From the bustle of New York City to the tranquility of California’s Wine Country, cities across the country are seeing short-term rental properties pop-up at an exponential rate. Thanks to companies such as Airbnb and VRBO, travelers can feel more “at home” in a new city, while residents are able to earn a little extra income to offset their own living expenses. On the surface it appears to be a win-win: vacationers get a bargain on prime real estate for the duration of their stay, and hosts get extra cash in their pocket. But there’s a third party in this equation whose role continues to shift as the market grows and fluctuates – local government.
While municipalities are allowed through their municipal codeto collect a transient occupancy tax (TOT) and business license taxes on short-term rentals as they would for traditional lodging providers and general businesses, the rental markets have seen such rapid growth that local governments have often struggled to keep pace. In fact, some governments don’t even have policies in place that address local tax compliance.
It isn’t just popular destination cities struggling to regulate taxes and get local hosts to comply with tax payments. Cities surrounding metropolitan hubs have untapped earning potential thanks to rental markets.
Richmond, California, offers one example. The suburb of San Francisco is home to massive manufacturing and industrial companies, which increased demand for hotel and residential short-term rental needs because traveling employees, contractors and other visitors arrive to work on brief projects. At the same time, an influx of Bay Area population tightened the overall rental market.
These two realities elevated the challenge of rental housing management as concerns arose about rental impacts on neighborhoods, zoning, and local tax application.
Working with Avenu Insights & Analytics, Richmond addressed the challenge starting with a review of its ordinance. It made the necessary revisions to its governing document, identified all property owners and short-term rental proprietors, then rolled out a compliance and inspection program. From the minimal response received (about 25 percent compliance rate), city leaders realized that most property owners simply didn’t know about the requirements for licensure and health-and-noiserelated regulations.
While an education campaign increased this awareness to more than 70 percent, two simultaneous audits had the strongest impact in changing the revenue picture for the city. A review of short-term rentals uncovered nearly 100 unregistered rentals that contributed to overall TOT revenue, which gets collected from hotel and rental guests before submission to the city andamounts to 10 percent of gross rents.
Secondly, a review of business license revenue identified nearly 2,600 of unlicensed businesses subject to a yearly business license tax, and the resulting outreach to them brought in $2.8million.
There is something for everyone in this ongoing program: the city expects to receive $360,000 in anticipated annual business tax revenue, and the residential landlords have less turnover because rental conditions are improved. Moreover, for the short-term rental market, property owners have the peace of mind with compliance, and Richmond keeps a revenue source that otherwise would go outside city limits for lodging, restaurants and shopping.
In some cases the path to revenue success with short-term rentals is to contact the companies such as Airbnb in order to set up a Voluntary Collection Agreements. In those cases they collect the tax and remit it back to the city; it’s something they are increasingly doing because they see that it’s a good business practice and they want to fulfill their role as a good corporate citizen.
Each jurisdiction has different regulations, so the onus is on leaders to determine what they can tax and how they go about it in this “sharing economy” where health and zoning issues also can get called into question.
Doug Jensen is senior vice president with Avenu Insights & Analytics, provider of revenue enhancement and administration solutions for local governments in California. Contact him at doug.jensen@avenuinsights.com.