What to Know About Occupancy Taxes and Short-Term Rentals
The increased popularity of vacation rentals (or Airbnbs) has brought city and county tax agency focus on short-term rentals, seeking hotel occupancy taxes and introducing new and complicated requirements that tax professionals need to be aware of.
Short-term rentals, like those offered on services such as Airbnb and VRBO, have always been required to collect and remit sales and lodging taxes. Historically, the large vacation rental websites viewed these occupancy taxes as the responsibility of the host or homeowner responsibility, not the platform.
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 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 lodging taxes.
Over the last several years, 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, which are basically the same taxes collected by hotels. Hosts and homeowners automatically think of income taxes when they hear the word ‘tax’ as they are simply not familiar with the class of business taxes known as lodging taxes.
Changing Lodging Tax Laws
The tax environment for short-term rentals is changing dramatically. 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 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.
Out west, New Mexico recently updated their statutes, which now require short-term rentals owe 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 example where an exclusion is still in place, known as the “Bungalow Exemption.”
The Rise of Platforms and 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 these platforms collect tax, the implication is that hosts are then off the hook for collecting and remitting those taxes.
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.
Platform tax compliance is an emerging trend in short-term rentals and has also created confusion amongst many operators. Platforms often pay state taxes, but not the city and county taxes.
There is 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.
How and When Platform Compliance Got Started
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. Last year, VRBO jumped into the lodging tax collection game. Another platform, HomeAway, started paying lodging taxes in a few cities and is now gradually expanding their footprint to pay taxes across a growing number of markets.
Lodging Tax Confusion
So, what is causing all the lodging tax confusion? The platforms are usually paying state administered sales and lodging taxes. Unlike sales taxes which are almost universally administered by state revenue agencies, a huge amount of lodging taxes are administered by local tax agencies, meaning city and county governments. The platforms are not paying a high number of these cities and counties—instead focusing on state taxes, at least to date.
For example, in large vacation rental states such as Florida or Colorado, there are anywhere from several dozen to hundreds of local taxes that the platform is not collecting and remitting. For owners and operators in Florida, Airbnb and HomeAway are collecting Florida 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.
Of the 13.5 percent tax due in Osceola County, the platform is paying 7.5 percent of the tax that is administered by the Florida Department of Revenue. The remaining 6 percent is the homeowner’s responsibility, paid each month to the Osceola County Tax Collector.
Of the 12.275 percent tax due in Breckenridge, Airbnb is paying the 6.375 percent of the tax that is administered by the Colorado Department of Revenue. The remaining 5.9 percent is the host’s responsibility, paid to the town of Breckenridge, usually each quarter.
These are two examples where platforms collect some (but not all) taxes and 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 platforms to 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.
Where Do We Go From Here?
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 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 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. These cities and counties will remain the responsibility of each host and homeowner.
For anyone with clients who are hosts and operators that are unsure how these taxes are being handled, we suggest they contact the platform, or study the links in this article directly to Airbnb and VRBO tax information pages. The platforms are communicating these tax details in various levels of depth, so review your listing for tax details, tax communications you receive from the platforms and any tax related FAQ’s.