects the

sales tax and does not refund it. Lodging providers must have a sales

tax license and report the value of the Long-Term Lodging Exemption

on the Department of Revenue’s Retail Sales Tax Return (Form DR

0100) using the “other exemptions” line of the form’s exemptions

schedule. This line aggregates several exemptions that do not have a

separate reporting line on the form.

WHO ARE THE INTENDED BENEFICIARIES OF THE TAX

EXPENDITURE?

Statute does not explicitly identify the intended beneficiaries of this

exemption. Based on the statutory language of the exemption, we

inferred that the intended beneficiaries of this exemption are individuals

and businesses who purchase long-term stays in lodgings, such as hotels,

corporate housing, home shares (including online platforms such as

Airbnb, Vacation Rentals by Owners (VRBO), and HomeAway),

recreational vehicle parks, and campgrounds, which are typically

subject to state sales tax. According to a 2006 study conducted by the

U.S. Census Bureau, individuals who occupy hotels on a long-term basis

do so for a variety of reasons, including, financial hardship that results

in the loss of permanent housing, relocation by an employer on a

temporary or permanent basis, loss of a home to fire or natural disaster,

or a decision to live in high-end hotels to have access to luxury services.

Some of these individuals choose hotels specifically designed and

marketed for extended stays, but others stay in traditional hotels, some

of which may offer low rates and flexible payment terms (e.g.,

discounted weekly rates, day-to-day payments) targeted to individuals

experiencing financial hardship.

WHAT IS THE PURPOSE OF THE TAX EXPENDITURE?

Statute does not explicitly state the purpose of this exemption. Because

it was enacted in 1959, concurrently with the state sales tax on lodging,

TAX EXPENDITURES REPORT

we inferred that the purpose was to limit the state sales tax on lodging

to individuals making short-term stays (less than 30 days) and provide

parity in tax treatment between people who enter into residential leases

for 30 days or more (which are not subject to sales tax) and people

making long-term stays at lodging establishments which are more

typically used for short-term stays by travelers.

IS THE TAX EXPENDITURE MEETING ITS PURPOSE AND

WHAT PERFORMANCE MEASURES WERE USED TO MAKE

THIS DETERMINATION?

We determined that this exemption is accomplishing its purpose for

many long-term occupants of lodgings, but some lodging providers may

not consistently apply it. Statute does not provide quantifiable

performance measures for this tax expenditure. Therefore, we created

and applied the following performance measure to determine the extent

to which the exemption is meeting its inferred purpose.

PERFORMANCE MEASURE: To what extent are the amounts paid for

long-term lodgings being exempted from sales tax?

RESULT: Although we lacked adequate data to quantify the extent to

which customers who make stays of 30 days or more in otherwise

taxable lodgings are properly exempted from state and local sales tax,

we determined that the exemption is likely applied to a substantial

portion of lodging sales. Specifically, based on our analysis of

Department of Revenue data and information from lodging providers,

we estimate that the exemption was applied to $423 million (10

percent) of about $4.3 billion in total retail lodging sales in the state

(see discussion below on how we arrived at our revenue estimates),

which indicates that the exemption is frequently used. However, we did

not have information on what percentage of stays were for 30

consecutive days or more, and therefore eligible for the exemption.

Despite evidence that the exemption is frequently used, we also found

that lodging providers may not consistently apply the Long-Term

LONG-TERM LODGING EXEMPTION

Lodging Exemption, which could reduce the extent to which long-term

stays are exempted from sales tax. Specifically, we found the following

based on our review of several types of lodging providers:

 TRADITIONAL HOTELS. We called a non-statistical sample of 20

Colorado hotels, including several large hotel chains, and customer

service representatives at eight of the hotels indicated that they would

not charge sales tax for a planned stay of 30 or more days (40

percent). Of the remaining 12 hotels that indicated that they would

charge the sales tax, two stated that they would only apply the

exemption for stays of 31 days or more and the other 10 did not seem

to be aware of the exemption.

 EXTENDED STAY HOTELS. We reviewed the online booking systems of

five extended stay hotels and found that three did not include sales

taxes in their quoted price for a planned stay of 30 or more days, the

other two included the sales tax in the quoted price. We contacted

each hotel and staff at all five indicated that the tax would be

refunded or credited to a guest’s account after 30 days.

 CORPORATE HOUSING. We interviewed representatives from two

corporate housing providers that specialize in providing

accommodations, such as furnished apartments, for long-term

business travelers, and both indicated that they apply the exemption

to stays of 30 or more days.

