Tax Aversion

Meetings & Conventions: Tax Aversion - April 1998 Current Issue
April 1998
Tax Aversion

You may not want to face it, but what you don't know about meetings-related taxes can hurt you

BY CHERYL-ANNE STURKEN

For meeting planners, taxes are definitely not just about making the April 15 deadline. No. Taxes are a daily challenge that all meeting planners corporate, association or independent must face. Unfortunately, many prefer to look the other way, assuming "it's not my job" or "there's nothing I can do about it."

Wrong on both counts. A host of tax traps affect spending at meetings and conventions, and a little knowledge on the planner's part can mean significant savings and maybe even some management recognition.

"Honestly, taxes have never been something I've really concerned myself with," says Debbie Elder, CMP, manager of meeting services for Applied Measurement Professionals, a Lenexa, Kan.-based association management firm. "Whenever I prepare my budget, I just automatically tack on something in the 25 percent range to cover any taxes or tips."

That's an easy approach and a common one. But knowing your tax obligations before you sit down to budget and arming yourself with that information before you enter the negotiating process can save you money and headaches, says Atlanta-based meetings attorney John Foster. "Tax laws affect everything we do," he insists. "If planners only paid attention to tax laws, they could save tons of money and look like heroes. Ignorance may be bliss, but it is also expensive as hell."

Following are five common tax traps and simple ways to avoid them.

FEDERAL TAX
TRAP 1: Sponsorship Contributions Tax-exempt organizations, otherwise known as 501(c)3s, work hard to drum up sponsorship money. The 501(c)3-rating assigned to charitable, educational, scientific and religious organizations, allows corporate sponsors a tax deduction on any sponsorship monies they contribute. On the surface, the sponsorship equation sounds simple enough: The association wants to defray a cost, and the sponsor wants a little promotion. In reality, associations could be courting tax disaster if they push sponsorship recognition beyond what the Internal Revenue Service considers "acknowledgement." If the IRS determines you gave your sponsor more than the precursory "acknowledgement," your sponsorship money will be considered advertising income and, as such, taxable. That's not all. If deemed advertising, your sponsor will no longer be able to claim a tax deduction on the money given to your organization. "There is a very fine line between advertising for and acknowledgement of a sponsor," says attorney Jonathan Howe, senior partner of Chicago and Washington, D.C.-based Howe & Hutton, Ltd. Howe advises planners to know the IRS-specific guidelines for treatment of sponsorship money. You can certainly put up a banner announcing the luncheon's sponsor. You may even give the sponsor a brief mention from the podium. You can probably go as far as placing a card on each table acknowledging the sponsor's contribution. But don't do too much more. If you start showing video clips extolling your sponsor's achievements and passing out programs announcing its various services, discounts and clients, you're asking for trouble. But precisely because associations are dependent on sponsorship money, many are reluctant to curb recognition of their sponsors. "I've had clients call me and say, 'Why should I do that? Who [from the IRS] is going to be at my meeting to know what I say about the sponsor?'" says Foster. "I tell them, 'If you can't do the time, don't do the crime.' I've known organizations that have been audited by the IRS and had their sponsorship money deemed income earned for advertising. They ended up paying taxes on it," he adds.

Action Plan: Before you begin accepting checks from sponsors, make sure your sponsors are crystal clear on what you can, and cannot, do for them. And put it in writing. Hammer out a sponsorship contract that you can both live with. And make sure it's signed by both parties. A solid, well-prepared sponsorship contract is a big plus when the IRS comes calling, says Foster. It also eliminates any misunderstanding between sponsor and planner. Remember, an unhappy sponsor won't be so eager to fork over a big check the next time you come calling.

TRAP 2: Show Directory Ads Planners routinely solicit paid advertising from suppliers to help offset the publishing costs and perhaps garner a profit for show directories. But, according to the IRS, that's advertising income and subject to federal taxes.

Action Plan: While it's impossible to avoid payment on advertising revenue, planners can offset much of the advertising money by carefully tracking directory costs. Typical costs that can defray income include printing, staffing (payroll) and distribution. "Most meeting planners are not aware of this tax issue," says Howe, "but financial controllers are painfully aware of it."

SALES TAX
TRAP 3: Attrition Penalties Your contract calls for a block of 500 rooms at $100 per night. But by meeting's end your group has filled 350 rooms. Now, the hotel wants to collect on attrition. The attrition tab alone adds up to $16,237.50, including a 8.25 percent sales tax of $1,237.50.

Nothing has planners more up in arms than attrition charges. When hotels add sales tax to these charges, it's as if they're rubbing salt on a raw wound. "It has become a seller's market to the detriment of everyone," laments Thomas A. Fernley III, chairman of the board of Fernley & Fernley, a longtime Philadelphia-based association management firm.

