Originally published January 2023
Updated June 2023
If you thought 2023 would bring pre-pandemic normalcy to the lodging industry, think again.
True, the lodging industry has largely rebounded from COVID. Short-term rentals experienced phenomenal growth in 2022 and the American Hotel & Lodging Association expects the hotel industry to experience pre-pandemic levels of demand in 2023. So that’s good.
Yet success usually comes at a price. For some in the lodging industry — notably accommodation platforms, online travel agencies (OTAs), and short-term rental (STR) operators — that price could be greater scrutiny, increased regulation, and new tax obligations.
Technology could help businesses in the lodging sector address these looming challenges, but those businesses won’t be the only ones pinning their hopes on technology. City, county, and state officials will increasingly use technology themselves, both to uncover noncompliance and enforce compliance.
Technology’s time has come
If technology can change the way we research, write, and manage crises, why couldn’t it reshape the lodging sector too?
Well, it can.
State and local officials have long grappled with short-term rental operators that fail to register for necessary licenses/permits; comply with regulations; or collect and remit lodging, occupancy, and sales/use tax as required. It must, at times, feel like they’re losing the battle.
For example, Los Angeles has required short-term rental registrations since November 1, 2019. The city restricts STRs to the host’s primary residence and caps them at 120 days per year, though licensed operators may apply for extended home-sharing rights. Yet a McGill University study from 2022 found 43.1% of active listings to be “multilistings,” meaning the hosts have more than one listing, which is prohibited. It determined a whopping 45% of STR listings in Los Angeles are illegal.
This is costing the city. The McGill study estimates Los Angeles lost between $56.8 million and $302.2 million in unassessed fines in 2022 due to STR violations, and as much as $14.2 million in uncollected local Transient Occupancy Tax (TOT).
Though Airbnb and Vrbo have agreed to collect and remit Los Angeles TOT on behalf of their hosts, some other platforms operating in the city may not do so. Hosts are responsible for applicable taxes if platforms do not collect and remit them, but the McGill study found that some platforms don’t provide a mechanism for hosts to charge the TOT to guests.
The McGill study maintains that “the City has no way of reliably tracking the number of reservations and the price per reservation associated with STR bookings.” However, other jurisdictions are finding that technology can help tax authorities acquire the data they need.
Technology can unearth noncompliant businesses (Big Brother is watching)
“2023 is likely to be the year that government adoption of technology to automate auditing short-term rental compliance in their jurisdictions hits its stride,” reports American City & County. Fort Worth and Galveston, Texas, as well as more than 20 other cities, are looking to use data mining powered by artificial intelligence to identify and monitor noncompliant properties.
A future compliance sweep could include automated audits, whereby AI-powered data-mining technology scrapes information from publicly available STR booking services to identify active properties in a jurisdiction. Tax authorities could then cross-reference that information with what they already know to uncover businesses that aren’t properly registered, permitted, or filing/remitting taxes.
This would be a monumental, resource-eating task if done manually. Machines can do it while humans take care of other tasks — like following up with noncompliant businesses.
As governments turn to technology to crack down on compliance, STR operators can use it to be better neighbors.
Technology can help STR operators be better neighbors
People staying at a vacation rental tend to walk to a different beat than neighboring residents going about their daily lives. As a result, complaints happen. Palm Springs issued 159 citations to vacation rentals in the city from June through August 2020. Los Angeles received 4,370 complaints related to short-term rentals from July 2019 through August 2022.
In Santa Rosa, such complaints get passed to the STR’s local contact, who “shall be available by phone 24 hours per day, seven days per week, during all times when the property is rented.” That person must contact the renter to “correct the problem within 30 minutes” and “ensure that the issue has been corrected within 45 minutes.”
That could get old for everyone involved. Fortunately, there are now tools to help hosts cut complaints off at the proverbial pass. Noise-monitoring and sound-detecting equipment can alert hosts when guests are getting too rowdy. Cameras can keep an eye on how many people are coming and going, the number of parked cars, and trash buildup. And so on.
