Avalara Tax Changes 2023

Lodging tax changes

Avalara Tax Changes 2023

Lodging tax changes


Travel is back, as anyone who’s traveled recently knows. Businesses in the lodging industry are catering to an influx of holiday travelers, business travelers, and a new amalgamation of both. This is good news, but it also comes with tax compliance challenges. (Doesn’t everything?)

SOURCE: GlobeNewswire


SOURCE: Avalara

Ready or not, travel’s coming back

International tourism expenditures reached a 25-year low in 2020, according to Skift Research’s State of Travel 2022 report, but they’re on their way back up. Tourism experts from the United Nations World Tourism Organization are “cautiously confident” about the state of the industry. Despite rising inflation and high oil prices, 65% of the experts surveyed expect better tourism performance in 2023 than in 2022.

There will still be long lines. Daily passenger caps will continue at least until March 2023 at Amsterdam’s Schiphol Airport, which is suffering from a lack of personnel much like many airports. And there could be more air industry strikes, like during the fall of 2022, leading to more flight cancellations and delays.

That’s just what happens today when people are on the move.


Lodging leads the travel recovery charge

Perhaps more than anything else, people on the move need a place to stay. That could be why the accommodation sector is leading the recovery for the travel industry. 

Occupancy rates in U.S. hotels are improving, though they haven’t quite returned to pre-pandemic levels. 

Vacation rentals have been particularly popular. Short-term rentals accounted for roughly 27% of the U.S. lodging market in 2021, a 10-point increase over 2019. They’re such a successful business model that even traditional hotel companies like Marriott International have entered the space.

Short-term rentals are practically perfect for bleisure, blended business and leisure travel.


Business vs. and leisure

Business travel is recovering more slowly than leisure travel, but bleisure is helping to bring business travel back. 

Skift Research found about 38% of U.S. travelers today are laptop luggers, people who bring laptops on vacation so they can stay three to six days longer but get some work done. Digital nomads have turned bleisure into a lifestyle. Skift predicts digital nomads could be a $1 billion new market in the U.S. alone. A growing number of people able to work from anywhere (WFA) are traveling for an extended period of time (more than 10 days).  

Bleisure, laptop luggers, digital nomads, WFA. As these trends shape our lexicon and alter the shape of travel, they also help contribute to the rise of short-term rentals (STRs).

Short-term rentals

Let’s be honest, short-term rentals don’t appeal to everyone. One too many experiences with a host that expects guests to start a load of laundry and mop floors before leaving can sour a person on STRs for life. In fact, 72% of respondents in a 2021 survey said they’d rather stay in a hotel or resort than a vacation rental.

But for many people, especially the under 34 crowd, vacation rentals are where it’s at. Airbnb statistics reported by iPropertyManagement show that just over half of all Airbnb bookings are by travelers between the age of 18 and 34.

Expecting demand to outstrip supply, Airbnb is working to “unlock the next generation of hosts” and boost its inventory of short-term rentals. A growing number of hosts now own multiple properties. In fact, almost 60% of bookings on Airbnb in 2019 were for hosts with multiple listings on the platform. This growing trend is known as the “professionalization” of the STR industry.

The more properties a host has to take care of, the more likely they are to turn to a professional property manager to help shoulder the work required.

SOURCES: iPropertyManagement and Skift

As if cleaning one house isn’t enough

In 2020, more than 60% of hosts employed a property manager to fully manage their rentals. That figure could be even higher now. “Vacasa and other property management companies are growing exponentially,” says Oliver Hoare, general manager of Lodging at Avalara.

Many short-term rental owners (49% of respondents to a survey) that use property managers live too far from their rental properties to easily oversee day-to-day operations themselves. Another 66% of property owners surveyed say they brought on a property manager for convenience. 

Plus, properties managed by professionals tend to see higher revenues, longer stays, and extended booking windows than properties managed by individual hosts. But good things come at a cost, and for property managers, one of the most costly costs is tax compliance.


SOURCE: Avalara

There’s no escaping tax compliance

Tax compliance could be the most onerous aspect of owning or managing a short-term rental property, with the possible exception of trash-throwing, partying guests. It’s so burdensome that,  according to Oliver Hoare, only about 25% of short-term rental owners comply with registration and tax requirements. The rest generally operate under the table. “Avalara’s biggest competitor is noncompliance,” says Hoare. 

Hosts may not realize they’re required to register to collect and remit applicable state and local taxes, of course. They may think online travel agencies (OTA) like Airbnb, FlipKey, and Vrbo handle tax for them. And here’s the confusing bit: Some platforms are responsible for collecting and remitting some taxes; others aren’t.

For the most part, OTA platforms are considered marketplaces and are subject to marketplace laws, which hold marketplaces responsible for collecting and remitting tax on transactions made through the platform. However, oftentimes marketplaces are not responsible for all taxes within a given state; marketplace laws may only apply at the state level, not the local level. 

