A New York State Administrative Law Judge held that a Manhattan hotel is not entitled to a tax credit for the amounts it paid to purchase continental breakfasts that it made available to hotel guests. Matters of Washington Square Hotel LLC and Daniel Paul, DTA Nos. 825405, 825505, & 825821 (N.Y.S. Div. of Tax App., Sept. 10, 2015).

Facts and Audit Issues. The Washington Square Hotel LLC owns and operates a hotel on Waverly Place in New York City. Its brochures indicate that the room rates include a continental breakfast, and state that a restaurant is also on the premises. As part of its contracts with travel companies, which also advertise that the room rates include a continental breakfast, the hotel provides rates for meals described as American breakfast for $15, lunch for $25, and dinner for $40. No rates for continental breakfasts are given.

On its sales tax returns for the period from December 1, 2007 through May 31, 2010, the hotel claimed a credit for sales tax it paid when it purchased continental breakfasts for provision to guests. On audit, the Department denied the credit because the hotel did not separately state the cost of the breakfast on the guests’ bills, resulting in additional tax of approximately $300,000. The hotel also filed an application for a refund of approximately $22,000 on the same theory for the period December 1, 2011 to February 29, 2012; this refund was similarly denied by the Department.

Decision. The ALJ upheld the Department’s denial of the credit and refund. She found that although Tax Law § 1101(b)(4)(i), commonly known as the “sale for resale” exclusion, allows an exclusion from tax for amounts paid to purchase tangible property for resale, the exclusion only applies when the property is resold “as such” or as a component part of other tangible personal property, or if it is used in performing certain specified services. The service of providing hotel rooms for occupancy is not included within the specified qualifying services. Therefore, the sale of continental breakfasts as part of the service of providing hotel rooms does not fall within the sale for resale exclusion in Tax Law § 1101(b)(4)(i)(B). She also found that the record contained no evidence that a continental breakfast was sold to all guests, or that the price for each breakfast was separately stated on each invoice along with the applicable tax. Furthermore, the record contained no substantiation of the hotel’s claim that credits were given to guests when the continental breakfast was not provided.

The ALJ relied primarily on Matter of Helmsley Enterprises., Inc., (N.Y.S. Tax App. Trib., June 20, 1991), aff’d, 187 A.D.2d 64 (1993), lv denied, 81 N.Y.2d 710 (1993), in which the Tax Appeals Tribunal found that a hotel’s purchases of furniture, guest room supplies, and in-room amenities were not considered purchases for resale, because the items were furnished to guests not as resales of tangible personal property but as a component part of an “overall package of services.” The ALJ also found that the hotel failed to demonstrate the value of the breakfasts or that the value was charged to each guest, since there was no separate charge on the hotel invoices for the breakfasts and no separate statement of sales tax.

The ALJ also rejected the hotel’s argument that it was a caterer or co-vendor with the on-site restaurant, finding no evidence of the sales of continental breakfast, the collection of tax, or even that any cost was ever associated with the continental breakfasts in the hotel’s brochures. Finally, the ALJ rejected the hotel’s argument that the Department should be estopped from changing its position from that taken in earlier audits, determining that reference to a previous audit of the on-premises restaurant and correspondence by the restaurant’s accountant did not reflect any determination made by the Department with regard to the hotel. However, the ALJ noted that the Department had previously audited the hotel, and while a previous audit does not bind the Department for the future, the hotel was claiming it had been instructed to claim a credit for taxes paid on the breakfasts. Since the audit papers for the previous audit had been destroyed, leaving an open question as to whether the hotel actually followed the instruction it had been given, the ALJ found it was not unreasonable for the hotel to continue to file its returns the same way over the past decade. She therefore found that reasonable cause existed and that penalties should be abated.

Additional Insights

Based on the ALJ’s decision, the hotel in this case seemed to face two problems with its claims. First, as noted by the ALJ, the New York courts have affirmed the Tribunal’s determination in Helmsley that, in general, items purchased by a hotel and provided to guests as part of overnight accommodations do not qualify for the resale exemption when they are initially purchased by the hotel. The Tribunal found in Helmsley that the purchased items did not retain their separate identity as tangible personal property when they were furnished to guests as part of services, and thus they were not purchases for “resale as such” as required by the statute. The Tribunal drew a distinction between the services provided in Helmsley and the holding in “container cases” such as Matter of Burger King v. State Tax Commission, 51 N.Y.2d 614 (1980), where purchases of food wrappers were held to be “resold as such” since the wrappers retained their separate identity when used as containers for food and drinks sold at Burger King restaurants. Second, there appears to have been a basic proof problem, since it does not seem from the facts as recited by the decision that evidence was offered establishing how many guests actually availed themselves of the continental breakfast, or how it was valued, particularly in light of the fact that no prices were listed for continental breakfasts, while prices were separately stated for other meals.