NEW YORK STATE

TAX APPEALS TRIBUNAL

________________________________________________

                         In the Matter of the Petitions

                                              of                                                                     DECISION
                                                                                                                      DTA NOS. 821078,
      MARRIOTT INTERNATIONAL, INC. ET AL.⁽¹⁾                            821079, 821080, 821219,
                                                                                                                      821374, 821375, 821376,
for Revision of Determinations or for Refund of Sales and                                821380, 821381, 821382,
Use Taxes under Articles 28 and 29 of the Tax Law for the                             821383, 821384, 821385
Period September 1, 2000 through February 28, 2007.                                   and 821753
________________________________________________

The Division of Taxation filed an exception to the determination of the Administrative Law Judge issued on November 26, 2008. Petitioners, appeared by Hodgson Russ, LLP (Timothy P. Noonan, Esq., and Mark S. Klein, Esq., of counsel). The Division of Taxation appeared by Daniel Smirlock, Esq. (James Della Porta, Esq., of counsel).

The Division of Taxation filed a brief in support of its exception. Petitioners filed a brief in opposition. The Division of Taxation filed a reply brief. Oral argument, at the request of the Division of Taxation, was heard on July 15, 2009, in Troy, New York.

After reviewing the entire record in this matter, the Tax Appeals Tribunal renders the following decision.

ISSUE

Whether the reimbursements paid or credited to petitioners from Marriott Rewards were consideration for hotel occupancy subject to sales tax pursuant to Tax Law § 1105(e).

FINDINGS OF FACT

We find the facts as determined by the Administrative Law Judge. These facts are set forth below.

Petitioners own or operate hotels and are engaged in the rental of hotel rooms in New York State. Petitioners had or have a contractual relationship with Marriott Rewards, Inc., and Marriott Rewards LLC (hereafter Marriott Rewards) to participate in a marketing program operated by Rewards known as the Marriott Rewards Program.⁽²⁾

Until January 2004, the Marriott Rewards Program was operated by Marriott Rewards, Inc., a wholly owned subsidiary of Marriott International. Marriott Rewards LLC, wholly owned by Marriott Rewards, Inc., was formed in 2003 and has operated the Marriott Rewards Program since January 2004.

Marriott Rewards operates a frequent stay program designed to reward members who stay at participating Marriott hotels. Each of the hotels is a legal entity distinct from Marriott Rewards. The program is designed to increase lodging at participating hotels by offering points to program members for staying at the hotels. Given the development of similar programs by other hotels in the industry, programs like this are now viewed by Marriott Rewards as prerequisites from a marketing perspective, and industry customers have come to expect these types of programs.

Some hotels benefit more than others from participating in Marriott Rewards. Marriott lodgings in Hawaii and Florida, for example, are particularly popular, as are the Marriott Marquis and the Marriott East Side in New York City. Guests would probably stay in these hotels regardless of whether they earn points. Less popular lodgings that provide fewer free rooms, like the Brooklyn Marriott, benefit more from participating in Marriott Rewards, in the sense that fewer guests would stay there but for the opportunity to earn points.

Internally, Marriott Rewards is referred to as a "zero sum game." It is not designed to make a profit, nor does it make a profit; inflows must equal outflows. Funding received by the program during a particular year represents the operating costs of the program, cost of the awards redeemed during the year, and the provision for the liability for outstanding points that will be redeemed for awards in the future.

Individuals may enroll as members in the Marriott Rewards Program online, by calling the Marriott Guest Service Center, or by applying at a hotel that participates in the program. There is no fee to join or remain a Marriott Rewards Program member.