Some platforms have voluntarily decided to collect all taxes within a given state, notes Pam Knudsen, senior director of Compliance Services at Avalara. Others have not. “The property owner needs to know which taxes their platform is collecting and which ones they’re still responsible for.”

State and local tax requirements: A pain point for all

Because they tend to have more influence and clout than individual hosts, many OTAs are in a position to advocate for themselves and negotiate with tax authorities. Where they’re not required to collect and remit applicable taxes, hosts or property managers are. According to a 2022 study by the National League of Cities, 82% of surveyed cities require short-term rental hosts to remit taxes directly to the city, while only 5% require the platform to collect and remit local taxes on the hosts’ behalf. 

The Vrbo website clearly states, “Property owners and managers are responsible for understanding and complying with the laws and regulations applicable to their property listing. You’re also responsible for collecting and remitting lodging taxes when we’re not liable to do so.”  

Airbnb explains, “As a host, depending on your location, you may be required to collect local tax … from your guests.” It’s made agreements to collect and remit certain state and local taxes on behalf of hosts in some jurisdictions, but not others. 

Unfortunately, Airbnb, Vrbo, and similar platforms may not tell each host exactly which taxes they do and don’t collect. They’re not tax professionals; it’s not their job or responsibility.

So STR hosts and property managers have to figure out where they’re required to register and which taxes they’re required to collect and remit. It’s incredibly complicated. Some hosts may accidentally charge customers tax that the platform has also collected. Others may simply opt to not deal with tax at all. 

In the long run, playing that game can lead to some serious consequences.

San Diego shuts down nearly 50% of the city’s short-term rentals

There were more than 12,000 STRs in San Diego in 2022. After May 1, 2023, there will be no more than 6,500. A new short-term residential occupancy regulation is cutting and capping the number of units available for more than 20 days per year to 1% of San Diego’s housing units. Each homeowner is allowed to operate one short-term rental under the new rules.

“This is a pilot that everyone will watch,” says Pam Knudsen. “Cities will be gauging the economic impact on San Diego, whether the new regulation leads to an increase in housing stock or a decrease in economic activity and tax revenue.”

The city is running a lottery to determine which hosts can continue to operate and which will need to shutter. It’s prioritizing “good actors,” hosts with fewer than three verifiable complaints that paid transient occupancy tax (TOT) directly or through an OTA.

There’s just one thing: The city has a hard time determining whether hosts are tax compliant. Those that register and remit to the city directly are considered likely to be compliant. But those that rely on an OTA to collect and remit the tax are less likely to be considered a good actor because, per the City Treasurer, “the City does not receive the data necessary to verify eligibility.”

It’s a big problem, for San Diego and its lottery as well as for any other state or local tax official trying to keep track of short-term rentals and related lodging taxes.

States may lean on marketplace facilitator laws

More states are extending their marketplace facilitator laws to online travel agencies (OTAs), making them responsible for collecting and remitting applicable lodging taxes on behalf of their hosts the way Amazon and other online marketplaces must collect and remit applicable sales taxes for third-party sellers. 

For example, as of October 1, 2022, OTAs, travel agents, and third-party marketplaces are responsible for collecting and remitting Virginia retail sales and use tax and transient occupancy taxes on room charges (including fees retained to facilitate the sale). Virginia also now requires intermediaries like OTAs to report a list of property addresses for all accommodations they facilitate in the locality, along with the gross receipts for all facilitated accommodations.

Effective January 1, 2023, marketplace facilitators must collect and remit any “other taxes” administered by the state of Oklahoma, including local lodging taxes. The Oklahoma Tax Commission serves as the single point of registration and remittance for these taxes. Oklahoma did not institute a reporting requirement like Virginia. 

Knudsen expects more to come on this topic as local jurisdictions also look to simplify compliance by holding marketplace facilitators responsible for collecting and remitting the applicable tax.

SOURCE: Avalara

Other issues likely to affect the lodging industry in 2023

The impact of travel on the environment and the environment on travel

Many companies are looking to reduce business travel to reach emission-reduction goals. While unlikely to make much of a dent in the travel industry in the near term, this trend could eventually cut into the industry’s revenue.

As extreme weather events become more common, travelers will be increasingly impacted by rerouted and canceled flights and the like. If it gets bad enough, some will stay (closer to) home.


Green business practices

In line with the above, a growing number of travelers are taking sustainable business practices into consideration when planning trips. According to a Skift survey conducted in February 2022, 24% of U.S. respondents said sustainability was more important to them at that time than before COVID-19. Nearly 50% of respondents want sustainable practices to be certified by an independent third party, for fear of “greenwashing.”

However, few travelers are actually willing to spend more to offset carbon emissions.


Stay tuned. We’ll share more insights in our upcoming comprehensive lodging industry report coming your way in 2023.

Avalara Tax Changes 2023

A tax compliance guide for businesses

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