Financial Performance
and Budget Committee
TO: FINANCIAL PERFORMANCE AND DATE: JANUARY 10, 2024
BUDGET COMMITTEE
FROM: FINANCE DEPARTMENT WARDS: 1
SUBJECT: ADMINISTRATIVE APPEAL BY MONYVANN KEO OF AZUL HOSPITALITY (MARRIOTT RIVERSIDE AT THE CONVENTION CENTER) IN REGARD TO TRANSIENT OCCUPANCY TAX AUDIT FINDINGS ISSUE:
Consider the appeal, requested by Monyvann Keo of Azul Hospitality (Marriott Riverside at the Convention Center). Per section 5.32.120 of the City of Riverside's tax ordinance, Azul Hospitality is requesting an administrative appeal with the Financial Performance and Budget Committee to address the finding that complimentary rooms are taxable.
RECOMMENDATION:
That the Financial Performance and Budget Committee deny the appeal from Monyvann Keo of Azul Hospitality and uphold the findings of the transient occupancy tax audit of the Marriott Riverside at the Convention Center that complementary rooms are taxable and that the unpaid amount for taxable comped rooms is due and payable, including total tax, penalties, and interest.
LEGISLATIVE HISTORY:
Chapter 5.32 of the Riverside Municipal Code (RMC) governs the City’s application of transient occupancy tax revenue, stating that “For the privilege of occupancy in any hotel, each transient is subject to and shall pay a tax…”. Applicable to the appeal by the Marriott Riverside at the Convention Center (Marriott) is Section 5.32.010 – Definitions, which states:
Occupancy means the use or possession, or the right or entitlement to the use or possession, of any room or rooms or portion thereof, in any hotel for dwelling, lodging or sleeping purposes.
Rent means the amount of the consideration charged or chargeable to the tenant or person entitled to occupancy, for the occupancy of space, valued in money whether received in money, labor or otherwise, including the full value of receipts, cash, credits, property or services of any kind or nature, without any deduction whatsoever.
BACKGROUND:
At the request of the City of Riverside, HdL Companies performed a Transient Occupancy Tax (TOT) audit of ten (10) hotels for the audit period of January 2019 through December 2021. The audits were conducted remotely, with follow-up phone calls, emails, and information exchanged in the months following. Marriott was one of the 10 hotels that were included in the audit.
Using the data provided by the City and lodgings provider, HdL conducted a thorough review of the monthly TOT returns filed during the TOT audit period. HdL analyzed the returns for accuracy using the data provided, performing reasonableness tests and trend analysis based on prior history and City market trends. The high-level analysis and trend assessments were complemented by a detailed review of sample periods within each filing year. HdL completed the TOT Audit for the hotel properties in August 2022.
During the TOT audit of the Marriott, HdL noted that the Marriott did not charge TOT on taxable miscellaneous revenue and comped rooms. HdL found comped rooms on the Daily Revenue Report, and since these rooms were not assigned a value, the auditor used the Average Daily Rate (ADR) for each year to compute the findings.
DISCUSSION:
Operators regularly provide rooms to customers, employees, contractors, or “guests,” at no cost. These no-cost rooms are commonly known as “comped or complimentary rooms” and are recorded in the operator’s Profit and Loss (P&L) or Monthly Operating Report (MOR) without assigning them a specific value. However, comped rooms involve a transfer of value from the operator to the beneficiary, the guest. HdL referred to the City of Riverside’s TOT ordinance (5.32.010 – Definitions) for guidance. There, “Occupancy” is defined as the use or right to use hotel rooms for dwelling, lodging, or sleeping purposes. “Rent” is defined as the amount of consideration charged or chargeable to the tenant entitled to occupancy, valued in money whether received in money, labor or otherwise.
The purpose of a comped room is to secure a benefit for the operator. Comped rooms are provided to maintain the guest’s loyalty, as barter for other services provided to the operator, or for employee retention. These types of consideration are valued in money as they provide enrichment/benefit to the operator in a non-monetary form but in a form valued in money and deemed as “otherwise” per the definition of rent. It is HdL’s and the City of Riverside’s position that comped rooms are taxable rent per the RMC and the value is attributed to the reasons noted: guest loyalty, barter, or employee retention. While each has a differing value, HdL found no value assigned in the operator’s records. Thus, for consistency, HdL used the Average Daily Rate (ADR) for each year, if available, or for the audit period, as these values are determined by the operator.