Marriott International, Inc., either owns the hotels or holds the franchise rights (i.e., as the franchisor) for the hotels participating in the Marriott Rewards Program. Marriott Rewards does not own the hotels or hold the franchise rights for any of the hotels participating in the Marriott Rewards Program.⁽³⁾

The following classes of Marriott franchises participate in the Marriott Rewards Program: Marriott Hotels & Resorts, JW Marriott Hotels & Resorts, Renaissance Hotels and Resorts, Courtyard by Marriott, Residence Inn by Marriott, Fairfield Inn by Marriott, TownPlace Suites by Marriott, SpringHill Suites by Marriott and Marriott Vacation Club International and Marriott Conference Centers. All classes of Marriotts are required to participate in the Marriott Rewards Program, and the terms of the program are governed by a 1998 Participation Agreement, which was amended in January 2004.

The Participation Agreement is a contract between Marriott Rewards and the participating hotels. Under the Participation Agreement, it is indicated that Marriott Rewards desires that the Marriott Brand Hotels, i.e., the petitioners here, participate in the program, which is described as a "marketing program" in the agreement. Section 1.1 of the agreement provides that the Marriott Brand Hotels "shall participate in the Program." This section also provides that "Marriott Rewards Members will earn points in Marriott Rewards through their patronage of the Participating Hotels and Participating Hotels will provide discounted room nights to be used as award redemptions in Marriott Rewards [Program]."

Marriott Rewards members earn points in Marriott Rewards through their patronage of the participating hotels. Most points are issued as a result of hotel stays. Although the percentage varies slightly from year-to-year, an average of 78% of all points are issued to members for hotel stays in participating Marriott hotels. Members can purchase points by paying Marriott Rewards cash or can acquire them from Marriott Rewards Partners who have paid Marriott Rewards for the points. Marriott Rewards does not collect sales tax on points it sells to members for cash.

The primary Marriott Rewards "partners" are credit card companies and airlines. Marriott Rewards sell points to these partners who then issue the points to their customers. The points issued by airlines and credit card companies can be redeemed for stays at participating hotels. Marriott Rewards does not collect sales tax on the sale of points to the airlines or credit card companies.

Marriott Rewards can terminate its points program at any time. Points can be forfeited and points do not constitute property of the member. Marriott Rewards sets the value of the points, e.g., it determines how many points must be redeemed to acquire hotel occupancy.

At most hotels, members earn points for each $1.00 spent at the hotel. Fewer points are earned for dollars spent at properties that generally cater to longer-term accommodations, such as Residence Inn, TownePlace Suites, & Horizons by Marriott Vacation Club International. The points a member earns for a hotel stay depend on the class of hotel providing the lodging. Stays at some classes of hotels only generate points based on a room rate, while stays at other classes of hotels generate points based on room rate, tax and incidentals.

When a member purchases a stay at a participating hotel located in New York, the hotel collects and remits full New York State and local taxes on the total rents received pursuant to Tax Law § 1105(e) unless the member's occupancy is exempt from sales tax.

Under the terms of the Marriott Rewards Program, each time a member stays at a participating hotel, the hotel is required to pay to Marriott Rewards (referred to as the Central Fund) approximately 4.5% (or some other agreed-upon percentage) of the total hotel folio (hereafter referred to as the Contribution Calculation) generated by the member. For purposes of the Contribution Calculation, the hotel folio includes the room rate, all taxes and all incidental fees billed to members.

Petitioners do not actually contribute 4.5% of the member's hotel folio to Marriott Rewards each time a member purchases a stay at a hotel. Instead, pursuant to the Contribution Calculation, petitioners are required to determine the amount of the total contributions payable to Marriott Rewards for all qualifying member stays at its hotel on a periodic basis, 13 times a year (hereafter referred to as the reporting periods).

The Participating Hotels remit the funds due under the Participation Agreement to Marriott Rewards, which does not hold the monies as agent or fiduciary for the Participating Hotels.

Marriott Rewards Program members and nonmembers pay the same price for the same room when staying at a participating hotel, and a patron's status as a member in the Rewards Program does not affect the sales tax collected from the member for stays at participating New York Hotels. However, each of the hotels treats the contribution amounts as a cost of doing business and, like all costs and expenses, this is reflected in the prices charged to all guests.

