It's a tough time to be a destination management company. In several states, attempts to classify DMCs as "resellers"—which would result in the collection of sales taxes, including, in some cases, back taxes, penalties, and interest for up to 10 years—are being challenged by theindustry. But so far, only DMCs in Texas have been successful in getting their voices heard.
In the past three years, virtually every DMC in California has either been audited or has been informed that they will be audited, according to Chris Lee, DMCP, CEO of Access Destination Services, San Diego, and co-founder of the Association of Destination Management Executives.
Lee and his fellow ADME members in California formed the Sales Tax Task Force four years ago, when the taxation fight began. At that time, the California State Board of Equalization identified a DMC that bought items wholesale and repackaged them as gift baskets for clients—a transaction, it said, that required the DMC to pay sales tax. The CSBE pursued more companies, with the wider assertion that all DMCs are resellers.
In other words, Lee said, if a DMC attaches a service fee to food and beverage or tangible personal property (like flowers or attendee gifts), those fees are subject to sales tax—in addition to the sales tax the DMC pays its vendors—as if the DMC were a reseller. "DMCs have been operating for 40 years as service companies, not resellers," said Lee.
"This has implications way beyond DMCs and could apply to any company in the industry that charges a service fee, management fee, or markup on food and beverage or any tangible personal property," Lee said, "including independent meeting planners, event planners, production companies."
Success in Texas
Meanwhile, in Texas, the situation was just starting to come to a boil. A rule was in the works that would have reclassified DMCs as resellers, requiring that they collect sales tax on the fees they charge for their services when any tangible personal property is involved. Further, if the DMC were to combine entertainment and transportation (non-taxable services) with a meal, the whole package would be taxed, including these otherwise nontaxable services.
"This was just plain unfair," said Laurie Sprouse, CITE, CMP, DMCP, president of Ultimate Ventures, a Dallas–based DMC. "In the eyes of the clients, it could make Texas look more expensive than, say, Florida, because of these taxes, and they might choose to hold their meetings elsewhere."
Last year, Sprouse led a group of 20 Texas–based DMCs who banded together to hire a lobbyist on their behalf. She testified before the state legislature and gained the support of the state hospitality community—including the National Federation of Independent Business, Texas Travel Industry Association, Texas Hotel & Lodging Association, Texas Restaurant Association, and Texas Association of Convention & Visitor Bureaus. After introducing two bills that stalled in the legislature, the group was able to get Senate Bill 636 passed last year, which provides an exemption for sales tax revenues for payments DMCs make on behalf of their clients.
"Once I could show them the economic impact if just one large meeting pulled out of Texas—the hotel taxes lost, the food-and-beverage taxes lost—because this tax law put us at a disadvantage against another state, everyone started to get it," said Sprouse. "They finally understood DMCs, and that we are an industry worth shepherding. They also understood that we actually spend our money marketing their state to potential clients who bring them revenue."
Another Problem Solved
Senate Bill 636 also allows DMCs to deduct the cost of services sold (flow-through revenue from their clients that they then turn around and pay to their vendors) to determine their taxable margin. This was added relief for DMCs who—if they are a taxable business entity—previously had to include that cost as gross profit margin and pay tax on it.
In 2008, a law went into effect in Texas that changed the franchise tax from 4.5 percent of net income to 1 percent of gross profit margin. However, because the state would not allow DMCs to subtract their flow-through expenses as cost of services sold, the DMC essentially had to pay 1 percent of its gross revenue in tax. For a DMC, the cost of services sold can account for 70 percent to 90 percent of its gross revenue, leaving a gross profit margin of 10 percent to 30 percent—before deducting employee compensation and overhead.
"Many DMCs have just 3 to 7 percent net income left after that," said Sprouse. "You can't be giving the state one-third, or more, of your net income."
The battle against burdensome taxation continues for DMCs in seven other states. In California, a bill that would provide relief, previously known as SB1628, which, despite facing no opposition has been stalled in bureaucracy, was once again reintroduced in January as AB1687.
Lee and the California ADME members continue their fight. "This is not money the state has ever before collected before from us; it's not like we're trying to get out of paying existing taxes," he said. "It's no coincidence that we're located in a state that is in a financial crisis right now."
The ADME task force has hired legal counsel and continues to stay on top of the issue. "Our California group is still working on legal recourse, but in the meantime, they are also working to educate everyone on what a DMC does," said Fran Rickenbach, CAE, IOM, ADME's executive vice president.
"It's been an underground battle that the DMCs have been trying to wage," said Lee, "but now we need to go public, with the support of the meetings industry."
To join the effort and/or contribute, visit online.