Tax Services for Hospitality & Hotels

LA’s Transient Occupancy Tax — What Hotel Operators Need to Know

The city of Los Angeles charges a 14% Transient Occupancy Tax (TOT) on all hotel room rentals for stays of 30 days or less. That’s on top of the state and county rates. When you add in the LA Tourism Marketing District assessment (1.5%) and the California Tourism Assessment, the total tax burden on a hotel room in LA runs around 15.5% to 17.5% depending on the property’s size and location.

This tax is collected from guests but remitted by the hotel operator. The city requires monthly filing and payment. Late payments trigger a 10% penalty plus interest. If you’re operating a boutique hotel or a short-term rental property, these obligations apply to you just as much as they apply to the Marriott down the street.

Short-term rental hosts on Airbnb and VRBO have the same TOT obligation. The platforms collect and remit the tax in some jurisdictions, but LA’s rules are specific — make sure you know whether the platform is handling it or whether you’re on the hook.

Restaurant and Food Service Sales Tax

California’s sales tax rules for food and beverages are notoriously complicated. Grocery food is generally exempt. Prepared food sold for immediate consumption is taxable. A hotel restaurant serving a $45 steak dinner collects sales tax. The same hotel’s room service? Also taxable. The minibar? Taxable on the snacks, exempt on the unheated beverages — unless they’re carbonated, in which case they’re taxable again.

Catering and banquet events add another layer. If you’re hosting a wedding reception or corporate event and providing food service, the entire charge (food, setup, labor) is typically taxable. Mandatory service charges are taxable too. Optional tips are not. The distinction between a “service charge”. And a “tip”. Has specific legal definitions under California Labor Code and different tax treatment under the CDTFA rules.

Getting sales tax wrong on a high-volume restaurant isn’t a small problem. A hotel restaurant doing $5 million in annual food and beverage sales with a 1% error rate has a $50,000 exposure sitting there every year. Over a three-year audit period, that’s $150,000 before penalties and interest.

OBBBA-2025 Tips Deduction — What It Means for Tipped Employees

OBBBA-2025 §70402 (P.L. 119-21) added a new above-the-line federal deduction for qualified tips of up to $25,000 per year for tax years 2025–2028, codified as IRC §224. The deduction phases out at $150,000 MAGI single / $300,000 MFJ. It applies to W-2 tipped employees in tip-customary occupations — servers, bartenders, hotel housekeeping, valet, hairstylists, hosts — and to self-employment tipped income (though the SE-tax piece isn’t reduced).

California didn’t conform. The state hasn’t enacted a parallel tips deduction, so tips remain fully taxable on Form 540. A server earning $40,000 in tips will pay zero federal income tax on the first $25,000 but will pay California income tax on the full $40,000. FICA also still applies on every dollar of reported tips. Hotel housekeepers, who are also covered occupations, see the same federal benefit. Communicate this to your staff at year-end so they know to claim the deduction on their 1040 — the federal benefit is real, but it doesn’t carry through to the state return.

Tip Reporting and Payroll Compliance

Hotels and restaurants with tipped employees face some of the strictest payroll reporting requirements in any industry. The IRS expects 100% of tips to be reported, and the employer is responsible for withholding income tax, Social Security, and Medicare on those tips.

California is one of the few states that doesn’t allow a tip credit against minimum wage. Your tipped employees earn the full California minimum wage plus their tips. LA city goes higher — currently $17.28/hour for most employers. For a 200-room hotel with 150 employees, payroll compliance isn’t just a tax issue, it’s an operational one. Misclassifying a banquet server as a contractor, miscalculating overtime on a week where someone worked a sixth day (California’s daily overtime rules are different from federal), or failing to account for tip pooling arrangements — any of these can trigger penalties from the EDD, the DLSE, and the IRS simultaneously.

The FICA tip credit (Section 45B) gives employers a tax credit for the employer’s share of FICA taxes paid on tips exceeding the federal minimum wage. For a large hotel, this credit can be worth $50,000 to $200,000 per year. It’s one of the most underused credits in hospitality.

Property Tax and Proposition 13 Considerations

Proposition 13 caps property tax assessments at 1% of the purchase price, with annual increases limited to 2%. But when a hotel changes hands, the property gets reassessed to current market value. An LA hotel purchased for $20 million in 2010 and assessed at roughly $24 million today would jump to its current market value — say $45 million — on sale. That’s a property tax increase from $240,000 to $450,000 per year, overnight.

For hotel investors doing a 1031 exchange to defer capital gains, the property tax reassessment still applies on the relinquished property sale (for the new buyer) and on the replacement property purchase. The tax deferral strategy doesn’t help with property taxes. Timing renovations and capital improvements matters too — significant improvements can trigger a supplemental assessment on the improvement value.