For years, UCLA has operated hotels that compete with local hotels. The commercial hotels pay the city’s 14 percent hotel tax and federal corporate income tax; UCLA’s do not.

Now, UCLA wants to expand its hospitality empire with a $162 million, seven-story, 250-room luxury inn, to be called the Luskin Hotel and Conference Center, and eliminate 754 parking spaces adjacent to Pauley Pavilion. The proposed hotel will charge $224 a night and, like other UCLA hotels, will neither pay the city hotel tax nor comply with federal requirements for a tax-exempt enterprise.

Generally, rents from real estate property are excluded from federal “unrelated business income tax.” But there is an important exception: When rental of real property comes with personalized services such as maid or linen service, it is subject to federal unrelated business income tax.

UCLA can call it a “faculty guest house,” a “patient family guest house” or the Luskin residential conference and guest center, but as long as it provides maid and linen service, it should pay income tax on its hotels. This calls into question whether the project would be eligible for tax-exempt financing.

That’s why hotels at other state universities, such as the University of Wisconsin at Madison’s Fluno Center and Indiana University’s Biddle Center, pay hotel taxes for their guests.

The business plan for the Luskin Hotel assumes that it is tax exempt because it will only accept “university affiliates” with some loose affiliation with UCLA. According to the IRS, anyone can stay at a UCLA hotel. But UCLA, like commercial hotels, is subject to income tax:

“The exclusion (from federal income tax) does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses” (IRS Publication 598, “Exception for income from personal services,” Unrelated Business Taxable Income, 2012, p. 10).

Los Angeles City Controller Wendy Greuel recently stated: “The city needs to have processes in place to ensure, with a high degree of certainty, that uncollected money isn’t being left on the table at a time when the city needs it most.” Collecting the hotel tax from UCLA would be a good start. Millions of dollars are on the table.

Local tax-paying hotels support a Luskin conference center – which enhances their business opportunities – but not a tax-free, subsidized hotel that reduces demand for their services and denies the city precious tax dollars. They want to work with UCLA and find a win-win solution. If the hotel component is a must for UCLA, the local hotels at least want a fair playing field.

The Regents will vote on Sept. 14. It is not too late for them avert a major financial, tax and political disaster by approving a conference center without a hotel.

Laura Lake is co-president of Save Westwood Village Inc., a business-community alliance to revitalize Westwood.