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OPA: Hotel occupancy tax may be underreported due to lack of rules

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THE Division of Revenue and Taxation has failed to adopt regulations on hotel occupancy tax so it is unclear whether the government has been making proper collections, the Office of the Public Auditor stated in a report.

In his letter to Finance Secretary David DLG Atalig, Public Auditor Mike Pai said the objective of the OPA audit report is to determine if Revenue and Taxation has adequate procedures to detect underreported hotel occupancy tax and unlicensed businesses that are subject to the hotel occupancy tax.

The CNMI government imposes a 15% hotel occupancy tax on amounts charged on transient occupants of hotel rooms. Separate from the business gross revenue tax, the collection of hotel occupancy tax is remitted to  Revenue and Taxation on a monthly basis.

Public Law 19-36 requires that 80% of the hotel occupancy tax collection is appropriated for the Marianas Visitors Authority to promote tourism and attract tourists, and 20% is to be allocated to fund  25% of the retirees’ pension.

OPA states that regulations are intended to guide the activities of those who are regulated by an agency, define proper compliance with the law, and enable an agency to uniformly enforce the law.

“However, the Division of Revenue and Taxation has failed to adopt regulations, which would provide operators with clear guidance for properly collecting hotel occupancy tax, and enable DRT to effectively and equitably enforce the hotel occupancy tax,” OPA said.

It added that the division has not conducted tax audits of hotel operators’ revenue records to verify the proper collection and remittance of the tax due to the CNMI.

Regularly conducting tax audits, OPA said, not only ensures the correctness of reported hotel occupancy tax, but may also influence the voluntary tax compliance of hotel operators who have not been audited.

The division should assess the effectiveness and efficiency of its existing procedures, including capabilities of the tax system, for processing and enforcing the filings of monthly hotel occupancy tax forms, OPA said.

But it commends the division for its intent to detect potential underreporting of hotel occupancy tax and unlicensed businesses subject to hotel occupancy tax.

“Under the leadership of a now full-time director, OPA believes that the Division of Revenue and Taxation is well positioned to continually develop its enforcement capabilities for the uniform enforcement of the hotel occupancy tax law,” OPA said.

OPA recommends that the division adopt regulations, which interpret the hotel occupancy tax law’s use of the term “accommodations,” and enable the division’s uniform enforcement of the  tax; adopt a procedures manual for auditing hotel occupancy tax; conduct tax audits of hotel occupancy tax that involve examinations of operator revenue records; implement procedures using the automation capabilities of the tax system for initiating tax audits of the hotel occupancy tax; implement procedures using the automation capabilities of the tax system to routinely identify non-filings or non-filers of hotel occupancy tax and BGRT; implement procedures for staff to immediately notify and request operators to file all missing hotel occupancy tax and BGRT filings; formally require operators to report revenues that are subject to both the hotel occupancy tax and BGRT under a specific business activity code in the monthly BGRT form; implement the automation capabilities of the tax system to streamline the verification of revenues reported in hotel occupancy tax and BGRT forms; and promptly review the rules, regulations and laws that impact the division’s enforcement of the hotel occupancy tax law, and implement appropriate procedures for uniformly enforcing business license requirements and the hotel occupancy tax law on all operations of short-term lodgings, including operations conducted at private residences.

Secretary Atalig, in his response to Pai, said the division concurs with the findings, adding that it has been challenged with understaffing since fiscal year 2015. He said the division’s examination branch began audit activities of hotel occupancy tax in FY 2017, but discontinued due to lack of staff.

To address OPA’s findings, the Finance secretary said, the division will work with tax system developers to mimic the income tax matching process to flag suspicious activity in the hotel occupancy tax database. Additionally, the division will include an audit procedure manual in the proposed hotel occupancy tax regulations that are for adoption by Oct. 1, 2020.

In regards to the lack of procedures to detect underreporting of hotel occupancy tax, Atalig said the lack of resources has hindered the compliance branch from immediately notifying taxpayers of non-filings. To address this, the division will work with tax system developers to mimic the income tax matching process to flag non-filings based on revenues reported in the BGRT tax activity codes.

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