Using a Court Appointed Receiver to Collect Hotel Sales Taxes: Part 1

During economic recessions and related downturns in business and leisure travel, many cities and counties across the nation are generating lower tax incomes due to less overnight room sales tax or hotel transient occupancy taxes (called TOT) being collected at area lodging facilities. This is especially evident in popular destination hotels and resorts that produce substantial room revenues from tourists staying overnight. Added to this problem is that the hotel TOT is often underreported or not paid when the owner of these hotels and resorts faces a reduction in their own cash flow. Even in good economic times, some dubious owners will skim a certain amount of income off the room revenues before reporting the actual tax amounts to be paid. Unless a city or county has the financial resources to perform periodic audits or do a substantial comparative analysis of like properties, much of this will go uncovered, resulting in underpayment of the hotel TOT for long periods of time. Fortunately for many cities and counties, if the hotel is a brand or franchise, the room revenues are normally tracked through the franchisor’s reservation and property management systems so their fees are correctly reported. This in turn provides the city or county a reliable room revenue figure to calculate the hotel TOT provided this is the information that is used for the occupancy tax reporting. However, it still does not stop the owner from using the hotel TOT collected as a line-of-credit instead of paying it to the city or county. To Receive or Not Receive If there is a substantial backlog of hotel TOT to be paid or there is no suitable recourse plan provided by the owner to pay the city or county, a Court Appointed Receiver may be an appropriate next step. However, when placing a hotel into receivership to collect a judgment such as unpaid taxes, typically the Receiver is appointed to take over the entire estate including the hotel’s property and its business. This hotel receivership action, although suitable from the perspective of the city or county, will often bring about a fight from the owner who does not want to lose control of their business. A full-purpose hotel receivership could also be found to be intrusive by a Judge who does not understand the role of a Receiver. Nor, do many Judges want an outside party necessarily interfering with an independent owner and its business unless there is adequate cause to force such a hotel receivership action. Hotel ResortIf the objective is to start collecting and then paying both the current and past due hotel TOT, a “limited-purpose” hotel receivership may be an appropriate and less costly alternative. However, it will require an agreement and stipulation between the various parties (i.e. owner, city) to allow takeover and control of the bank deposit accounts by a Court Appointed Receiver while the hotel continues business as usual. Short of this cooperation between the parties in dispute, it will probably require convincing a Judge that a Court Appointed Receiver being assigned in a limited-capacity could easily satisfy getting the TOT judgment paid while causing little interference to the hotel and its day-to-day operation. Allowing a Court Appointed Receiver for a limited-purpose action, may be a benefit to the owner if the city or county is willing to forego future interest and collection fees on the past due TOT as part of the hotel receivership cost. It may also allow a owner to retain control of the day-to-day operation while avoiding further tax liens and defaults if the Court Appointed Receiver controls and makes payments toward the agreed plan between the parties. In many cases, a Court Appointed Receiver taking over all aspects of the hotel’s operation may trigger a default or adversary action by one the hotel’s mortgage holders or its franchise agreement. A limited-purpose hotel receivership could be conducted without any impact to the hotel’s lenders or franchisor. Hotels are also complex assets and using a Court Appointed Receiver with specific expertise and experience in hotel administration and management will aide in dealing with the various nuances surrounding a lodging operation, the staff and its many customer accounts during a limited-purpose hotel receivership. It is equally important that a city or county consults appropriate legal counsel concerning the various court actions it is considering and how this applies within the laws affecting its jurisdictions. To be continued – See Part 2…