Why lodging taxes are important for property managers
- Mar 26, 2019 | Jennifer Sokolowsky
The vacation rental market has experienced meteoric growth since the founding of Airbnb a decade ago, with no end in sight. In 2012, global room sales of short-term rentals amounted to $45.6 billion. By 2022, those sales are projected to rise to $132.5 billion globally, according to Euromonitor International.
As the short-term rental market has grown, demand for short-term rental property management has also risen. While that presents opportunity, it also means increased competition as more property managers enter the fray.
Amid this competition, short-term rental property managers need to find ways to stand out to prospective clients. If you’re a property manager, one way to differentiate yourself from the competition is to demonstrate expertise in vacation rental lodging taxes. Several trends make lodging taxes an essential part of the property manager’s arsenal.
Growth in regulations
As more people turn to short-term rentals to make some extra cash or as a full-time business, state and local governments are taking notice. The rise of short-term rentals has generated heated controversy in many communities, especially urban areas.
Residents complain that short-term rentals disturb neighborhoods with noise, garbage, and parking issues, as well as other not-so-neighborly activities. Meanwhile, affordable-housing activists accuse short-term rentals of taking up housing stock and exacerbating housing crises. And the hotel industry argues that short-term rentals should have to compete on a level playing field when it comes to paying taxes and maintaining standards.
On the other side, short-term rental operators champion individual property rights and maintain that renting out extra space allows residents to live in places they might otherwise have to leave because of high prices. They also argue that short-term rentals offer an in-demand lodging alternative that boosts tourism.
While many governments simply ignored short-term rentals for many years, they’re now realizing that rules are necessary to balance competing interests and provide structure for vacation rentals — and they’re putting those rules into action. In just the first month of 2019, for example, new state and local vacation rental laws went into effect in Arizona, California, Colorado, Hawaii, Massachusetts, Ohio, and Washington, among others.
Short-term rental ordinances can include license/permit requirements, zoning and density restrictions, occupancy limits, parking and noise rules, and more. These new laws can also levy taxes on short-term rentals, which are generally paid by the guest, but are collected and filed by short-term rental operators.
More communities cracking down
Along with creating new regulations, local governments are making more of an effort to enforce current laws, including tax obligations. In many communities, short-term rentals have long been subject to lodging taxes, even in places that had few other official short-term rental regulations. While those tax rules have often been unenforced, communities are realizing how much revenue they’re leaving on the table when short-term rentals don’t follow tax rules.
Some communities are turning to technological solutions to assist them in enforcing short-term rental rules, with many hiring third-party companies that can help them gather information on which hosts are complying with vacation rental laws.
These companies include Host Compliance, which provides services for more than 150 cities and counties, including Fort Lauderdale, Los Angeles, Nashville, and Oakland. Other companies that help cities with short-term rental compliance include LTAS Technologies, which has worked with cities such as Santa Fe, New Mexico, and La Quinta, California, and STR Helper, which counts Moab, Minneapolis, and Palm Desert among its client cities — and recently announced it will be merging with Host Compliance.
Other communities employ more old-fashioned methods of enforcement. New York City, for example, has led raids over the past year on buildings where illegal vacation rentals are suspected.
Recently, New York upped the ante by issuing a subpoena to Airbnb and HomeAway to force the short-term rental platforms to turn over data for approximately 20,000 listings in order to see which vacation rental hosts might be breaking the law — including failure to meet tax requirements.
Operator awareness = opportunity
As the short-term rental industry has gained a higher profile, short-term rental operators are becoming more aware of the rules and regulations surrounding vacation rentals, including the obligation to collect lodging taxes.
However, lodging taxes can be complicated and confusing. Because short-term rental taxes are extremely local in nature, a given vacation rental may be covered by more than one tax jurisdiction. That means compliance can involve registering with multiple tax authorities, collecting several different taxes, and filing multiple lodging tax returns every year.
With all the work tax compliance can require, it doesn’t contribute at all to a host’s bottom line. When short-term rental operators seek a property manager to ease the burden of running their rentals, lodging taxes may be high on the list of tasks hosts would rather just outsource. This is particularly true if the property manager will be collecting payment from guests on the host’s behalf, since lodging taxes are collected at the time of payment.
Being able to handle short-term rental lodging taxes doesn’t mean you need to become a lodging tax expert overnight. Services such as MyLodgeTax can automate and simplify compliance so you can confidently manage clients’ lodging tax obligations without expertise in all the various tax rules in all your clients’ jurisdictions.
Property managers who can capably handle lodging taxes — including registration with tax authorities, collecting taxes, and filing lodging tax returns — offer a truly valuable service to vacation rental hosts. Having this service in your arsenal can help you raise the bar and break away from the pack.