Amount Due for Comped Rooms
The exact amount due from the Marriott for comped rooms and computation of the amount is not disclosed in this report so as to preserve the confidentiality of Marriott’s finances. Per RMC 5.32.060 – Returns and remittances, the tax imposed “becomes delinquent and subject to penalties if not received by the Tax Administrator on or before the fifteenth day of the month following the close of each calendar month.” The computation of the amount is set forth in RMC 5.32.090 – Delinquency as follows:
Any operator who fails to remit any tax to the City or any amount of tax required to be collected and remitted to the City, including amounts based on determination made by the Tax Administrator under Section 5.32.110, within the time required, shall pay penalties of ten percent of the tax in addition to the tax amount due the first day on which the tax required to be collected becomes delinquent, 25 percent in addition to the tax amount due shall be imposed on the thirtieth day of delinquency, and 50 percent in addition to the tax amount due shall be imposed on the sixtieth day of delinquency. In addition, interest of one percent per month, or fraction thereof, shall be imposed from the date on which the tax required to be collected becomes delinquent until the day of payment.
Marriott Riverside at the Convention Center Appeal
In accordance with RMC Chapter 5.32.110 – Failure to collect and report tax—Determination of tax by Tax Administrator, the City’s Chief Financial Officer conducted several conversations with representatives of Azul Hospitality, ultimately proposing to settle for a total payment amount of $10,000 in relation to all audit findings, including the taxable comped rooms (Attachment 1).
However, Azul Hospitality elected their right to appeal to the Financial Performance and Budget Committee within 15 days after notice thereof by filing with the City Clerk a written notice of appeal, briefly stating in such notice the grounds relied upon for appeal, per RMC Chapter 5.32.120 – Administrative (Attachment 2).
On November 09, 2023, Monyvann Keo of Azul Hospitality (Marriott Riverside at the Convention Center) requested an administrative appeal to address the finding that complimentary rooms are taxable. It is their belief that they are not in violation of the City of Riverside’s tax ordinance based on the following assertions:
The ordinance, as it is currently written, is ambiguous on whether complimentary rooms are taxable. The City of Riverside has also acknowledged this, stating they are working on a comprehensive review of the tax ordinance to address this ambiguity.
The previous tax audit did not identify complimentary rooms as being taxable.
Azul Hospitality also holds the position that the auditors (HdL) used an arbitrary percentage of room revenue to calculate the taxes on complimentary rooms and they do not agree with the calculation that was used.
In 2012, the City’s Internal Audit Division conducted a TOT audit of the Marriott. Current City staff reviewed the audit workpapers and correspondence with the Marriott but found no reference to complimentary rooms.
Other TOT Audit Findings
The Marriott’s request for an administrative appeal did not include a request to review the taxable Miscellaneous revenue finding.
STRATEGIC PLAN ALIGNMENT:
The topics included in the report support Strategic Priority 5 – High Performing Government and Goal 5.3: to Enhance communication and collaboration with community members to improve transparency, build public trust, and encourage shared decision-making.
Community Trust – The appeal process is transparent and reflects how decisions are made based on sound policy.
Equity – The appeal process ensures that all businesses have equal access to the process and therefore share in the benefits available to all businesses.
Fiscal Responsibility – TOT audits ensure that the City is collecting all taxes payable per the applicable RMC.
Innovation – The City contracts HdL, which employs the most current resources, technologies, and strategies to ensure compliance with the City’s TOT ordinance.
Sustainability & Resiliency – The appeal process is in line with the continued effort to ensure businesses are in compliance with the RMC. Best practices are reviewed and implemented to ensure the highest level of compliance with City laws and regulations.
FISCAL IMPACT:
The maximum fiscal impact of the action will be the amount assessed per the TOT audit on taxable comped rooms, the amount of which is not disclosed so as to maintain the confidentiality of Marriott’s finances.
Prepared by: Daniel Sanchez, Business Tax Supervisor
Approved by: Kristie Thomas, Finance Director/Assistant Chief Financial Officer Certified as to
availability of funds: Kristie Thomas, Finance Director/Assistant Chief Financial Officer Approved by: Edward Enriquez, Assistant City Manager/Chief Financial Officer/ Treasurer Approved as to form: Phaedra A. Norton, City Attorney
Attachments:
Tax Administrator Correspondence
Marriott Request for Appeal
Marriott Riverside at the Convention Center Administrative Appeal ● Page 2