Monsurah Olaitan visited a restaurant in Lagos and after enjoying her meal, she checked her receipt and was surprised to see both a 5 percent consumption tax and 7.5 percent value-added tax (VAT) charged on the same bill, and this led her to asking questions about why two consumption-related taxes are being applied to the same transaction.
The experience reflects a recurring complaint among diners about why two consumption-related taxes appear on the same transaction. But beyond the additional cost to customers, the practice raises a business question: how should restaurants handle tax obligations when the legal relationship between the federal VAT framework and Lagos State’s Hotel Occupancy and Restaurant Consumption Tax has been contested in court.
Agbada Agbada, a tax expert, said the dispute must be understood in light of the distinction between the power to impose a state tax and whether that tax can operate alongside federal VAT on the same supply.
“The imposition of sales tax or consumption tax, as the case may be, simultaneously with Value Added Tax amounts to double taxation,” Agbada said.
The Lagos State’s 5 percent Hotel Occupancy and Restaurant Consumption Tax is imposed under the state’s 2009 law and applies to qualifying hospitality transactions. In a public notice issued in 2017, the Lagos State Internal Revenue Service (LIRS) directed hotels, restaurants, event centres and other covered establishments to charge and remit the tax, with receipts showing the amount collected.
However, the enforcement of the state tax alongside VAT has long been disputed, with businesses caught in the middle of competing interpretations of the law.
In Attorney-General of Lagos State v Eko Hotels Ltd & Anor, the Supreme Court held that the federal VAT legislation had covered the field in relation to the relevant goods and services also covered by Lagos State’s Sales Tax Law. The Court explained that where federal legislation covers the same field, a similar state law may remain on hold while the federal law operates.
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The dispute resurfaced in a case brought by the Registered Trustees of the Hotel Owners and Managers Association of Lagos State, which challenged the application of VAT to hotels, restaurants and event centres in the state. In October 2019, the Federal High Court, presided over by Justice Aikawa, ruled in favour of Lagos State’s counterclaim and restrained the Federal Inland Revenue Service from enforcing VAT on the covered transactions.
But in July 2022, the Court of Appeal in FIRS v Attorney-General of Lagos State & Anor set aside that judgment and struck out the counterclaim. The appellate court also held that the VAT Act covered the field in relation to the relevant consumption taxes, relying on the Supreme Court’s decision in the Eko Hotels case.
Agbada argued that states have a constitutional basis for imposing certain consumption-related taxes and suggested that this may help explain why such charges persist in practice.
He also noted that similar taxes apply in different states, for instance it’s called “entertainment tax” in Abuja and its a means of the state government generating revenue
Tomi Sodeinde, a tax professional, said the two charges arise from different levels of government, with the 5 percent consumption tax accruing to Lagos State and VAT administered federally.
“The position of the judgement was that both taxes shouldn’t be charged but in practice the reality is different,” Sodeinde said.
For restaurants, the uncertainty is not merely a legal debate. Establishments must determine what to include on customer bills, explain the charges when diners question them, and account for the taxes they collect. Incorrectly charging or describing a tax could expose businesses to customer disputes, while failing to comply with an applicable tax obligation could create further regulatory risk.
In an article on tax compliance, Monsurah Olaitan, a tax professional, said businesses that incorrectly charge taxes may unintentionally expose themselves to customer disputes and complaints.
She also called on regulators to provide clear guidance, engage industry stakeholders and promote consistent enforcement to reduce uncertainty and encourage voluntary compliance.
The issue also raises questions about the fairness of collecting both taxes from consumers. Under Section 81 of the Nigeria Tax Administration Act 2025, net VAT revenue is distributed with 10 percent going to the Federal Government, 55 percent to state governments and the Federal Capital Territory, and 35 percent to local governments.
“The states are direct beneficiaries of the VAT that is being paid by the customers of patronised hotels, event centres and restaurants,” Agbada said.
For Agbada, that revenue-sharing arrangement strengthens the argument for examining whether consumers should face an additional state consumption charge on transactions already subject to VAT.
The immediate concern for businesses is the lack of clarity between the legal dispute and the taxes appearing on customers’ receipts.
Clearer guidance from Lagos State and the Nigeria Revenue Service would help restaurants understand their obligations, reduce disputes at the point of payment and give customers a more transparent explanation of the charges on their bills.
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