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Local Tax Registration Tips for Hospitality Clients

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Feb 12th 2018
SALT partner TaxOps
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Local tax registration is a common tax compliance issue among small businesses in the hospitality industry – and there are several issues.

Many rental property owners and Airbnb hosts are under the misconception that:

  • if they have not registered as a business entity, such as an S corporation or LLC, they do not have to register with their local tax authority to receive a license;
  • there are various local requirements around collecting and remitting sales and occupancy taxes; and/or
  • if they are renting their primary or secondary home, or only renting occasionally, they are exempt from licensing requirements.

While there are some exceptions, more times than not, anyone renting property on a short-term basis needs to be registered, licensed and tax compliant. Ensure your clients avoid costly fines by ensuring they comply with local tax registration requirements for rentals and hotels.

Understanding Definitions of Lodging and Hotels

Depending where the rental property is and what type of rental, your client will need the appropriate business license, occupational license or vacation (or nightly) rental permit. Depending on the type of rental they operate – hotel, vacation or occasional – many states require a rental owner to register for a license or a permit.

Tax, registration and regulatory requirements can vary between these categories, depending on the location of the rental property in question. For example, certain categories of rentals may be required to complete additional regulatory certification to meet building or housing standards. Many states also require owners to add their license or registration number to the online rental listing.

Hotels. Most states define the hotel category as any business whose primary purpose is to provide a short-term room. This can include motels, campsites, bed and breakfasts, or tourist courts for RVs and campers.

A room remarketer, such as an internet travel website, can also considered to be a hotel operator, and must register and collect sales and lodging taxes on any charges to its customers that are related to occupancy – costs typically include nightly rental charges, pet and cleaning fees, if applicable.

Some states have provisions that distinguish between hotel guests and permanent residents. In order to be a permanent resident, a guest must stay in the hotel for at least 90 consecutive days without interruption. Additionally, many jurisdictions exempt stays for 30 days or more as not subject to short term lodging taxes.

Lodging or Vacation Rentals. A common misconception is that longer-term vacation rentals do not have the same registration requirements as hotels, but Airbnbs, summer rentals and other non-hotel type lodging businesses usually do have to register and collect and remit taxes. Lodging or vacation rentals can extend beyond the standard short-term hotel stay to a number of months, including summer rentals, and short-term rental properties may have additional tax and registration requirements based on the state, city or county. Although the definition of a short-term rental varies from state to state, it is usually less than 30 days.

You may want to advise your clients to require stays of specific durations to be designated as one category or the other. Some states limit rental or lodging operations. For example, San Francisco limits entire-home rentals to just 90 days a year.

Section 280A of the Internal Revenue Code governs the tax treatment of homes that are used for personal and rental purposes. In general, a home is treated as being used for rental purposes for any day it is rented for fair market value.

Which Category is Your Client?

Many vacation rentals straddle the line between lodging or hotels; numerous states use the service provided (or not) to differentiate between the two. If hotel services are provided, including housekeeping, food, or other common hotel amenities such as entertainment or planned activities, the room, is considered a hotel and taxable as such.

As mentioned above, if your client uses Airbnb to rent out a room while continuing to reside in the same dwelling or apartment, this would be considered personal use of the dwelling and would receive the corresponding tax treatment.

Location, Location, Location

Across many U.S. states, the planning and zoning department must approve your client’s application before a license will be issued. If the property is not zoned for short-term rentals, the jurisdiction will not issue a license.

At the state and local level, there are numerous locations where short-term rentals, such as nightly or weekly, are restricted or prohibited altogether. Find out if your client’s property is zoned for vacation rental use or short-term rentals.

You can easily find out the permitted uses of a particular property by contacting the city’s planning and zoning office. If your client’s rental is located within a city’s principal limits, they will likely need to collect city taxes and register, in addition to any county or state requirements.

Frequent Filing Requirements

Your client will likely be required to file the appropriate tax returns with the state, county or city, or potentially all three based on the location of your property on a monthly or quarterly basis. In addition, states are increasingly requiring electronic filing of occupancy tax returns.

Some hotel or lodging licenses require annual renewal (and annual fees). The local agency that ensures compliance will typically send your client a renewal notice requiring payment of a set fee or a fee based on the total gross receipts for the year. Advise your client on the need for renewal and any associated fees if applicable.

Finally, if your client’s property is a part of the European Union (EU) or China, they may need to assess the Value Added Tax (VAT) on the services provided. Airbnb is required to collect VAT on its service fees in countries that tax Electronically Supplied Services. Currently, this includes all countries in the EU, Switzerland, Norway, Iceland, South Africa and Albania. Airbnb is also required to collect VAT on its service fees from all users who contract with Airbnb China.

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