Steve Tecco, owner of the Armada Motel in Wildwood Crest, knows that when it comes to keeping his inn fully occupied, he’s competing against 190 other motels and hotels on the island, as well as hundreds of condominiums.
Tecco accepts the competition from other motels but says he is at a significant disadvantage against the condominiums, which are privately owned and not subject to charging a combined 14 percent tax. The condos, as a result, can offer customers a lower price on their stays.
“That’s a real marketing advantage,” said Tecco, president of the Greater Wildwood Hotel and Motel Association. “Our members have definitely lost people to the condos.”
The island’s lodging landscape has changed dramatically over decades, as numerous hotels and motels have been razed and replaced by condominiums. Many of the condos are privately owned but are rented out by their owners to vacationers. Those rentals come without the combined 14 percent tax that hotels and motels must charge, thus creating friction between the two groups.
Motels and hotels on the island, with about 8,000 rooms total, must charge a 7 percent state sales tax, a 2 percent county tourism tax, a 1.85 percent local tourism assessment and a 3.15 percent state room occupancy tax. Combined, it equals 14 percent.
Statewide, hotels and motels must pay a 7 percent sales tax and a 5 percent occupancy fee. Atlantic City, Newark, Jersey City, Wildwood, North Wildwood and Wildwood Crest are prohibited from charging that 5 percent occupancy tax because they already impose a local hotel occupancy tax.
The state occupancy tax generated $72.8 million for New Jersey in 2010, according to the state Division of Taxation’s annual report for that year, the latest available.
The Division of Taxation, however, does not require those same taxes to be paid by “facilities other than hotels,” which under the latest state regulations includes furnished or unfurnished private residential properties, including condominiums, bungalows, single-family homes and similar living units, where no maid service, room service, linen service or other common hotel services are available. Those properties can provide linens, but not change them, to maintain their nontaxable status.
“The state is basically subsidizing them,” said Bruce Smith, owner of the Tangiers Motel in Wildwood Crest.
In a 2008 lawsuit, the hotel and motel association estimated New Jersey could collect an estimated $345 million if the condominium rentals across the state paid similar taxes and argued that the state tax court should require the Division of Taxation to impose the same room taxes across the board to all types of transient rentals of less than 90 days.
The court did not agree. A state tax court judge and an Appellate Division panel found the court could not force the state to impose the tax on others but encouraged the state to revise its rules.
Attorney Frank Corrado, who represented the group, said the state’s rules leave too much to the discretion of the Division of Taxation and that the statutes on what is a motel and what’s not have never been clarified.
The hotel and motel association argues that the length of stay, not the services provided, should determine who is subject to any state tax.
Jarrod Grasso, CEO of the New Jersey Association of Realtors, said that while private condominium owners aren’t paying room or sales taxes, owners of so-called “condotels,” or condominiums that openly operate as hotels, are paying their share of taxes. The association, however, opposes any move to have private rentals pay the hotel/motel tax.
“We want to promote tourism and not create a deterrent for visitors,” Grasso said.
Grasso said condotels — which often give additional services to customers, such as providing linens and maid service — are now paying the 7 percent sales tax because they provide a level of service that private rentals do not. The tax charge began this year by order of the director of the Division of Taxation.
Grasso said it was a smart decision to institute the 7 percent sales tax, thus reducing the discrepancy between room prices at condotels and those at motels. Previously, the condotels were not subject to any tax.
“I would hope the Wildwoods would see that,” said Grasso, adding that levying additional taxes on the condotels isn’t wise.
In a June 2007 analysis by Global Insight, the company produced a report that looked at how seasonal rentals, including condos and summer homes, contribute to local economies and the impact of extending the state sales tax to seasonal rentals.
According to the survey, which was prepared for the Realtors association, the state had 109,075 total seasonal rental units, nearly 70 percent of which are in Cape May and Ocean counties, and the seasonal rental industry generates $7.4 billion for New Jersey’s economy.
The survey at the time found average seasonal weekly rental rates for condos and motels were $2,767 and $1,902 in Cape May and Ocean counties, respectively.
The survey estimated that imposing only the state’s 7 percent sales tax would have varying degrees of impact, but imposing additional occupancy taxes on renters would affect visitor spending in other areas such as food, transportation, shopping and entertainment.
Grasso said that instead of imposing state taxes on private rentals, the availability of those rentals gives visitors another reason to go to places such as the Wildwoods.
State Sen. Jeff Van Drew, D-Cape May, Cumberland, Atlantic, said he agrees with the Wildwoods motel and hotel owners. However, rather than see the state taxes imposed on private rentals, Van Drew said his goal is to change the law entirely.
“The answer is to reduce this room tax,” Van Drew said. “It puts the entire state at a disadvantage.”
Motels in places such as Ocean City, Md., for instance, charge a 10.5 percent room tax. Motels in Lancaster, Pa., charge an 11 percent room tax, and motels in Rehoboth Beach, Del., charge an 8 percent room tax.
Corrado said the hotel and motel owners in the Wildwoods can either lobby their legislators, as they have done over the years, or lobby the Division of Taxation to change its rules.
In the meantime, Smith said he still gets the occasional visit from former guests, now renting at nearby condominiums, asking whether they can use his pool.
“We very politely say no,” Smith said.
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