Memphis Approves 5% Hotel Surcharge That Returns Tax Revenue to Hoteliers

MEMPHIS, TN — The Memphis City Council has implemented a novel financing mechanism allowing certain hotels to add a 5% tourism surcharge to guest bills, with the collected revenue being funneled directly back to the same properties to fund their own renovations and expansions. The new surcharge, which applies to all purchases made at a participating hotel from room rates to bar tabs, is first being applied at the downtown Memphis Sheraton. The move is intended to spur development and ensure the city’s key hospitality assets remain competitive, particularly those adjacent to the Renasant Convention Center. While this presents an innovative, if controversial, method for capital improvement financing, it also introduces significant complexities. For the businesses involved, what appears to be a simple pass-through tax is actually a complicated revenue and remittance mechanism requiring meticulous tracking and reporting to remain compliant. Under the ordinance, the hotel is responsible for collecting the 5% fee from its customers. The property must then file monthly returns and remit the total amount to the city treasurer. The city retains 1% of the gross funds to cover its administrative costs. The remaining 99% of the revenue is then disbursed back to the hotel to be spent on pre-approved projects, such as renovations, expansions, or servicing debt related to those projects. For the downtown Sheraton, the funds are earmarked for a tentative 300-room expansion. City officials have emphasized the importance of this project, especially after the large-scale One Beale project, which was to include a Grand Hyatt, was paused. Ensuring the Sheraton is updated and expanded is seen as critical to attracting and accommodating large conferences and events. Proponents argue the measure is a vital tool for economic growth. “It means jobs, it means economic development for our community,” said Paul Young, President and CEO of the Downtown Memphis Commission, in a statement to local media. He added that successful conventions and events create a ripple effect of economic activity throughout the downtown area. This sentiment is echoed by tourism officials. Kevin Kane, President of Memphis Tourism, noted that the tourism sector employs over 50,000 people in the community. According to the Tennessee Department of Tourist Development, tourism generated approximately $166 million in tax revenue for Shelby County in 2021. The department also projects that for every increase in tourist-generated tax revenue, each local household could see a reduction of around $700 in its state and local tax burden. In our experience, any deviation from standard state and local tax procedures can create pitfalls for a business. The monthly filing requirement with the city treasurer, coupled with the unique flow-through of funds, means hotels must treat this differently than a standard lodging tax. This isn't just about collection; it's about ensuring compliance with a bespoke local ordinance, which can be a drain on internal resources without specialized support. Navigating these unique local tax structures is a core part of the tax preparation and compliance services we provide to clients, and you can learn more about how we help businesses manage these obligations by contacting C&S Finance Group LLC at csfinancegroup.com. Despite the official designation as a tax, economists and industry observers point out that the surcharge functions as a deferred price increase for the hotel. Because the funds are returned to the business that collects them, the mechanism allows the hotel to raise its effective rates without that increase being immediately apparent to consumers comparison shopping on many online travel agency websites. This structure is what makes the Memphis ordinance particularly unusual. While tourism improvement districts (TIDs) and special assessments are common across the country, those funds are typically pooled and used by a public or quasi-public authority to promote an entire district or city. The Memphis model, by contrast, directly benefits the specific private entity collecting the fee. This new 5% surcharge is levied on top of an already significant tax burden for visitors to Memphis. According to a report from the Tennessee Advisory Commission on Intergovernmental Relations, the city’s total lodging tax rate was already 15.95%, which includes a combination of state sales tax, a 5% Shelby County lodging tax, and a 1.7% Memphis lodging tax. The addition of the new surcharge at participating properties pushes the total rate for those guests above 20%. Ultimately, this model blurs the line between a public tax and a private revenue stream. Businesses in other jurisdictions that might see this as an attractive financing option must carefully weigh the benefits against the potential for negative customer perception and the administrative burden of a non-standard tax process. The implementation at the Sheraton will serve as a crucial test case. City officials and competing hoteliers will be closely watching the progress of the renovations, the impact on the hotel's occupancy and revenue, and whether other properties seek to establish similar surcharge arrangements for their own capital projects.