From the bustle of New York City to the tranquility of California’s Wine Country, cities across the country are seeing short-term vacation 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 entitled to collect a total occupancy tax (TOT) or business license taxes on short-term rentals as they would for hotels and resorts, the rental markets have seen such rapid growth that local governments have not kept pace. In fact, some governments don’t even have ordinances in place that subject short-term vacation rentals to local tax compliance.
But 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 non-traditional rental markets.
Richmond, California, for example, is not a typical short-term vacation rental destination. An industrial suburb of San Francisco, the city has had an influx of Bay Area transplants who work nearby but struggle to find permanent housing. Richmond also is home to a massive Chevron plant, which further crimps housing and hotel options because traveling employees, contractors and other visitors working on brief projects. Rather than sending visitors to hotels outside city limits where the taxes won’t benefit the residents, a regulated short-term housing rental market presented a unique and lucrative revenue source. And keeping visitors in town means a new, steady stream of business for local restaurants and shops, introducing potential economic growth all around.
To get a handle on its rental market, Richmond made sure it had the right clauses in its ordinance. It made the necessary reviews and revisions to its governing document, then rolled out a rent control 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. An education campaign increased this awareness to more than 70 percent, and simultaneously changed the revenue picture for the city in two ways.
The TOT gets collected from hotel and rental guests before redistribution to the city, which amounts to 10 percent of gross receipts in Richmond. And because short-term rentals are a business, they are subject to a business license tax that pulls in $234.10 a year). All told, Richmond identified nearly 2,800 unlicensed rentals, brought in more than $2 million, and expects to receive $360,000 in anticipated annual business tax revenue from the program.
In some cases the path to revenue success here is to contact the short-term rental platforms such as VRBO and Airbnb in order to set up a Voluntary Collection Agreement with those companies. 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 corporte 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 firstname.lastname@example.org.