Cities Grappling With Challenges Of How to Tax, Regulate Short-Term Rentals

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By Joyce E. Cutler

Oct. 20 — Cities from San Francisco to New York and Portland, Ore., to Palm Beach, Fla., are trying to figure out how and how much to regulate home sharing and to bring what could be considered part of the underground economy out in the taxable open.

Whether renting rooms or whole houses for the weekend BottleRock concert in Napa Valley, Calif., or the sprawling South by Southwest event in Austin, Texas, tenants and homeowners are offering space for sale to strangers who book lodging on hosting platforms such as Airbnb Inc., HomeAway.com Inc., FlipKey Inc. and VRBO.com—Vacation Rentals by Owner. And cities are figuring out how to impose transient occupancy taxes (TOT).

“I think it's imperative that we ultimately bring these initially informal approaches to the economy under the traditional regulatory and tax system that operates city by city but also across the country when you put it all together,” William F. Fox, University of Tennessee economics professor, told Bloomberg BNA.

Part of the reason electronic commerce 15 years ago “developed as rapidly as it did, much of it developed outside the sales tax system,” Fox said Oct. 16. “When you tax one thing and don't tax another, it's not shocking that one grows faster.”

Airbnb offers over 800,000 listings in more than 34,000 cities worldwide. FlipKey offers 300,000 properties in 179 countries. HomeAway, which also runs VRBO, has more than 1 million listings in 190 countries, according to the companies' websites.

“What I think is best for the economy is to line up a reasonable tax structure, a reasonable regulatory structure,” with local governments creating a level playing field “key to allowing a balanced growth,” Fox said.

San Francisco-based Airbnb in the last three months began collecting and remitting San Francisco's 14.5 percent hotel tax and Portland's 11.5 percent TOT on behalf of hosts and guests.

“We'll take the experiences we learn there and move forward,” Airbnb spokesman Nick Papas said Oct. 17. “And by ‘experiences we learn,’ I mean ‘lessons,’ ” Papas said in an e-mail to Bloomberg BNA.

Looking for Answers, Learning From Others

The U.S. Conference of Mayors at the group's annual meeting in June adopted a resolution supporting policies for sharable cities and to allow “short-term rentals of homeowner residential units, with appropriate limits on guest nights, percentage of income generated, and other regulatory controls.”

The National League of Cities in August formed a network of business, policy leaders and city officials to identify regulatory challenges posed by the disruptive technologies that power the sharing economy. The Sharing Economy Advisory Network will create and promote model solutions that can be adopted by communities across the nation as they work to resolve these questions.

“Cities are grappling with these issues and working with them really quickly,” Brooks Rainwater, National League of Cities city solutions and applied research director, said Oct. 17.

“I think one of the biggest pieces of the sharing economy is the cultural shift,” Rainwater said. The sharing economy was born out of cities as young people during the economic downturn focused on sharing, Rainwater told Bloomberg BNA.

The common elements in all cities is the issue of ensuring safety, regulation and licensing systems are up to par, Rainwater said.

“At the same time, the tax piece of this is key,” as home sharing has a real economic development potential, he said.

New York: Millions in Taxes Owed

New York City is owed at least $33.4 million in unpaid hotel occupancy taxes over the past five years, as a result of short-term rentals through Airbnb, an Oct. 16 report by New York Attorney General Eric T. Schneiderman said.

Based on an analysis of some 500,000 Airbnb transactions, the report, “Airbnb in the City,” said the state and city may also be owed sales taxes and unincorporated business taxes on short-term rentals, although it didn't estimate the amount.

“Few Airbnb hosts appear to have filed the paperwork with New York City necessary to remit hotel room occupancy taxes, nor did Airbnb collect any of the hotel taxes owed for the reviewed transactions,” the report said. “Even the most conservative estimate, therefore, finds that private short-term rentals booked through Airbnb incurred millions of dollars in unpaid hotel room occupancy taxes.”

New York City imposes a hotel room occupancy tax of 5.875 percent on private short-term rentals, plus a per-room fee of 50 cents to $2, depending on the total cost of the room, the report said. Anyone who rents out a unit on a short-term basis must pay the taxes, it said.

The report is based on information Schneiderman obtained in an agreement with Airbnb following a May subpoena in the AG's probe of whether the popular home-sharing service allows users to run illegal hotels.

The New York City Unincorporated Business Tax is a 4 percent tax on net income that is imposed on individuals or unincorporated entities that “carry on or are currently liquidating a trade, business, profession, or occupation within New York City,” the report said.

