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Cash Cow: City says hotel owners have been improperly helping themselves to room taxes

It's a truism that nobody likes paying taxes. So last year when the city of Bend staff proposed to eliminate a loophole in the city's room tax rules that allowed hotels to take a meal credit deduction, several Bend hotels predictably objected.



It's a truism that nobody likes paying taxes. So last year when the city of Bend staff proposed to eliminate a loophole in the city's room tax rules that allowed hotels to take a meal credit deduction, several Bend hotels predictably objected.

Leading the charge was local hotelier Wayne Purcell, an influential businessman whose family has been operating The Riverhouse hotel off Third Street at Mt. Washington Drive for two generations.

Purcell appealed to city councilors, asking them to consider the impact of a cost increase on his hotel and other lodging properties in the midst of a recession.

"Guests should not have to pay a tax on the food portion of their room cost," he said.

It was a powerful argument coming from the owner of one of the city's largest hotels and only convention center, and the statement swayed several council members.

The only problem was that hotel owners, unbeknownst to city officials, were already taxing guests on their food and pocketing the proceeds. The food tax deduction was sometimes just a few dollars, but the pocket change added up. According to the city, which recently released the results of the audit after the Source and other media outlets filed public records requests seeking the information, The Riverhouse alone owes the city more than $100,000 in back room taxes it charged guests and never remitted to the city. It's not clear how many properties were using the same accounting approach. But The Riverhouse wasn't alone. An initial audit that looked at six properties found that each of them owed between $18,000 and $119,000 to the city. There are perhaps a dozen more properties that could owe back taxes to the city as well.

Finance Director Sonia Andrews said she doesn't know how many properties might owe the city back taxes, but the city plans to expand the audit to include some of the other higher volume properties that weren't included in the first go- round. It's also not clear just how much local hotels might have withheld from the city, or overcharged guests - depending on how you look at it. The meal exemption has been a feature of the room tax code for almost a decade, but city code only allows properties to be audited for three years worth of back taxes, according to Andrews.

In the meantime, the city has already set up a meeting with property owners to discuss the delinquent taxes and wants to work with its lodging partners who collect room taxes on behalf of the city. Andrews said the city isn't trying to portray the lodging partners as scofflaws. However, she said the staff's reading of the room tax code leaves no room for leeway on the tax question.

"We're not saying they are liars or anything like that. We really want to work with them," said Andrews, "We're setting up a meeting to get to the source of this confusion and to try to figure out how to resolve this."

Not surprisingly, hotel owners don't agree with the city's math. Given the politics, both past and present, around the meal exemption, it appears that the accounting issue might be less than black and white.

Purcell, who says he takes pride in submitting all of his room taxes on time, takes exception to the idea that he has done anything but follow the rules as they were agreed upon initially and enforced for years.

"I'd say for us, unequivocally, we don't owe that money. There is no way, shape or form that we owe that money and we're convinced that the city is going to understand that, too," said Purcell who added that The Riverhouse's room tax statements included an accounting of the meal tax exemption even though he said the city never provided a line on the form for that information.

He attributes the city's interpretation to a change in leadership. He says the current staff isn't privy to the intent of the meal exemption, which was negotiated between the city and its lodging partners roughly a decade ago when the city increased the room tax rate to its current nine percent.

Since that time, Purcell said he has been following the rules as they were understood by the city staff and The Riverhouse.

"The bottom line is we knew exactly what (the process) was. We went to the city years ago and our controller met with their controller. Other lodging properties met with their auditors and everybody was on the same page until last year," Purcell said.

While the politics are sticky, the math is relatively straightforward.

According to Andrews, the city allows lodging properties to deduct a $10-per-person meal tax credit for up to four people before calculating the room tax rate for guests. That meant that a group of guests renting a room for $100 per night would only have to pay taxes on $60 of their tab. The problem, said Andrews, is that hotels were charging guests the full rate for tax purposes and then pocketing the difference. It was only a few dollars per guest, but the money added up for hotels. According to the city's audit, which looked at just a half dozen of the city's hotels, the city is owed more than $300,000 in back taxes.

Councilor Mark Capell said he understands that there may have been some confusion or misinterpretation about the code, but that doesn't change the fact that the hotels have apparently overcharged guests and shorted the city in the process. He likened the situation to an individual taxpayer who underpays taxes because he or she didn't understand the law.

And while he doesn't take pleasure in "zinging" local business for a tax bill, a debt is a debt, Capell said.

Andrews said she didn't know at this point if the city would consider reducing dollar amounts for the lodging properties, but she said the city isn't necessarily taking a hard line with hotel owners for now. If it were, the city would have the option of adding late fees and other penalties to the bill, something that it isn't yet doing.

For his part, Purcell said he looks forward to presenting his case to the city council, which is likely to hear hotel owners' appeals sometime in the not-too-distant future.

"I can go back and show records of years and years where we were putting [the meal exemption] right on the form. There was no confusion. If anybody had an issue with it then it should have happened years ago. For anybody to go in now and say that's not right is just not accurate." Purcell said.

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