Audit Report on the Department of Finance’s Hotel Room Occupancy Tax Collection Practices

The Department of Finance (DOF) is responsible for collecting City revenues efficiently and encouraging compliance with City tax and other revenue laws. One such revenue DOF collects is the Hotel Room Occupancy tax (HROTX), which is imposed upon the occupancy of a hotel room in the City of New York.¹ DOF collected $369.1 million in HROTX revenue for Fiscal Year 2010.

All hotel operators are required to file a Certificate of Registration with DOF within three days after the opening of a new hotel. DOF will issue a Certificate of Authority, within five days of registering, to collect the HROTX. Once a hotel is registered, all hotel operators are required to collect the HROTX and remit it to the City. Then all hotel operators are required to file a Hotel Room Occupancy Tax Return quarterly. During the 2010 tax year, the HROTX was and continues to be 5.875 percent of the total room rate of all room types, plus an additional charge per room per day between 50 cents and $2.00 depending on the room rate.

The objective of this audit was to determine whether DOF had adequate controls over its tax collection practices to ensure that hotel operators and room remarketers² collect and remit the Hotel Room Occupancy tax due to New York City as required.

Audit Findings and Conclusions

DOF collected HROTX from 1,076 hotels totaling $374 million for the June 1, 2009– May 31, 2010 tax year. However, we noted several internal control weaknesses regarding DOF’s HROTX collection practices that resulted in 92 hotels owing an estimated $8,894,040 in HROTX. Eighty-four of the 92 hotels—64 hotels and 20 room remarketers—in operation did not file HROTX. We estimate that these 64 hotels owe $1,821,058 for the June 1, 2009–May 31, 2010 tax year. We further estimate that these 64 hotels owe $7,615,122 from the year the hotel began business through the 2010–2011 tax year.³ Also, while the remaining eight hotels filed HROTX returns, we estimate that they under-reported HROTX by $1,278,918 for the June 1, 2009–May 31, 2010 tax year.⁴ One of these hotels has filed for bankruptcy. We estimated that this hotel under-reported HROTX by $66,547 for the last month of the 2009– 2010 hotel tax year. DOF officials have not completed an audit assessment for the owners of this hotel, but informed us during the exit conference that this hotel owes over $2 million in total unpaid HROTX.

We found that DOF did not maintain a complete list of all hotels that are required and authorized to collect the HROTX. Also, DOF did not ensure that all hotel operators and room remarketers commencing business, or opening new hotels, filed a Certificate of Registration within three days after the commencement or opening and did not maintain copies of all the Certificates of Registration received from hotel operators and the returned Certificate of Authority when a hotel ceases business. In addition, DOF did not have a tracking system for all hotels to identify the estimated HROTX amount due from each hotel, did not maintain a tracking system of returned Certificates of Authority when a business was discontinued or sold, and did not link the hotel account identification number with the new number when a hotel changed names. Finally, DOF did not ensure that separate tax returns were always filed for each hotel.

In an effort to reduce the redundancies in government, we believe DOF and the New York State Department of Taxation (the State) could streamline their process by coordinating efforts in collecting HROTX. Currently, hotels operating in New York City must apply for Certificates of Authority on behalf of the City and State, collect the HROTX, and file HROTX returns separately from their New York State Sales Tax return. This is a redundant and arduous practice for hotel operators. Currently, hotel operators report hotel room occupancy “taxable sales” to the State. This is the amount subject to New York State’s Sales and Use Tax that hotel operators pay to the State. Instead of filing separate tax returns, we believe that DOF should coordinate with the State in order to allow the hotel to file one HROTX return on behalf of both the City and the State.

Audit Recommendations

To address these issues, we made 16 recommendations, including that DOF should:

• Conduct audits of the 64 hotels identified in this report as non-filers.

• Conduct further reviews of the 20 room remarketers to determine whether they should be paying the HROTX and pursue actions for those deemed to be non-filers.

• Implement a tracking system that includes, but is not limited to, the following:

• Hotels that have submitted a Certificate of Registration
• Hotels that have received a Certificate of Authority
• Hotel Business Name and Address as well as the name of the Corporation that owns the hotel
• Hotels’ HROTX filing status and an estimated HROTX amount due for each hotel required to submit HROTX

• Conduct audits of the eight hotels mentioned in this report that under-reported the amounts of HROTX due and recoup any additional amounts owed.

• Periodically assign staff to research and update the list of active hotels required to collect the HROTX annually and ensure that the list has the name and address of the hotel as it is doing business as.

• Ensure that separate tax returns are filed for each hotel as indicated on the New York City Department of Finance NYC HTX Hotel Room Occupancy Tax Return for Use by Operators and Room Remarketers.

Agency Response

In its response, DOF officials agreed with eight recommendations and partially agreed with eight recommendations. DOF did not agree with the audit calculation of $1.8 million in hotel tax due from the 64 hotels during the audit period. DOF stated that hotels with fewer than 10 rooms have an occupancy rate of approximately 55 percent, significantly below the rate for larger size hotels. By applying the 55 percent rate across the board, DOF determined that the potential hotel tax payable during the audit period is $1.2 million. DOF stated the 55 percent rate is based on “a review of filings for a recent annual period.” However, DOF never indicated which specific year it was referring to and never provided this review to the audit team. Thus, the analysis could not be replicated and the information could not be verified. We, therefore, have no basis to assess whether DOF’s estimate is accurate.

Additionally, as DOF is aware, in making the reported estimates, auditors did not include interest and penalties associated with late and non-filers. Based on information provided by the agency, DOF can expect to assess between $596,000 (based on $1.2 million) and $895,000 (based on $1.8 million) in interest and penalties. When interest and penalties are included, we estimate that, for these 64 hotels, DOF can anticipate additional tax collections between $1.79 million (using DOF’s estimates) and $2.69 million (using auditors’ estimates) during the audit period.

Nonetheless, the important point is that DOF has stated it agrees that outstanding HROTX should be recouped and has begun to perform either a follow-up limited scope audit or a field audit of the entities identified in this audit.