Redeeming Points/Reimbursements from the "Fund"

For point redemption purposes, participating hotels are grouped into seven categories by location and type. An average of 7,500 points must be redeemed by the member to receive a free room at a category one hotel. An average of 35,000 points must be redeemed for a room at a category seven hotel. An upgrade would require the redemption of additional points.

The number of Reward Points needed to be redeemed for a Rewards Redemption Stay, i.e., a hotel stay obtained by redeeming points, may vary by the length of the stay, location of the room and amenities, the category of hotel and time of year.

When redeeming points, a Marriott Rewards member must indicate that the reservation is for a Marriott Rewards redemption. A Reward Certificate will be provided to the member when he or she checks into the participating hotel. The Reward Certificate can be redeemed for a single or double standard room and includes the cost of the hotel room, room tax and service charge.

To use their Marriott Rewards for a stay at a participating hotel, members may make reservations online, by calling the particular hotel, or by calling one of Marriott International, Inc.'s phone line reservation telephone numbers.

From 2001 through 2006, an average of about 87% of all points were redeemed for hotel stays. The remaining points were redeemed for rental cars (about 1%), merchandise through the Marriott Rewards catalogue (about 6%), vacation packages (about 3%), airline tickets (about 4%) and other miscellaneous categories. Points cannot be redeemed for cash.

A participating hotel receives no payment from a member who redeems points for a stay at the hotel.

Marriott Rewards is obligated to reimburse the hotels for the occupancy obtained through points redeemed when members redeem points for a hotel room. The reimbursement-rate calculation is performed annually, and the end result of the calculation determines the hotel's reimbursement rate for the year. The reimbursement rate for a participating hotel by Marriott Rewards varies depending on the brand and the volume of redemptions at the hotel, and takes into account two factors. To the extent redeemed room nights are less than 2.5% of all paid room nights for a particular period, the reimbursement rate is $15.00. Redeemed nights above 2.5% amount are reimbursed based on the hotel's "RevPar," Marriott's term for the standard revenue per room at the hotel. The end result of this calculation is a flat rate, classified as a percentage of RevPar. Based on this calculation, a hotel will get 70% of RevPar, or 80% of RevPar, etc. Generally, the more rooms are redeemed by a hotel, the higher percentage of RevPar it will receive. But no hotel would ever get 100% of RevPar.

The Participation Agreement requires that participating hotels invoice Marriott Rewards for "room nights or other services given in redemption of Marriott Rewards Certificates."

Since the reimbursement amount is determined on an annual basis, the amount payable to any particular hotel is not specific to the operations of the hotel on a specific day. Whether the hotel is having a good day or a bad day, its reimbursement amount during any particular year is the same.

The reimbursement amount paid to any particular hotel is not specific to the nature of any particular room. A hotel will get the same reimbursement whether the member gets a suite or a single room when points are redeemed. The hotel will get the same reimbursement whether the guest gets one or two beds, and it will get the same reimbursement regardless of the actual costs associated with the provision of the room to a member, i.e., such as cleaning costs, utility costs, etc.

Petitioners do not actually receive a payment from Marriott Rewards each time it provides a room to a member. Instead, Marriott Rewards determines the applicable payments payable to petitioners on a periodic basis based on the reporting periods, i.e., 13 times a year.

Not all funds paid by participating hotels to Marriott Rewards are used to pay the hotels for the hotel stays by Marriott Rewards Program Members. Approximately 83-84% of its expenditures are payments to hotels for hotel stays by Marriott Rewards Program members and the balance of expenditures are for administrative and advertising expenses related to the Marriott Rewards Program. Marriott Rewards only pays for petitioners' advertising expenditures related to the Point Program.

