The Federal Government Employee Exemption from Transient Room Taxes
The Federal Government Employee Exemption from Transient Room Taxes
Oregon Lodging Association’s "Lodging News"
October 2006
One of the most complicated and misunderstood issues relating to the imposition of transient room taxes around the State of Oregon is who exactly is required to pay these taxes when staying at your lodging facility. The simple, "bright-line," rule is that federal government employees, as well as certain government contractors, when traveling on official government business, are exempt from transient room taxes. All other local and state employees, employees of nonprofit corporations, federal government employees not traveling on official government business, and all other guests must pay transient room taxes unless expressly exempted under the local ordinance in your jurisdiction or the statewide 1% transient room tax.
The legal basis for exemption comes from the Supremacy Clause of the United States Constitution which has long been held to prohibit state and local jurisdictions from levying a tax on the United States. Many years ago, the United States Supreme Court substantially narrowed this broad rule and held that we must first determine where the "legal incidence" of the tax resides as distinguished from the "economic burden" of the tax. In other words, even though the federal government may ultimately bear the economic burden of a tax when it reimburses a government employee for amounts incurred by the employee for room taxes, the legal incidence of the tax is upon the employee who pays the tax to the lodging facility in the first instance. The Courts had further held that the determination of where the "legal incidence" lies – the federal government versus the employee – is a determination that is made by the local jurisdiction that imposes the tax. This means that local jurisdictions were free to state that a transient room tax is imposed on the person staying in the room, as opposed to that person’s employer, government or otherwise, regardless of who will actually remit payment for the room.
The legal "fiction" created by the courts discussed above has led to a great deal of confusion as to when to charge transient room taxes to federal government employees. After all, distinguishing between the "economic burden" and the "legal incidence" is difficult and confusing. Fortunately, this changed in 1999 when the Ninth Circuit Court of Appeals, the federal appellate court with jurisdiction over Oregon, held that regardless of how the local ordinance is written, and regardless of the distinction between the "legal incidence" and the "economic burden" of the tax as described above, as long as the employee is traveling on federal government business, that employee is not subject to the tax.
The question thus becomes what to do when an individual checks into your lodging facility and claims to be exempt from the applicable transient room tax. In some jurisdictions, such as Portland, you are required to fill out a form provided by the local jurisdiction which sets forth the employee’s name, federal government agency, purpose of travel, etc. You are required to then hold onto this form for a certain period of time. In Portland, this period is three years and 6 six months. In jurisdictions that do not require a specific form, we recommend that you prepare your own form to obtain this information, that you make copies of any official travel orders, and that you obtain the employee’s signature certifying that the employee is, in fact, traveling on official business. We recommend that you hold onto this form for the entire period in which the local jurisdiction has the authority to audit your records, typically three years.
Unfortunately, the local transient room tax ordinances in the various jurisdictions are often quite different. Some contain an express exemption for federal government employees but many do not. In fact, many ordinances around Oregon simply state that a tax is imposed on the transient but do not list government employees among those exempted from the tax; however, the answer is always the same. As long as the employee is a federal government employee traveling on official government business, you cannot charge the transient room tax.
Complicating this issue are circumstances in which the employee claims to be exempt from tax, but that person does not work for the federal government. Rather, the person may work for an entity that is under contract to the federal government, he or she may be a credit union employee traveling on business (yes, credit unions are considered instrumentalities of the federal government under federal law), or the employee may claim exemption on some other basis tied to federal government business. In these circumstances, these persons are likely to be considered "constituent parts" of the federal government. As the Ninth Circuit Court of Appeals stated, "when acting on behalf of the federal government, the congruence between the professional interests of the employee and those of the government is complete." The best practice in these situations is to obtain the guest’s travel orders. If the guest refuses, or is unable, to prove to your satisfaction that they are exempt from transient room tax, then kindly explain to them that your local ordinance does not provide for their exemption from tax; however, you will refund the tax if they can forward the appropriate documentation to you after they return to their office. The point here is that you do not want to be undergoing a room tax audit and have the local jurisdiction levy penalties and interest, as well as the actual tax, for the allegedly unpaid tax. This has actually become a significant issue in California, and we should expect it to occur in Oregon as well, as local governments continue to seek additional revenue to feed their constant hunger.
Given the varying provisions set forth in state and local transient room tax ordinances, as well as the general complexity of this issue, there continues to be a great deal of confusion among lodging operators, federal government employees, and local jurisdictions. We highly recommend that you become very familiar with your local ordinance and the statewide transient room tax law. We also highly recommend that you keep good records for those individuals who stay at your facility and are not subject to the transient room tax. Finally, if you have any uncertainty as to your duties under these laws, you may want to consult with your local jurisdiction to discuss your obligations and record keeping requirements.