 HOME SHARES. We reviewed the websites of Airbnb, VRBO, and

HomeAway, the three largest home share platforms. We found that

as of March 2018, Airbnb’s website applies the exemption correctly

to the quoted price of most long-term stays, although it appears to

require a stay of 31 or more days before removing sales taxes. VRBO

and HomeAway typically place the responsibility of sales tax

collection and remittance on the lodging owners and there was no

data available to determine the extent to which they apply the

exemption.

TAX EXPENDITURES REPORT

Though our assessment of the practices of lodging providers suggests

that some may improperly collect sales tax from customers making

long-term stays, we did not inform the providers that we contacted that

we would expect them to exempt long-term stays from sales tax. Thus,

it is possible that if a customer knew that the exemption should apply

and asked the lodging providers’ customer service representatives to

remove or refund the sales tax, the providers would do so. However,

based on our limited survey of hotels in the state, it appears that lodging

customers who are unaware of the exemption may be charged sales tax

by some lodging providers.

WHAT ARE THE ECONOMIC COSTS AND BENEFITS OF THE

TAX EXPENDITURE?

We estimate that about $12.3 million in state revenue was forgone in

Calendar Year 2017 as a result of the Long-Term Lodging Exemption.

As shown in EXHIBIT 1.1, we calculated the revenue impact estimate

separately for the hotel and corporate housing industry sectors due to

different data sources for each sector.

EXHIBIT 1.1.

ESTIMATED REVENUE IMPACT OF THE LONG-TERM

LODGING EXEMPTION

BY LODGING INDUSTRY SECTOR

CALENDAR YEAR 2017

SALES

ATTRIBUTABLE

TO LONG-T

ERM

STAYS (30 DAYS

OR MORE)

STATE

REVENUE

IMPACT

LOCAL

OVERNMENT

REVENUE

IMPACT

TOTAL

REVENUE

IMPACT

Hotels and Home

$356 million

$10.3 million

$6.6 million

$16.9 million

Corporate Housing

$67.3 million

$2 million

$1.3 million

$3.3 million

TOTAL

$423.3 million

$12.3 million

$7.9 million

$20.2 million

SOURCE: Office of the State Auditor analysis of data from the 2015 Department of

Revenue

reports, State Demographer data, Bureau of Economic Analysis data, and information

published by industry associations.

Data provided in the Department of Revenue 2015 Retail Sales Tax Reports.

Data provided by Corporate Housing Providers Association. Assumes that all corporate

housing stays are 30 days or longer.

To arrive at the revenue impacts, we first estimated the total taxable

LONG-TERM LODGING EXEMPTION

revenue associated with long-term lodging stays of 30 days or more. We

used data from the Department of Revenue’s 2015 Retail Sales Tax

Reports to determine that hotels and other types of accommodations, such

as home shares, reported $450.6 million in tax exempt sales (the difference

between net sales and taxable sales on their Retail Sales Tax Returns) in

Calendar Year 2015 (the most recent year available), which includes

exempt sales for lodging and other items, such as food. Although the

Department of Revenue does not collect data specifically for the Long-

Term Lodging Exemption on its Retail Sales Tax Return (Form DR 0100),

our review of the State’s sales tax exemptions indicates that this exemption

is likely the most common exemption that would apply to sales of lodging.

There are no other sales tax exemptions specifically targeted to the lodging

industry and only a few other exemptions appear to potentially apply to

the lodging providers, such as exemptions on food sold through vending

machines (Section 39-26-714(2), C.R.S.), and food provided to restaurant

staff (Section 39-26-707(2)(a), C.R.S). We attributed a factor of 25 percent

to these nominal other exemptions. Therefore, we assumed that 75 percent

of the tax exempt sales reported by lodging providers were due to the

Long-Term Lodging Exemption. We multiplied this figure by the $450.6

million in reported exempt sales, to estimate $337.9 million in Long-Term

Lodging Exemptions for Calendar Year 2015. We then increased this

amount by 5.3 percent to account for growth in the hotel industry from

Calendar Year 2015 to 2017, as reported by the U.S. Bureau of Economic

Analysis, to arrive at our estimate of $356 million in exempted sales for

the hotel and home share sector.