The report, which estimated that 72 percent of Airbnb reservations in New York City violated state laws, is the first of its kind to analyze Airbnb data, Schneiderman said. It looked at 497,322 transactions between January 2010 and June 2014.

In a statement following the release of Schneiderman's report, Airbnb's Papas said the company is proud it “has helped countless families pay their bills and stay in their homes.”

“Now, we need to move forward. We should not deny thousands of New Yorkers the chance to share their homes, pay their bills and stay in the city they love. We need to work together on some sensible rules that stop bad actors and protect regular people who simply want to share the home in which they live,” Papas said.

San Francisco Adopts Regulation

San Francisco Board of Supervisors President David Chiu (D) said there are “real upsides and downsides with these new business models that impact cities differently. And San Francisco, in the midst of our city's housing affordability crisis, we needed to address both the intense downsides of hundreds of housing units being taken off the market a year, which my legislation now prohibits clearly,” with the benefit for “thousands of San Franciscans who have been struggling to pay rent and the mortgage.”

The Board of Supervisors approved Chiu's legislation on first reading Oct. 7. It requires individuals and entities offering homes and spare rooms to rent via hosting platforms to register and pay the city's 14 percent TOT. The legislation, which will go into effect in February 2015, must return to the board Oct. 21 for a final vote and then go to Mayor Ed Lee (D) for his signature.

Lee backed a 2013 U.S. Conference of Mayors resolution supporting the sharing economy.

The amount of receipts in San Francisco is in the $12 million to $15 million range and is “not insubstantial,” Chiu told Bloomberg BNA Oct. 10. “We have a multibillion-dollar budget. But with any new industry, that level of taxation reflects a significant amount of economic activity we're interested in regulating,” he said.

The San Francisco ordinance creates challenges, Carl G. Shepherd, co-founder of Austin-based HomeAway Inc., told Bloomberg BNA Oct. 8. “If it survives, a private enterprise is supposed to track the taxable activity of its customers. That's kind of like the San Francisco Chronicle being asked to track the taxable activities that occur from classified ads. And I don't know how that occurs,” Shepherd said.

Oregon: Proactive Effort

Portland, Ore., began collecting 11.5 percent in transient lodging taxes July 1, Revenue Division Director Thomas Lannom told Bloomberg BNA Oct. 20.

Of that, 6 percent goes to the city and 5.5 percent goes to Multnomah County, which encompasses Portland. In addition, the state of Oregon collects a 1 percent transient lodging tax.

Lannom said his office sent a letter in September to entities such as Airbnb, VRBO.com, HomeAway and FlipKey “requesting information from them about their hosts in Portland and Multnomah County because we felt they were not properly remitting transit lodging taxes as they should. The only operator that stepped forward and entered into an agreement was Airbnb.”

Lannom called it “a proactive effort to enforce our code.” He pronounced Airbnb “in compliance.”

Asked if Portland was considering legal action against the other entities, Lannom said: “I am not at liberty to discuss that at this time; but we are continuing to look at that.”

Regulation, Registration, Taxation

“I think a lot of cities are probably waiting to see how it works out in San Francisco,” said Benjamin P. Fay, an attorney with Jarvis, Fay, Doporto & Gibson LLP in Oakland, Calif., who specializes in local government revenue, land use and complex municipal litigation.

“With TOTs and Airbnb, it is primarily an issue of how to collect the tax, not whether it applies in the first place. I think the really big question is if, how, and to what extent Airbnb rentals will be regulated,” Fay said in an Oct. 16 e-mail to Bloomberg BNA.

Among the cities reviewed trying to devise a regulation, registration and/or taxation scheme:

• Austin, Texas, in September 2013 adopted Ordinance No. 20130926-144 that requires registration and a $285 licensing fee for an operating license if renting for less than 30 days. It also limits the number of short-term rentals permitted per census tract and requires collecting and paying the 15 percent hotel occupancy tax, comprised of a 7 percent occupancy tax, an additional 2 percent venue project tax and a 6 percent state hotel occupancy tax.

• Madison, Wis., in an August 2013 ordinance limited “tourist rooming house” rentals to 30 days a year, and requires licensing by the health department and paying 9 percent room tax.

• Grand Rapids, Mich., subjects one-room, short-term rentals to a $287 licensing fee and requires notification of neighbors.

• New Orleans in July amended its transient vacation rental ordinance to clarify that unlicensed short-term rentals of less than 30 days, and 60 days in the French Quarter, are illegal.

