Proposition K - Hotel Tax Loophole Fix

Voter Guide
November 1, 2010
This measure appeared on the November 2010 San Francisco ballot.

 

What it does

Proposition K is an ordinance that clarifies the application of San Francisco's hotel tax in two ways:

It clarifies that the hotel tax is charged on the full retail rate of the hotel room. For example, if the hotel room costs $100 per night to the traveler, the 14 percent tax should be $14, for a total price of $114. If the traveler bought the hotel room online, it is possible that the online travel company bought the room at a wholesale rate from the hotel, at perhaps $90, and is charging hotel tax on only the $90, not the $10 in additional revenue to the online travel company. This measure would close that loophole to require the tax to apply to the full price.

It clarifies the exemption to the hotel tax on extended hotel stays. This is a clarification of the code's "permanent resident" exemption from the tax. The tax has always included a permanent resident exemption to ensure that low-income people living in residential hotels would not be required to pay the tax. However, under certain circumstances current law authorized corporations and business entities to claim the exemption, and lawsuits have been initiated over these claims. Airlines sometimes have booked hotel rooms for more than 30 days, to accommodate flight crews who stay overnight. Although the individual members of the crews did not stay for the entire period the room was booked, the airlines claimed the exemption because the room itself was booked more than 30 days. Prop. J changes the definition of a permanent resident from "any occupant" to "an individual" to remove any basis for corporations and business entities to claim a tax exemption meant to apply primarily to low-income people living in residential hotels.

If passed, this measure would update the tax code to clarify that the full retail rate of the hotel room is subject to the tax regardless of who the seller is and that the exemption from the tax is limited to low-income residential hotel residents.

This measure also includes a provision to invalidate any competing ballot measures, should both measures pass and this measure receives more votes. This means that if Prop. K receives more votes than Prop. J, the portion of Prop. J that would impose a 2 percentage point increase in the hotel tax rate would not go into effect.

Why it's on the ballot

The mayor put Prop. K onto the ballot, using his authority under the San Francisco City Charter to directly place ordinances and declarations of policy before voters. Because it is an expansion of the use of an existing tax, it must be passed by a simple majority of the voters. Because the ordinance affects the application of a tax, it cannot be changed by the Board of Supervisors and must be referred to the people.

In addition, the measure is part of a City effort to close loopholes in the hotel tax. The City previously has attempted to collect the hotel tax on the retail rate charged by online travel companies for stays in San Francisco hotels that are booked online. Online travel companies believe they are not required to remit this tax to the City and sometimes keep the tax that would be charged on the difference between the retail rate and the wholesale rate.While this disagreement is being decided in court, passing a ballot measure clarifying the tax agreement would eliminate ambiguity in the future. This amendment clarifies that the full retail amount of the booking is subject to the tax, regardless of who the sales agent is.

Pros

  • This measure would help balance the City budget adding about $7 million in revenue each year.
  • This measure would increase the clarity of the law by closing a series of confusing loopholes. Since these loopholes are the subject of lawsuits in progress, this ordinance update could provide clarity to these suits.
  • This measure would level the playing field across hotels and means of room reservations, by making all forms of hotel room purchase subject to the same additional city hotel tax.

Cons

  • Maintaining lower rates for online customers of hotel rooms in San Francisco is a competitive advantage that could lead to increases in hotel occupancy and overall tourism spending.
  • The measure does not provide sufficient information about how to collect the tax. Instead, it continues to leave too much ambiguity about whether the Treasurer and Tax Collector's Office will make the seller (Internet booking company) or service provider (the hotel) responsible for gathering the tax.
  • By forcing airlines to pay the full hotel tax for their flight crews, this measure could result in a slight decrease in the competitiveness of San Francisco as a hotel destination for housing flight crews.
  • The passage of this measure likely will not result in immediate revenue to the City, as the online travel companies likely will not pay until the issue is settled in the courts. Furthermore, this issue is larger than one jurisdiction. As this issue is discussed and settled nationwide, San Francisco's position may not have much bearing on the way online companies collect and pay tax.
  • The measure is a misuse of the ballot process because it includes a poison pill that would invalidate Prop. K if Prop. J receives more votes. Prop. K is identical to Proposition J except that it also includes a 2 point increase in the current hotel tax.

SPUR's analysis

This measure is a relatively simple clarification of an aspect of the hotel tax that is ambiguous today. While it might seem more appropriate for this to be passed by the Board of Supervisors, California law requires the voters to clarify any seeming expansion of an existing tax. In this case, the expansion refers only to the application, of the current hotel tax to the full retail rate, even when a room is booked online and the online retailer paid a lower wholesale rate for the room from the hotel.

While the policy goals of Prop. K are reasonable and straightforward, the fact that the measure includes a poison pill to invalidate Prop. J (which SPUR opposes) is a misuse of the ballot process. Overall, SPUR's board was not entirely comfortable with the measure and did not choose to support it.

SPUR's Board of Directors did not reach our required vote of 60 percent to either support or oppose a ballot measure.

SPUR takes "No position" on Proposition K.