Because corporate housing providers may not be included with hotels

and other types of accommodations in the Department of Revenue’s

retail sales tax reports, we obtained sales revenue data from the

Corporate Housing Providers Association, which showed total U.S.

corporate housing revenues of $3.2 billion in Calendar Year 2016. We

multiplied this figure by 2.1 percent, which is the share of U.S. hotel

sales that occurred in Colorado in 2012, which is the most recent year

available, to estimate $65.9 million in Colorado corporate housing

sales. We then increased this amount by 2 percent to account for

industry growth and inflation from Calendar Year 2016 to 2017, as

TAX EXPENDITURES REPORT

reported by the U.S. Bureau of Economic Analysis, to arrive at our

estimate of $67.3 million in Colorado corporate housing sales for

Calendar Year 2017. We assumed that all of these sales were exempt

under the Long-Term Lodging Exemption because according to the

stakeholders we contacted, it is uncommon for corporate housing units

to be used for shorter-term stays, though a few shorter term stays could

be included in our estimate and cause a slight overestimate.

To estimate revenue impacts, we then applied the State’s 2.9 percent

sales tax rate and the Colorado population-weighted average local tax

rate (including lodging taxes, if applicable) of 1.95 percent, which

excludes self-collected home-rule cities, to our revenue estimates

discussed above.

It is important to note that our estimated revenue impacts could double

count the impact associated with corporate housing providers to some

degree because we could not determine how corporate housing

providers are typically categorized in the Department of Revenue’s

Retail Sales Tax Reports. Specifically, these reports rely on self-reported

information from taxpayers based on the North American Industry

Classification system. It is possible that some corporate housing

providers could have selected industry categories that would have

included them within the “Hotels and Other Accommodation Services”

category in the Department of Revenue reports, the category we used to

estimate the revenue impact from hotels and home shares, as opposed

to other categories, such as the “Real Estate, Rental and Leasing.” In

this case, our estimate would likely double count the revenue impact.

The savings provided by the exemption may provide a significant benefit

to some individuals, but likely has only a small impact on the lodging

industry in general. Specifically, for some individuals, the combined state

and local tax savings, which averages 4.85 percent and $20.2 million in

total, or about $146 on a 30-day $100 per night hotel stay, may be

significant enough to drive choices about where they make overnight

stays. In particular, individuals who are staying in hotels due to economic

hardship may choose or only be able to afford to stay in a hotel because

LONG-TERM LODGING EXEMPTION

of the cost savings provided by the exemption. Further, in some local

jurisdictions with higher tax rates on lodging, which can range up to 9.5

percent, the exemption may be more important to price-sensitive

customers. In addition, for many individuals who choose to make long-

term stays in hotels and other lodging establishments, other forms of

housing, such as apartment or home leases, which are typically less

expensive on a monthly basis, are impractical. This can be the case when

individuals do not wish to enter into typical 6-month or 1-year lease

terms, require hotel services and amenities, cannot pay the required up-

front deposits that are often required for leases, or have poor credit.

For the lodging industry, the $20.2 million in estimated total cost

savings to consumers represents about 0.5 percent of the $4.3 billion in

total lodging sales in Calendar Year 2017. Therefore, the exemption

likely has a relatively small impact on the lodging industry as a whole,

since even if consumers used all of their cost savings on longer or more

expensive hotel stays, it would represent a small increase in industry

sales. However, the exemption may be more significant for businesses

that specialize in long-term lodging, such as corporate housing

providers, or extended stay hotels. In particular, because most states

have a similar exemption, the Long-Term Lodging Exemption could

also help keep long-term lodging providers in Colorado competitive for

individuals who have the flexibility to choose which state to stay in.

WHAT IMPACT WOULD ELIMINATING THE TAX

EXPENDITURE HAVE ON BENEFICIARIES?

Eliminating the exemption could increase the cost of long-term lodging,

result in unequal tax treatment of people depending on the type of long-

term lodging they purchase, and negatively impact lodging providers who

specialize in long-term accommodations. Specifically, without the

exemption, the after-tax cost of long-term stays in non-home rule

jurisdictions would increase, on average, by 4.85 percent due to state and

local taxes. However, some lodging establishments could choose to offset

part of this increase by reducing prices to remain competitive with

establishments that are subject to lower taxes, since local tax rates for

TAX EXPENDITURES REPORT

lodging vary considerably across the state. In addition, individuals who

reside in lodgings, such as hotels, corporate housing, and home shares, on

a long-term basis would pay sales taxes that do not apply to individuals

who enter into traditional residential leases. This could create a hardship

for some individuals who cannot enter into traditional leases and could

cause some businesses to choose alternative means of housing, such as

renting apartments, for employees that need to make stays of over 30 days.

Several industry representatives we interviewed stated that the Long-

Term Lodging Exemption is important to their businesses and to

Colorado’s lodging industry. Corporate housing providers reported that

they are able to remain competitive with similar businesses and the hotel

industry as a result of the exemption, and the same may be true for other

lodging providers that rely on long-term occupants. Members of a

lodging providers association predicted that eliminating the exemption

would be damaging to their businesses and may have other adverse

effects, such as driving up housing costs or causing some low-income

residents to move to states where their dollar would stretch further.

