The shifting landscape of vacation rental taxes
It’s been said that the vacation rental industry is a bubble or a fad. And, conversely, that the rapid adoption of vacation rentals as a travel option is going to drive the hotel industry out of business and completely upend the travel industry. The truth lies somewhere in the middle. Vacation rentals aren’t a passing fad, but they aren’t going to replace the hotel industry anytime soon either.
Local governments and regulatory bodies are coming to this realization on a state, city and even a neighborhood homeowners association level — and they are taking action. Montana recently announced a lodging sales tax increase. Portland, Oregon, has begun issuing fines for unregistered vacation rental properties. And so has Vail, Colorado. Massachusetts has implemented a statewide vacation rental registry, with the aim of regulating Airbnb and other vacation rental platforms.
These initiatives are popping up more frequently, with city and county tax agencies adopting new and often complex requirements for vacation rentals. These tax agencies are increasingly looking to collect hotel occupancy taxes from these properties as well. And while many are only beginning to realize it now, short-term rentals, like those offered on Airbnb and VRBO, have always been required to collect and remit sales and lodging taxes.
Until recently, the large vacation rental websites viewed these occupancy taxes as the host’s or homeowner’s responsibility, not the platform’s. The platform was positioned simply as an advertising website or marketplace, and transactions occurred directly between homeowner and traveler. These taxes, however, were often overlooked and not well understood by homeowners and hosts. As the short-term rental industry has continued to grow, these lodging taxes are increasingly part of the industry narrative and are becoming much better understood. Short-term rentals are now ubiquitous, which has sparked pushback in some communities, with a new and heightened focus on regulation and collection of lodging taxes.
As the short-term rental industry continues to grow and moves closer to maturity, we’re seeing major shifts in how occupancy taxes are handled. Years ago, when short-term rentals were still relatively new, many owners renting their homes were simply unaware of the requirement to collect sales and lodging taxes. These are the same taxes collected by hotels. Hosts and homeowners automatically think of income taxes when they hear the word “tax”; many hosts are simply not familiar with the class of business taxes known as lodging taxes.
The evolution of occupancy tax legislation
There is no denying the extensive and ongoing changes in the tax environment for short-term rentals. Most states tax short-term rentals in the exact same way as hotels. Up until several years ago, only a handful of states exempted small operators or residential properties from the requirement to collect and remit hotel-type taxes.
Several states in the Northeast with exemptions for short-term rentals have since changed their tax rules, including Maine, Rhode Island and Connecticut. More recently, New Jersey and Massachusetts have eliminated their room tax exceptions for short-term rentals in the last year. In the West, New Mexico recently updated its statutes, now requiring short-term rentals to pay the same local lodging taxes as hotels.
There are now very few locations that treat taxes on short-term rentals differently than hotels. New York State sales tax is one of the few examples of an exclusion still in place, known as the “Bungalow Exemption.”
Misunderstandings and misinterpretations abound
It’s become clear there is a lot of confusion around lodging taxes, but what’s the cause? When short-term rental platforms are engaged in paying the hotel taxes, they are usually only paying state-administered sales and lodging taxes. Unlike sales taxes, which are almost universally administered by state revenue agencies, a large number of lodging taxes are administered by local tax agencies, meaning city and county governments. The platforms are not paying many of these cities and counties — instead focusing on state taxes, at least to date.
For example, in large vacation rental states such as Florida and Colorado, there are anywhere from several dozen to hundreds of local taxes that the platforms are not collecting and remitting. For owners and operators in Florida, Airbnb and HomeAway are collecting state-administered taxes, but they are not (at least not yet) collecting most county tourist taxes. As a result, many hosts and homeowners are unclear about what taxes the platforms are paying, and what taxes they still need to handle directly.
For example, in Kissimmee in Osceola County, which is the heart of the Disney World area, the total lodging tax rate is 13.5 percent, but Airbnb is only collecting 7.5 percent paid to the state. The remaining 6 percent county tax is still the host’s responsibility, paid each month to the Osceola County Tax Collector. This scenario has become increasingly common across the U.S.
To date, Airbnb and VRBO are the only two major platforms broadly collecting and remitting lodging taxes, but we expect this trend to continue. It is unclear if other platforms, both large and small, will adopt — or be forced to adopt — platform tax remittance per new legislation.
As mentioned, we are also seeing an increase in state legislation mandating that platforms collect and remit tax. But these state regulations typically exclude city and county taxes, similar to the voluntary tax agreements entered into by the large platforms. This creates a patchwork tax solution where platforms collect and remit a portion of the tax, but hosts are still required to manage a portion of the tax themselves.
The big vacation rental platforms tackle compliance
In the past, the lodging tax obligation was always a requirement of the host or homeowner. Up until recently, the platform was simply an advertising or distribution platform. Under that model, the host was required to collect occupancy taxes from the traveler, and then remit those taxes to the correct agencies. The host or homeowner was required to know the tax rate, collect the appropriate tax from guests, register with various state and local tax agencies, and pay the tax when due, typically monthly or quarterly.
Now, the emerging trend in short-term rentals is “platform tax compliance.” Platforms are large short-term rental websites where rental transactions take place, such as Airbnb or VRBO. Platform tax compliance means these large players directly collect and remit lodging taxes for transactions on their platform. When platforms collect tax, the implication is that hosts are then off the hook for collecting and remitting those taxes.
Platform tax compliance is helping more owners and hosts be compliant, but has also created more complexity. Platforms often pay state taxes, but not city and county taxes. There is often confusion because homeowners and hosts are not always clear on what taxes are being handled by the platform. The platforms paying tax often remove some, or all, of the requirements for hosts to collect and remit taxes, but frequently the platform is not paying all the taxes and the host must still manage a portion of the taxes.
State governments are increasingly passing legislation looking to require platforms to collect and remit lodging taxes. These platforms are voluntarily complying in certain markets, and now also complying with new laws, as new tax legislation is enacted across the U.S.
In 2016, Airbnb began collecting and remitting taxes in a few of their largest markets, such as Portland and San Francisco. In mid-2016, Airbnb also started paying statewide lodging taxes with North Carolina. Three years later, Airbnb is paying taxes in over 40 states. Here is a list from Airbnb’s website, disclosing the tax jurisdictions in which Airbnb is collecting and remitting lodging taxes.
Last year, VRBO jumped into the lodging tax collection game. It started paying lodging taxes in a few cities and is now gradually expanding its footprint to pay taxes across a growing number of markets. Here is a list of locations where HomeAway is collecting and remitting lodging taxes.
It’s clear the big platforms want a tax-compliant industry and will help with tax compliance where they can. We expect the big platforms to continue expanding their tax compliance footprint, and that other platforms will start following suit. However, it is important to note that a significant number of tax jurisdictions will not be covered in these platform tax initiatives, and compliance will remain an operator and host responsibility. The large platforms are paying taxes to many states, but there are still thousands of cities and counties that are not included in these programs.
If you have clients who are unsure how these taxes are being handled, we suggest you or they contact the platform, or study the links in this article to go directly to Airbnb and VRBO tax information pages. The platforms are communicating these tax details in various levels of detail. Hosts and homeowners should review listings for tax details and watch for any tax communications received from the platforms and any published tax-related FAQs.