Action Plan: "Meeting planners aren't aware that sales tax on attrition is very much a state-mandated law, with every state having it's own peculiarities," says Foster. In Arizona, for instance, room attrition is treated as damages incurred by the hotel and therefore subject to that state's Business Privilege tax. In other states it is allowable, but with certain exceptions. In Louisiana, for example, hotels may charge and tax you for canceled sleeping rooms, provided the rooms have not been resold. The trick, says Foster, is knowing how each state treats attrition, and wording your contract correctly. "I have had hotels that are in non-taxable jurisdictions try to collect tax on attrition," says Foster. "I always suggest planners word their contracts to read '...plus tax, only if applicable by state law.' Planners who don't know their state laws [may be] making unnecessary payments to suppliers and basically overpaying," says Foster. "There is no excuse for that. My feeling is if you don't have to pay it to the government, then you shouldn't have to pay it to the hotel."

ARE TAXES NEGOTIABLE? The easy answer is "no". But why settle for that? While sales tax isn't negotiable, suppliers might compensate for it in other ways.

Case in point: In researching this story, M&C called a major cellular rental company in Orlando on the pretext of renting some phones for the security staff handling an incoming convention. Toward the end of the sales pitch, and only after we asked, we were told there was an added charge - a 12.5 percent sales tax. When we balked, we simply were told: "Well, if you let us know what number of phones you're looking to get, we can knock something off the rental fee." C.A.S.

TRAP 4: Mandatory Gratuities You're meeting in Washington, D.C., and you've contracted with the hotel for $10,000 worth of food functions. You're told you'll have to pay an additional 17 percent mandatory gratuity tax and a 10 percent sales tax. The final bill comes to $12,870.

Take a closer look at those numbers. Sales tax was added not only to the food portion of the bill, but also on the gratuity charge. That's an extra sales tax charge of $170. Chump change, you say? Maybe. But if that's your average food and beverage budget and you plan 20 meetings a year in the same locale, it adds up to a whopping $3,400 in extra taxes.

"As a planner who deals mostly with top corporate clients, one of my biggest complaints is that you used to be able to negotiate the tax on the gratuity. Not any longer. Now I'm paying the gratuity and being charged the sales tax on top of it," says independent planner Paulette Hopkins, co-owner of Total Meeting Resources, Inc., in Decatur, Ga. "The worst part is, the people who are doing the work are not getting the full gratuity. A good portion is going to the facility."

Action Plan: The key to avoiding the whole issue of tax on gratuity is legal wording, advises Washington, D.C.-based meetings industry attorney James Goldberg. While many states impose a sales tax on a mandatory service charge, no state charges tax on a purely voluntary tip. His advice: Agree to voluntarily pay a gratuity equal to the mandatory charge, rather than having the service charge tacked on to the master account. "By doing this, the meeting planner will avoid paying tax on the gratuity portion of the bill."

TRAP 5: Merchandise Sales It's standard practice for associations to sell publications at their annual meetings. But how many are charging state sales taxes? Organizations that don't may be stuck paying the price later on. That is precisely what happened in Florida several years ago, says Goldberg. "Florida tax officials simply went to the convention centers, asked for a list of everyone who used their facility and sold products, and then went out and audited them. Those companies and organizations ended up having to pay the taxes they should have collected from the customer."

Action Plan: The fact that you're a tax-exempt association doesn't mean you're automatically exempt from paying sales tax on material, even if that material relates to your organization's business. "State laws on sales tax are very specific," says Verenda Smith, government affairs associate with the Washington, D.C.-based Federation of Tax Administrators. "Some states target just religious or charitable organizations, some educational." Smith suggests that meeting planners learn the tax exempt status of their group in the state that they are meeting in before they get there. Don't assume that because you're exempt in Michigan, New Mexico will give you the same "favored" status. And if you're an association or organization that's not tax exempt, immediately contact the state tax office in the destinations of your future meetings. Find out if a sales tax exists, the percentage, and how and when it must be collected. Association planner Debbie Elder suggests convention staff only take orders, rather than hand over the actual merchandise, at the meeting. "We only accept orders and then we fill them when we get back home," says Elder."It's more work with the shipping and handling, but we know what our taxes are in our home state and would rather avoid the whole tax issue elsewhere." However, if you do plan to sell merchandise at your meeting, you must purchase a tax permit from the tax department in the state where your group is meeting. The process could take a few weeks, so plan ahead.