ARE THERE SIMILAR TAX EXPENDITURES IN OTHER STATES?

At least 46 states assess a sales or lodging tax on the price of temporary

lodgings and at least 41 of these states provide an exemption for long-

term lodgings. However, the minimum length of occupancy required to

qualify for a “long-term” lodging exemption varies by state, and can be

anywhere from 28 days to 185 days. The most common time period

was 30 days, which is the requirement in Colorado.

ARE THERE OTHER TAX EXPENDITURES OR PROGRAMS

WITH A SIMILAR PURPOSE AVAILABLE IN THE STATE?

We did not identify any similar tax expenditures or programs in Colorado.

LONG-TERM LODGING EXEMPTION

WHAT DATA CONSTRAINTS IMPACTED OUR ABILITY TO

EVALUATE THE TAX EXPENDITURE?

The Department of Revenue does not track the amount of Long-Term

Lodging Exemptions claimed by lodging providers. Specifically, the

Department of Revenue’s Retail Sales Tax Return (Form DR 0100),

does not contain a specific line for long-term lodging sales, and lodging

providers report the sales that qualify for this exemption as part of the

“other exemptions” line on the form, which combines any exemption

not specifically addressed elsewhere on the form. Since this line can

encompass several different exemptions, the Department of Revenue

does not capture this data point in GenTax, its tax reporting system. If

the General Assembly wants to know the amount of the exemption

claimed with a higher degree of reliability than the estimates provided

in this evaluation, it could require the Department of Revenue to add a

specific line to the DR 0100 where lodging providers are required to

report this information and direct the Department of Revenue to

capture these data in GenTax. However, this change could increase the

administrative burden on lodging providers who would be required to

separately track long-term lodging sales and the amount exempted. It

would also require resources for the Department of Revenue to update

the form, provide new instructions, and make programming changes in

GenTax to capture the information (see the Tax Expenditures Overview

section of thisCompilation Report for details on limitations of

Department of Revenue data and potential costs for addressing them).

WHAT POLICY CONSIDERATIONS DID THE EVALUATION

IDENTIFY?

THE GENERAL ASSEMBLY COULD CONSIDER CLARIFYING WHETHER THE

EXEMPTION SHOULD BE AVAILABLE TO THIRD

-PARTY PAYERS. Statute

specifies that the Long-Term Lodging Exemption is for sales that are

made “to any occupant who is a permanent resident” of the lodgings

[Section 39-26-704(3), C.R.S.]. Statute does not indicate whether this

should apply to third-party payer situations, such as when a business

pays for a room that is occupied by multiple employees over the length

TAX EXPENDITURES REPORT

of stay. However, the current Department of Revenue policy is to allow

the exemption under such circumstances so long as the lodgings are paid

for by the same payer for at least 30 consecutive days, regardless of

whether the lodgings are actually occupied by the same person for that

length of time. The Department of Revenue’s policy likely decreases the

administrative burden on lodging providers and taxpayers, but also

allows for a broader application of the exemption than may have been

intended and likely increases its revenue impact.

THE GENERAL ASSEMBLY COULD CONSIDER CLARIFYING WHETHER

HOME

-SHARES AND SIMILAR FORMS OF LODGING SHOULD QUALIFY FOR

HE EXEMPTION

. With the expansion of the home sharing industry, non-

traditional temporary lodging options are growing. Although we found

that, in practice, some home-share sales are being exempted from sales

tax under the Long-Term Lodging Exemption, statute [Section 39-26-

704(3), C.R.S.] does not specifically list “home-shares” or “private

homes” as an exempted category of lodgings. Such sales could be

interpreted as falling under categories that are listed, such as

“guesthouse” or “lodging house,” though it may not be clear to some

taxpayers how to interpret these terms.

More broadly, while Airbnb collects Colorado sales tax on behalf of

home-share hosts, hosts operating through other platforms may not be

clear about whether or not they are liable for sales tax for any sales,

even those under 30 days. Specifically, statute [Section 39-26-102(11),

C.R.S.] does not include accommodation sales of “home-shares” or

“private homes” in the list of lodging types which are subject to sales

tax. Similar to the language in the Long-Term Lodging Exemption,

“guesthouse” and “lodging house” are included as applicable lodging

types and could be interpreted as including such sales; however, the

General Assembly could consider clarifying the types of lodging sales

that are subject to sales tax.