• Los Angeles, which charges a 14 percent TOT on occupancies of less than 30 days, in September said it will send letters to short-term rental property operators about their duty to collect city business and occupancy taxes from renters while working with websites toward voluntary agreements to help collect the tax.

• The San Diego Office of City Treasurer declared the 10.5 percent TOT and 0.55 percent to 1.45 percent tourism marketing district assessment are due on any properties or portion of any structure rented for less than one month whether rented directly by the owner/operator, by property management companies or via Internet travel services.

• Sonoma County, Calif., is exploring how to expand the 9 percent TOT from vacation rentals to shared housing while the city of Auburn in the Sierra Nevada foothills is exploring creating an ordinance to regulate the industry.

• The city council in Malibu, Calif., in May authorized issuing subpoenas to websites advertising short-term rental properties at the beachside community that charges a 12 percent TOT.

Cities and counties “are very independent creatures” that will come up with “a whole bunch of different solutions to this issue” as the questions and answers evolve, William “Jim” Priest, of counsel in the municipal law practice group of Best Best & Krieger LLP in the firm's Ontario, Calif., office, said Oct. 17.

“I think over time what will happen is this will get figured out. It may take legislation, it may take litigation, it may take both,” Priest told Bloomberg BNA.

Such is the case in the long-running litigation over taxing hotel rooms booked through online travel companies including Priceline Group Inc., Orbitz LLC, Expedia Inc., Hotels.com LP, Hotwire Inc. and Travelocity.com LP. “We're starting to get some resolution on these issues but it's taken a decade.” Priest said.

Regulate or Litigate?

San Francisco is “ahead of the game” in regulating online hosting companies, Brad Marsh, a shareholder with Greenberg Traurig LLP in San Francisco, told Bloomberg BNA Oct. 16. “It's almost like the new tax system you see around the country is making previously outlawed or fringe events taxable.”

Marsh, who focuses on state and local tax matters, said local tax authorities have two choices—litigate or legislate.

They can legislatively amend their laws to cover the activity to get to short-term rentals and taxes in jurisdictions that may require supermajority votes on tax measures, he said. “Instead, they're litigating and taking their old code from the '70s or earlier and say that applies. That's why there's this litigation. The jurisdiction is taking the risky but potentially politically easier route of just doing it,” Marsh said.

“The taxing authorities can't spend time to go after that three-person, three-night rental but they can spend the resources to go after these booking agencies that are managing it,” Marsh said.

Palm Beach Goes to Court

Anne Gannon, tax collector for Palm Beach County, Fla., selected the lawsuit route, and in January sued Airbnb, HomeAway, TripAdvisor LLC and Couchsurfing International Inc. alleging the defendants failed to register as transient accommodations dealers and collect and remit county-imposed 5 percent tourist development taxes (Gannon v. Airbnb, Inc., Fla. Cir. Ct., docket number unavailable, complaint filed 1/13/14).

The lawsuit seeks a court declaration whether defendants fall under the statutory scheme. The companies charge a service fee as a condition of using the accommodations and as such are required to collect and remit applicable taxes, the filing said.

Gannon declined Oct. 15 to comment on the lawsuit to Bloomberg BNA.

A Couchsurfing spokeswoman also declined to comment Oct. 15. Couchsurfing's website said the 10-year-old network of more than 9 million members connect for a “hospitality exchange, ranging from hosting one another in their homes to having a beer to becoming close friends and travel companions.” Couchsurfing members don't charge other members directly or through Couchsurfing, although Gannon's lawsuit seeks to audit their books and records.

With assistance from Gerald Silverman in Albany, N.Y., Paul Shukovsky in Seattle and Nora Macaluso in Lansing, Mich.

To contact the reporter on this story: Joyce E. Cutler in San Francisco at jcutler@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

Text of the U.S. Conference of Mayors 2014 resolution on innovation in local policies to advance sharable cities is at http://www.usmayors.org/resolutions/82nd_Conference/metro10.asp.

Text of a 2013 resolution supporting policies for shareable cities is at http://www.usmayors.org/resolutions/81st_Conference/metro18.asp.

Text of Schneiderman's report is at http://www.ag.ny.gov/pdfs/AIRBNB%20REPORT.pdf.

Text of the Malibu city council report on short-term residential rental subpoenas is at https://www.malibucity.org/AgendaCenter/ViewFile/Item/1083?fileID=1243.

Text of the complaint in Gannon v. Airbnb Inc. is at https://www.pbctax.com/sites/default/files/pdf/PBC%20Tax%20-%20Complaint%201-13-14.pdf.