Furthermore, software/tech can help make a property more competitive, reminds Pamela Knudsen, Senior Director of Compliance Services at Avalara. Dynamic pricing tools help hosts manage shifting consumer demands or rebook after last-minute cancellations. “Pricing and occupancy tools can also help adjust prices based on the current market performance to ensure that your property has a higher occupancy rate and gains a competitive edge.”
Technology can help businesses comply with supercomplex tax obligations
Knudsen says compliance tools can also help ensure hosts pay lodging taxes and other taxes to the appropriate taxing jurisdictions. This is a growing concern for accommodation platforms and online travel agencies (aka online travel companies) as well, because lodging taxes can be dizzyingly complex.
States typically take one of five different approaches to taxing accommodations. For example:
Connecticut, Maine, and New Hampshire each have a single, statewide tax on accommodations but no additional local taxes
Indiana, Minnesota, Tennessee, Virginia, and Wisconsin each have a combined state/local sales tax on accommodations and local jurisdictions can impose an additional local accommodations tax
Georgia, Hawaii, Idaho, Kentucky, Utah, and South Carolina have three separate taxes on accommodations: the general state and local sales tax, a state accommodations tax, and local accommodations taxes
Delaware, Illinois, Oregon, Pennsylvania, and Texas have no state/local retail sales tax on accommodations, but each has a state tax on accommodations and allows local jurisdictions to impose local accommodations taxes
Alaska, California, and Nevada don’t have state/local retail sales tax on accommodations or a statewide accommodations tax, but local jurisdictions levy local accommodations taxes
It’s a lot to keep straight, not to mention collect, remit, and file returns as required. All told, there are roughly 4,000 locally administered accommodations taxes across 30+/- states.
Tax compliance is perhaps most onerous for the accommodation platforms, marketplaces, and online travel agencies that handle bookings across the country or around the world. Their Herculean task is made more difficult by the fact that they may be required to collect and remit some taxes but not others.
We’ve already discussed how fed up with noncompliance many localities have become. When they reach the end of their line, they basically have two options: Ban STRs outright, or regulate and tax them and increase enforcement efforts.
Some cities, like Tybee Island, Georgia, have opted to ban new rentals. Such extreme measures don’t always work: Honolulu passed an ordinance to ban rentals between 30 and 89 days and limit vacation rentals to areas zoned as a resort, but shortly before the new policy was to take effect on October 23, 2022, a federal judge blocked the 30-to-89-day ban. While the issue plays out in court, Honolulu plans to aggressively enforce other provisions of the law.
One argument for regulating rather than banning STRs is the tax revenue they generate. For instance, a community that needs more affordable housing could earmark STR tax revenue for that purpose, as several communities in Colorado are doing. Simply banning STRs may not solve an affordable housing problem because many vacation rentals are large or in highly coveted areas and likely unaffordable for long-term renters. “Communities need to take a balanced approach,” observes Knudsen. “They need to identify what problem they need to solve and figure out whether the solution they’re considering actually solves that problem.”
Travel often drops us into unexpected situations that result in personal growth. Now that travel has resumed after its pandemic hiatus, the lodging sector is experiencing some growing pains of its own. The good news is that the hospitality industry is experiencing an influx of vacationers, business travelers, and a new amalgamation of both. Unfortunately, the growing and convoluted web of lodging tax compliance challenges is evolving and growing as well.
What the numbers tell us
Ready or not, travel’s 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 until at least September 2024 at Amsterdam’s Schiphol Airport, which is also capping flights to reduce noise pollution and protect the environment. And there could be more air industry strikes, leading to more flight cancellations and delays. During the first quarter of 2023, air travel was impacted by strikes across Belgium, France, Italy, Portugal, Spain, and the U.K.
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.
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).
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.
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.
