Streamlining the tax compliance process

By Pam Knudsen

In hospitality, we rightfully place a lot of focus on the customer experience. But what often is overlooked is back-end accounting technology that is vital to the continued operation of the property. Digital transformation is being embraced across many industries, but efforts in this area for hospitality are fragmented in comparison. The real winners of the post-pandemic world will be those who have evaluated the true return on investment of both front- and back-end technologies and seized opportunities to automate manual, inefficient and risk-generating processes.

Is digital transformation really that important for the hospitality industry? The answer is a resounding “yes,” as it can help align front- and back-end office systems, improve efficiency and manage the challenges of lodging and other tax compliance.

Neglecting lodging tax obligations can get expensive, with violators liable for payment of back taxes owed, penalties and interest. Those who creatively experiment with novel methods to avoid tax liabilities may be subject to a broad spectrum of civil and criminal penalties for activities deemed to be willful or fraudulent.

Unseen challenges of proper tax calculation
While it may seem like tax calculation is straightforward, nothing could be further from the truth. There are myriad rules and circumstances that can make figuring out taxes a truly monumental task. Here are just a few of the unseen challenges that can cause confusion:

Organizational complexity: It’s not uncommon for multiple parties to be involved with systems and processes. Consider the possibilities: Property owners may range from institutional real estate investor entities such as REITs or private equity funds to high-net-worth individuals or family offices. Independent properties like short-term rentals may be privately owned and operated. There could also be a third-party lessee, franchiser, management company and even public shareholders all with tax liability. At the end of the day, the accounting department needs to be able to manage tax compliance for increasingly complex organizational structures.

Taxing jurisdiction complexity: It is not just the structure of the organization that can be complex, but also the taxing jurisdictions that can be incredibly detailed. There may be state, county, city and other local taxes. Taking it a step further, it might not only be where a property is located that complicates matters but also what is being taxed, as there is no standardization across jurisdictions. For example, in addition to lodging tax, streaming entertainment, bottled water, beverage alcohol, parking and dining (just to name a few) are all taxed differently by jurisdiction.

Technology roadblocks and dated systems: It is hard to manage complex lodging taxes when there are technology roadblocks, including legacy systems that are not being upgraded. While many cloud-based systems have been introduced over the last decade, the software systems that run most U.S. hotels are outdated—with some running on front- and back-end technologies deployed more than 30 years ago.

Inefficient interfaces: Many technology upgrades are front-end and customer-facing, so back-end technology systems can often be outdated. Legacy computer systems may have poor and/or inflexible user interfaces that require cumbersome and staff-initiated workarounds to process tax-related reports or file exports between systems.

The importance of streamlining compliance
It is essential to streamline all aspects of the tax compliance process for both short-term rentals and larger hotels. This will reduce the need for manual human intervention; lower the likelihood of errors; lessen the time spent on and complexity of internal corporate tax audits; and speed the filing and remittance process to capture any incentives/discounts.

Digital transformation can also enable front-facing employees to capture exemption documentation and easily record data without the need for extensive training or convoluted processes that distract from providing exemplary guest service. It can also help to simplify audits and avoid unnecessary financial penalties.

Best practices that can be facilitated by streamlining compliance with a cloud-based system:

  • Early identification of exempt guests and document capture
  • Data input of tax-exempt rate plans, settlement methods, reservations and more
  • Long-term stay guest folios flagged with special revision routines automatically triggered
  • Revenue and tax calculation through night audit automatically generates a report reconciling income to taxes
  • Data extraction of tax reconciliation automatically transmitted to management or corporate offices
  • Internal tax audit will take place for any anomalies
  • Daily reports automatically generated and transmitted electronically

Properties with legacy property management systems (PMS), point of sale (POS) and back-office accounting systems that are not currently operating on modern technology platforms will still benefit from introducing a more streamlined compliance process, even if they are only partially automated.

Tech transforms hospitality taxes
As complex as the challenges of lodging and other tax compliance may be, there is an obvious path forward. Like many other challenges facing businesses of all types, modern technology has enabled cloud-based solutions to not only offer sector-leading technological resources, but also the subject matter expertise required to focus limited resources on critical functions and avoid the distraction of experiencing unproductive inefficiencies through trial and error. By embracing back-end technology transformation, the hospitality industry will welcome an easier and more streamlined process, which will help them to get and stay in compliance.

Pam Knudsen is an executive at Avalara, leading multi-tax teams including lodging, beverage alcohol, telecommunications and sales & use tax. She serves as a leading voice in vacation rental tax compliance and regulation, in addition to bringing in-depth experience across software/SaaS technology as well as ERP systems.

This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.