The owners of the Ritz-Carlton Dove Mountain Resort went to the Arizona Court of Appeals to get a refund on state taxes they paid for Marriott award nights that members redeemed. They argued that since they’re paying for points when members earn them, points redeemed are really a reimbursement not new taxable revenue.

The hotel had,

paid tax on the lodging at the time the Rewards points were earned,” [so] Dove Mountain claimed that imposing the transaction privilege tax on the monies it received from the Rewards Program amounted to double taxation.”

The Ritz owners lost the case, but it was a 2-1 decision, and conceptually interesting because of its discussion of rewards programs. The majority view is that the Arizona transaction privilege tax “is not a sales tax, but a tax on the gross receipts of the [taxpayer’s] business activities” and that ‘reimbursement’ by Bonvoy to the hotel for nights that members stay on points is new revenue (part of gross receipts).

The property claims that “a business’s offer of free goods or services to customers as a reward for their patronage adds no gross income or proceeds to the business’s tax base.” These are free nights, effectively rebates! (I am not sure how a hotel charging a $50 per night resort fee can claim these are free nights, but that was not at issue in front of the court.)

According to the state, though, the hotel isn’t offering its guests free nights as a rebate for stays at its hotel. They are paying for a third-party marketing program, and that program compensates the hotel for free night awards.

• I’d add that hotels can receive more revenue than the 4.5% of revenue they pay out to Marriott Bonvoy if they’re predominantly occupied by redemption guests

• And credit card or partner-generated points should certainly be subject to this tax. While a majority of points in airline frequent flyer programs are earned via credit cards, two-thirds of Bonvoy points are awarded from actual stays. But the credit card, dining, and other earn elements are still significant.

The hotel pays 4.5% of room revenue to Bonvoy. Members redeem those points for free stays, and Bonvoy pays the hotel for the room. The court concluded 2-1 that this is taxable gross revenue, not a reimbursement, but one judge disagreed. I am not an expert on the technical aspects of the Arizona transaction privilege tax, but more broadly a hotel pays Marriott for its marketing program and receives payment for the services it provides in the form of free nights. Those amounts can be wildly different, and it doesn’t seem appropriate to net those out for purposes other than this tax.

(HT: Eric M. Fraser)