HOW DOES IT FEEL to be caught in a vise? Ask the meeting planner trying to resolve a payment due under a cancellation or attrition penalty. Obviously, the hotel wants to mitigate its losses by maximizing income. But perhaps what's not so obvious is that the state often wants its cut, too. After all, the state would argue, we count on taxes from the sales of those sleeping rooms. If one doesn't get sold, but there is a payment anyway for the sale of that room because of a cancellation or attrition charge, we, the state, are still entitled to our tax revenue. So, oftentimes, both the hotel and the state want the meeting planners' money.

The law on taxation of cancellation and attrition fees — and who is obligated to pay — is not always entirely clear. Whether hotels can tax cancellation fees is a state law issue, so the code varies depending on which state has jurisdiction (invariably the state where the hotel is located). And while some states have specifically addressed this issue, most states have not. Here's a sampling from around the country.

State by State

• Vermont: One of the leading court decisions on this issue is in Vermont, whose Supreme Court held in 1985 that cancellation deposits were subject to tax. That case dealt with condominium rentals, and the court ruled that any fees retained by the taxpayer resort for the cancellation of rented units were fair game for room tax.

• Maryland: In Maryland, taxes apply not only to cancellation fees, but also to all no-show deposits and attrition fees paid to the hotel.

• Texas: If the cancellation charges are equal to the reserved room rate, they are taxable. However, no tax is due on fees that are less than the stated room rate.

• Oklahoma: Cancellation charges are taxed, regardless of the rate of the room, but forfeited deposits are not subject to tax.

• North Carolina and South Carolina: These states allow for taxation only when the canceled room in question has not actually been resold to a new guest.

• Florida: No tax is applied. Florida classifies liquidated damage fees as “penalty charges,” and clearly states that they are not subject to tax. While canceling rooms or failing to fill a room block in a Florida hotel may result in a penalty, it clearly won't require a tax on top. Florida is one of the few states with such a clear no-tax rule.

Negotiate It

A number of lessons can be learned from all this. First, and foremost, be mindful that cancellation fees and attrition charges may be subject to tax. Second, remember to negotiate upfront who pays the tax. As with anything else in a hotel contract, the party responsible for paying the tax on liquidated damages can be negotiated. Third, meeting planners and hotels should work together to minimize the potential for a tax being imposed.

Also, meeting planners should not pay a tax unless absolutely certain that it is due, and unless absolutely certain it is going to the state, and not to the hotel. If in doubt, simply make two payments: one to the hotel for the amount of the liquidated damages and the second in the amount of the tax to the state's taxing body.

There is increasing pressure on all states to find additional means to raise revenue, so be sure to address the issue of taxation of cancellation and attrition charges. That should eliminate the possibility of unpleasant surprises and mitigate potential trouble.

Jed R. Mandel is a partner in the Chicago-based law firm of Neal, Gerber & Eisenberg, where he heads the trade and professional association practice.