Contributions/Reimbursements: The Netting Process

For each period in the reporting periods, contributions due from each petitioner and payments payable by the Fund are netted against each other. Thus, if the amount of the contribution due to the Fund was equal to or less than the payment payable from the Fund in a particular reporting period, a petitioner would not have been responsible for making any contributions to the Fund during such period. Similarly, if the amount of the contribution due the Fund was equal to or greater than the amount of the payment payable to a petitioner in any particular reporting period, the Fund would not have been responsible for making any payments during such period.

The system of reimbursements and contributions did not affect the payment of sales taxes in New York. Specifically, petitioners paid full New York State and local sales taxes on all repayments to them from the Fund without deduction for any contributions determined to be due to the Fund. Thus, in any particular reporting period, although petitioners may not have received any payments from the Fund because of excess contributions due the Fund, petitioners would nevertheless have paid full New York State and local sales taxes on the repayments determined to be payable under the terms of the Marriott Rewards Participation Agreement. For example, one of the petitioners (Brooklyn Renaissance Hotel LLC) owns and operates the Brooklyn Marriott in New York City. In 2005, this petitioner did not receive any net payments from the Fund since its required contributions to the Fund ($783,644.00) exceeded the allowable reimbursements from the Fund ($536,680.00). Thus, in 2005, this petitioner ultimately paid $246,964.00 into the Fund (the difference between the calculated reimbursements and the calculated contributions). Nevertheless, New York sales tax was paid by this petitioner on the full reimbursement calculated to be due from the Fund without deduction for petitioner's required contributions (i.e., full sales tax was paid on $536,680.00).

During the periods in question, the amounts each respective petitioner was required to contribute to the Fund pursuant to the Contribution Calculation was as follows:

A hotel like the Brooklyn Marriott that pays more into the program than it receives still benefits more from Marriott Rewards than would a hotel in a more popular destination.

The Refund Claims

The participating hotels each filed refund claims for sales tax paid on the money received from Marriott Rewards for the occupancy of room nights (term used in Participation Agreement to characterize an overnight stay) acquired by Marriott Rewards members redeeming points. It is undisputed that sales tax was paid by Marriott Rewards to the participating hotels based on the reimbursement amount Marriott Rewards paid to the hotels.

On December 19, 2003 and June 18, 2006, each petitioner filed refund claims requesting a refund of sales taxes paid on the reimbursements payable from Marriott Rewards during the applicable sales tax periods. It is undisputed that sales tax was paid by Marriott Rewards to the participating hotels based on the reimbursement amount Marriott Rewards paid to the hotels.

The parties have agreed that in the event it is determined that the transactions between petitioners and Marriott Rewards are not subject to sales tax, petitioners will be entitled to a refund of $6,544,711.88, plus applicable interest.

THE DETERMINATION OF THE ADMINISTRATIVE LAW JUDGE

Addressing first the relevant statute, the Administrative Law Judge noted that Tax Law § 1105(e) imposes a sales tax on the rent for occupancy of a hotel room, and the term "rent" is defined as "consideration received for occupancy" in a hotel (see, Tax Law § 1101[c][6]). The term "occupancy," in turn, is defined as "[t]he use or possession" of a hotel room (see, Tax Law § 1101[c]). The issue presented was whether the amounts received by petitioners from Marriott Rewards constituted consideration subject to tax, under the statute, for occupancy in a hotel.

The Administrative Law Judge found that "the reimbursement was not consideration for hotel occupancy . . ." and "therefore, the consideration received by the hotels from Marriott Rewards is not subject to sales tax. The consideration for the occupancy of the hotel room was, in fact, provided by the customer who usually earned the points through previous lodgings at Marriott hotels."⁽⁴⁾ The Administrative Law Judge found it significant to his conclusion that Marriott Rewards did not pay petitioners each time a room was provided to a member; the hotels did not receive an "identifiable payment" for every room provided under the Marriott Rewards program; the amount paid by Marriott Rewards did not equal the hotel's actual charges for providing a hotel room; and the hotel received the same amount whether the Rewards member was given a single room or a suite or whether the hotel was busy or slow. Accordingly, the Administrative Law Judge found that the "reimbursement" was not consideration for hotel occupancy and he granted the petitions and ordered the Division of Taxation ("Division") to refund the sales tax amount of $6,544,711.88, plus interest.