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 Pamela Knudsen. 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 online travel agencies 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, and no limits on them. As of May 1, 2023, when a new short-term residential occupancy regulation took effect, the number of whole-home units available for more than 20 days per year is capped at 1% of San Diego’s housing units outside of the Mission Beach community and 30% of units within the Mission Beach community. That amounts to roughly 6,500 units.
“Cities need to understand the overall economic impact of limiting short-term rentals,” cautions Knudsen. “They need to consider not only the impact it has on the city’s revenue, but also how it affects residents who provide services to short-term rentals, such as cleaning, landscaping, and property management — not to mention the retailers that benefit from the tourists staying at these vacation houses.”
Each homeowner is allowed to operate one whole-home short-term rental under the new rules, and the city has been running a lottery to determine which hosts can continue to operate and which will need to shutter. As of May 26, 2023, it had received 4,227 short-term rental occupancy (STRO) license applications for San Diego (excluding the Mission Beach area) and issued 3,971 licenses; 1,448 licenses were still available. The application period for STRO licenses in Mission Beach is now closed; 186 applicants were on the waiting list as of May 26.
When reviewing applications, San Diego is 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.
Other issues likely to affect the lodging industry in 2023
Renewed focus on 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.
However, few travelers are actually willing to spend more to offset carbon emissions.
An emphasis on green business practices
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.”
Tax requirements for accommodation platforms will grow
Voters in Anaheim, California, approved Measure J, which broadens the city’s definition of lodging “operator” for the purposes of the Anaheim hotel, motel, and short-term rental tax to include accommodation intermediaries such as online and other travel companies, effective January 1, 2023. Measure J also stipulates that the hotel tax applies to associated lodging charges such as booking fees, internet, overnight guest parking, pet fees, resort fees, etc.
Anaheim has been trying to get online travel companies to collect the hotel tax since the mid-2000s, but courts repeatedly ruled that online travel companies didn’t meet the city’s definition of lodging operator and therefore weren’t liable for the tax.
Complying with the new requirements could be a bit challenging for both accommodation platforms and lodging providers, at least while they sort out their processes. Online travel companies must pass the tax they collect on actual lodging charges to the hotel, motel, or STR operator, which will be responsible for remitting the tax to the city. However, if the online travel company and similar businesses charge any fees for their services, they’ll be responsible for remitting the tax due on that fee.
Knudsen says other cities are watching what transpires in Anaheim “and may follow suit.”
Inflation and staffing challenges will take a toll on the hotel industry
The hotel industry is feeling the effects of inflation much like the rest of us, so while nominal room revenue is on track to “reach new heights ($197.48 billion forecasted for 2023 vs. $170.35 billion in 2019), … real revenue recovery will likely take several more years.”
Like so many other sectors, the hotel industry is also struggling to fill open headcount. The American Hotel & Lodging Association expects hotels to employ 2.09 million people in 2023 — a notable drop from the 2.35 million people they employed in 2019.
Increased regulation will take a toll on the STR industry
Short-term rentals will likely encounter greater regulation in a variety of markets, as cities and counties struggle to meet the conflicting demands of businesses, residents, and STR operators. The “wave of new and restrictive regulations” that emerged in 2022 in places like Breckenridge, Colorado; Atlanta, Georgia; and San Diego, California, won’t recede in 2023. For example, an advocacy group is pushing for municipalities across the Hudson Valley to ban vacation rentals outright. Several other communities in New York state are also considering bans or restrictions.
Amenities will help STRs stand out
Competition among short-term rentals is becoming fierce in some markets: 62% of the 1.2 million Airbnb listings in the U.S. were added since 2020. To stand out, Pamela Knudsen says STRs will need to differentiate themselves with amenities.
The top five filters leisure travelers select on Airbnb are pools, Wi-Fi, kitchens, hot tubs, and free parking. Not every property has a pool, of course, but STRs can stand out in other ways. For example, properties suitable for families with children could invest in family-centric items such as a crib, highchair, toys, and board games and advertise availability of these items.
Read the Avalara MyLodgeTax blog to stay informed of lodging tax regulations and policy changes.