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Is there a taxman under your bed?

Short-term room rentals are garnering the attention of taxmen on both coasts. For many hosts, this is very scary.

In Los Angeles, city officials are contacting Airbnb hosts and informing them they have to collect and remit local taxes on short-term rentals. These are more than just casual informational letters; they are warnings. And they’re not hollow warnings. On October 1, Airbnb began collecting San Francisco’s 14% hotel tax from visitors booking rooms and apartments in the city. This in spite of the fact that, as in Los Angeles, “short term rentals are illegal in San Francisco.”

The legality of products/activities has never stopped the taxman before; 

illegal drugs are subject to tax in many states.

Short-term rental hosts in New York should be particularly concerned, because New York Attorney General Eric Schneiderman is “cracking down on Airbnb.” Rather than issue warnings (as in L.A.) or seek accord (as in San Francisco), Schneiderman is “looking to shut down the online marketplace’s listings that he argues violate local hotel laws, which are in place to prevent people from renting residences for less than 30 days unless the occupants are also home.”

From California to Florida, businesses are periodically shuttered and business owners shamed, fined, and even sent to prison… because of delinquent taxes.

The New York Attorney General (NYAG) launched an investigation in late 2013 “of users of web platforms like Airbnb who run large-scale enterprises in violation of fire safety, zoning, tax, and other applicable laws.” NYAG issued a subpoena to Airbnb last May, and the online travel company has been cooperating with the office ever since, sharing data in an “anonymized format.”

The result of the investigation is an impressive report spanning nearly 40 pages and released this month. Detailed in the report are many aspects of short-term rentals in New York, including but not limited to, the tax implications of short term rentals.

Airbnb hosts may be particularly put out by hefty tax assessments, should they come. It is one thing to have to close down a business—that means loss of income. It is another thing to have to dig into one’s pockets to pay past taxes (and interest and penalties). Especially when we’re talking about significant amounts.

As explained in the report:

“Anyone who rents out a unit on a short-term basis must pay applicable hotel taxes. These taxes include the New York City Hotel Occupancy tax of 5.875%, plus an additional per room fee of 50 cents to $2, depending on the total cost of the room.

The operator (as relevant here, the host) is personally liable for the portion of the tax collected or required to be collected. The operator must collect the tax for all rentals of apartments or rooms, except in the case of: (1) rental of only one room in an owner-occupied home; (2) rentals for less than 14 days, or for fewer than three occasions during the year (for any number of total days); and (3) “long-term leases,” i.e., rentals for a continuous period of 180 consecutive days.

Other taxes, including sales taxes and the New York City Unincorporated Business Tax (“UBT”), may also apply. The UBT is a 4% tax on net income imposed on individuals or unincorporated entities that carry on or are currently liquidating a trade, business, profession, or occupation within New York City. This includes those engaged in the business of renting out homes and apartments for profit as an unincorporated business.”

[Emphasis mine.]

If you think the taxman doesn’t know you’re there, you’re wrong.

The report notes that New York City alone “is likely owed millions in unpaid hotel taxes from private, short-term rentals.” Even without penalties and interest on unpaid taxes (which the taxman will surely seek), “the total estimated liability for hotel room occupancy taxes associated with the Reviewed Transactions is over $33 million.”

And guess what? The report states, “Few Airbnb hosts appear to have filed the paperwork with New York City necessary to remit hotel occupancy taxes.” Remember “the host is personally liable for the portion of the tax collected or required to be collected” statement? The tax owed could reach frightening proportions,

For its part, Airbnb also failed to collect and remit New York City taxes.

If you haven’t paid your taxes, you should be scared.

There is a chance NYAG and related agencies will go after that tax revenue. The report reads that “the 300,891 reservations that appear to violate the building use and zoning laws yielded approximately $304 million for hosts during the Review Period (January 1, 2010 through June 2, 2014). Airbnb itself earned almost $40 million in fees from these transactions.” Altogether, “private short-term rentals in New York City generated over $500 million in revenue in less than five years…. During the Review Period … transaction fees associated with the Reviewed Transactions resulted in direct revenue to Airbnb of about $61 million.”

Presumably, some people in New York, specifically New York City, have been making pretty good money renting apartments as short-term lodging through Airbnb and similar organizations. It’s been a good run. One can only hope some of that money has been tucked away for the taxman.

Because he’s coming. And he knows where you sleep.

photo credit: goatling via photopin cc