ROOM TAX HIKES: WHO PAYS THE PRICE? In an effort to attract a greater share of the convention and meeting group business, cities are busy putting up new convention centers, stadiums and arenas, along with embarking on a host of civic improvement projects. But beware: There's a price to be paid for all these shiny new toys. Many cities will raise their room taxes as a way to pay for these facilities without increasing the tax burden of the local population. (For recent hikes, see chart.)

That's not good news for planners who frequently must arrange events years in advance. They go to contract expecting - and budgeting for - one tax rate, but end up compelled to pay a higher price.

Here's what you can do to stay on top of rising room taxes.

Call the city's tax department to see if room taxes are slated to change. If a tax increase is being considered, find out what the new rate will be and when it will go into effect.

Be up-front with hotel suppliers when soliciting quotes. Ask if the tax rate is expected to change. Tell them what, if anything, you have heard from the city's tax department.

Word your contract so that it offers you as much protection as possible from an increase. According to meetings attorney Jonathan Howe, of Chicago and Washington, D.C.-based Howe & Hutton, Ltd., planners can attempt to cap their room rates by wording their contracts to read, "room and tax rate of not more than..." For example: You contract at a tax-inclusive room rate of $110: $100 for the room, plus a 10 percent room tax of $10. Should the room tax increase to, say, 12 percent (or $12), your attendees will still pay $110 per room night; the additional $2 will come out of the room rate, which will fall to $98. "In effect, what you're trying to do is put the tax increase on the hotel's shoulders," says Howe.

C .A.S.
TRAP 6: Audiovisual Support If you hold a meeting in a state that imposes sales tax on goods and services, expect to be charged sales tax on A/V equipment rental. However, tax should not be imposed on technician's wages, otherwise known as labor.

Action Plan: "You should have the A/V rental billed separately from your technician charge," says Karl Nybergh, meeting consultant for American Meetings & Conventions, an independent meeting planning firm in Miami. "It's one thing to be charged tax on the equipment, it's another to have the labor lumped in there. If you have one or more technicians over a period of time, taxes could get quite costly."

TRAP 7: Meeting Rooms Again, it's important to learn as much as you can about your state tax laws. Texas does not differentiate between a sleeping room and a meeting room, notes John Rosen, director of research for Houston-based PKF Consulting, a hospitality consulting firm. Both are taxed at a rate of 15 percent, whereas sales tax statewide is 7.75 percent.

Action Plan: "What our research shows," says Rosen, "is that more planners are negotiating to have the meeting room comped, and then taking a hit in another line-item department where the tax rate is lower."

TRAP 8: Quirky Line-Item Taxes Are you thinking of renting cellular phones in Orlando for your staff and VIPs during your next meeting? That will cost you basic rental fees, air time, and an added 12.5 percent tax (a combination of air time, tax, rental and a hodgepodge of imposed city and state taxes).

Planning on serving your group soft drinks at your next Chicago convention bash? Besides being charged the standard 8.75 percent sales tax, get ready to shell out an additional 9 percent "soda/pop" tax on fountain soda and 3 percent on canned soda. And, if that function should happen to take place at Navy Pier or McCormick Place convention center, don't forget to include an additional 1 percent Metropolitan Pier & Exposition Authority tax. "Chicago has a tax for everything. It can become very expensive to eat in this town," admits Debbie Best, freedom of information officer for the Illinois Department of Revenue in Springfield.

If your attendees are planning to rent cars for the next sales meeting in downtown Boston, they'll have to pay a one-time automobile rental fee of $10, and pay the 5 percent rental tax. Why? To fund a proposed convention center.

Action Plan: Probably the only protection against these kinds of tax traps is knowledge and negotiation skills. "Planners don't look at tax as a line-item charge, but they should, because it is," stresses independent planner Nybergh. "They establish a budget without knowing the reality of it and then need a shoehorn to make the budget fit. That's usually because they didn't budget for taxes or other penalties."

THE LATEST ROOM TAX INCREASES Cities that have raised their room tax rates in the past 18 months or anticipate increases this year. CityRoom TaxSales TaxTotal Tax on Guest RoomsIncrease Atlanta 8% 6% 14% 1% Baltimore 7.5% 5% 12.5% 0.5% Boston 7.45% 5% 12.45% 2.75% Dallas* 13 (15)% 8.25% 13 (15)% 2% Fort Worth* 13 (15)% 8.25% 13 (15)% 2% Hawaii* 6 (7)% 4.7% 10.7(11.7)% 1% Hot Springs, Ark. 5% 6.625% 11.625% 0.125% Indianapolis 6% 5% 11% 1% Las Vegas 11% 7% 11% 1% (*Indicates expected room tax rate increases during 1998. At press time, Hawaii's tax increase had not been voted on.)
Source: Meetings & Conventions, based on information from individual cities.

Tax Aversion

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