ARGUMENTS ON EXCEPTION

The Division argues on exception that the Administrative Law Judge erred in mis-characterizing the amounts received by petitioners in the netting process as "reimbursement."  The Division urges that the amounts received by petitioners via the netting process constitutes consideration for the occupancy from Marriott Rewards. Petitioners disagreed.

OPINION

The Administrative Law Judge correctly presented the issue as whether the amounts paid or credited to participating hotels by Rewards constitute taxable consideration received for occupancy in a hotel for purposes of the Tax Law. The Division argues that the Administrative Law Judge improperly characterized the payments as reimbursements to petitioners for their periodic contributions to Rewards. The Division asserts that, despite the so-called reimbursement, the payments made are clearly consideration for hotel occupancy and, as such, are taxable pursuant to Tax Law § 1105(e). We disagree.

In reviewing the terms of the Participation Agreement, each time a Rewards member stays at a participating hotel, the hotel is required to pay the Marriott Rewards Fund approximately 4.5 percent of the hotel folio generated by that member. A member's hotel folio includes the room rate, all taxes and all incidental fees billed to members. The hotel folio for all members' stays at all participating hotels is contributed to the Marriott Rewards Fund thirteen times a year and is used by Rewards to pay for rooms when members redeem their reward points at participating hotels. We agree with the Administrative Law Judge that it is significant that Rewards paid for rooms periodically rather than each time a room was provided to a member. Such an arrangement highlights the fact that it was the formula that controlled the reimbursement. In other words, if the payment made was consideration for hotel occupancy, the taxable event is the occupancy at an identifiable room rate. It is undisputed that the room rate varied and the payment was not made at the time of the occupancy as envisioned by the statute. The amounts paid by Rewards for a room did not equal the hotel's actual charges or the hotel's cost of providing a particular room to a member. We agree with petitioners that, for tax to apply, there has to be a separate transaction that has as its primary purpose the furnishing of something that is taxable. This is not the situation in this case.

Based upon the evidence, we find that it was the members who paid the consideration for the occupancy of the hotel rooms, in essence, by their repeated stays at participating hotels. It was from these stays that a percentage of the consideration paid went into the Rewards Fund and, in return, the members earned points. Only upon a member redeeming the points for a free room at a participating hotel would the participating hotels be entitled to receive reimbursement from Rewards. Contrary to the position held by the Division, Rewards is not paying for a third party to receive a room. It is the member who has already paid for the room through repeated stays at participating Marriott hotels. Rewards merely reimbursed petitioners for the points redeemed at each of their hotels. Therefore, we find that petitioners were not required to pay sales tax on the reimbursements they received from Rewards.

Accordingly, it is ORDERED, ADJUDGED and DECREED that:

1. The exception of the Division of Taxation is denied;

2. The determination of the Administrative Law Judge is affirmed;

3. The petitions of Marriott International, Inc., et al. are granted; and

4. Petitioners claims for refund in the amount of $6,544,711.88, plus interest, are granted.

DATED: Troy, New York
               January 14, 2010

                                                                                 /s/ Carroll R. Jenkins     
                                                                                      Carroll R. Jenkins
                                                                                      Commissioner

APPENDIX

1. This matter involves 14 petitioners, which have been consolidated for decision. For a list of the petitioners, see the appendix.

2. There are eleven petitioners in this matter, ten of which own or operate hotels. Marriott Rewards is also a petitioner in this matter, but for purposes of these proceedings, the parties have stipulated that refund amounts will be payable to the hotels in the event the petitions are granted. Therefore, a reference to petitioners relates to the ten petitioners who own or operate hotels.

3. Marriott International also operated the Rihga Royal Hotel, which explains its status as one of the petitioners in this matter.

4. We have placed quotes here for reasons that will be made clear, infra.

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