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Keeping pace with rapid changes in the digital age can be challenging for state and local taxing authorities. Short-term rentals are an example. In this article, Liz Malm of MultiState Associates discusses the challenges posed by short-term rentals and the legislative actions to address these challenges.
By Liz Malm
Liz Malm is an economist and senior policy analyst at MultiState Associates, where she follows, analyzes, and reports on emerging state tax legislation across the country. Liz earned her graduate degree in economics from Duke University. To contact Liz, please email her at firstname.lastname@example.org.
State and local tax-writers face a perpetual struggle: how can they make sure their tax codes keep pace with the dynamics of our constantly changing economy? Short-term lodging represents a perfect case study of this phenomenon. Technology has made renting homes, other property, or portions of those properties faster and easier than ever. But tax codes haven't kept pace with these new markets and business models.
Vacation rentals have been around for decades, but technology-assisted short-term lodging has changed the game beyond Craigslist ads for a weekly beach rental and classifieds for spare bedrooms or basement apartments. In today's digital world, we now have short-term rental marketplaces that act as intermediaries between the renter and the property owner (known as the “host”). Hosts advertise private homes, condos, and apartments (or rooms within these), on the marketplace, and the marketplace provides services to both the renter and the hosts. These services may include photographing and marketing the rental property, advising regarding appropriate rental rates, providing a place for potential renters to read property reviews, and acting as a financial intermediary for the transaction between the renter and the host. This is where the tricky tax issues come in.
Newer short-term rental marketplaces serve as another accommodation option alongside traditional lodging (such as motels, hotels, and bed and breakfasts). These new business models emerged in a sector that is already widely subject to transaction taxes, whether at the state level, the local level, or both. Where these taxes exist they often exceed general sales tax rates. According to the National Conference of State Legislatures, state-level taxes on accommodations exist in all but three states, and in those states without a state-level tax, taxation occurs at the local level. In many cases, these state and local tax statutes and rules apply to traditional lodging, but often don't efficiently relate to new forms of short-term lodging.
A well-structured tax system shouldn't advantage an entire subsector (short-term rentals booked via home sharing platforms) over another subsector (traditional lodging) by requiring tax to be collected on one and not on the other. Tax parity between similarly-situated taxpayers (or similar activities) is an important feature of any tax system, so short-term rentals serving as a substitute for traditional lodging shouldn't be subject to different taxes. To achieve parity, many state and local laws need to be updated so that hotel, lodging, and other applicable accommodations tax statutes address short-term rental marketplaces. Tax authorities are further hampered by the fact that, in many jurisdictions, the underlying activity being marketed—short-term rentals of housing stock—may be illegal. Or, where legal, tax authorities often face an environment where hosts may not be registering pursuant to existing law.
During the 2017 state legislative sessions, we followed 53 bills in 24 states that dealt with short-term rentals and addressed taxation in some manner (many examined tax and regulation in tandem). These bills varied from state to state and pursued a variety of policies: some authorized, prohibited, or limited local taxing authority; some amended definitions so that short-term rental marketplaces were incorporated into existing tax statutes; some explicitly levied taxes on short-term rentals booked via a marketplace or platform; some allowed voluntary collection and remittance by the platform (but didn't mandate collection and remittance); some only required future study of the issue in general (including the tax component); and some required platforms to notify consumers about collected and remitted taxes if it occurred (among other approaches).
Despite all of this activity, the issue is far from settled. States haven't found a uniform way of creating a system of tax parity between short-term rentals booked via marketplaces and traditional lodging. Fortunately, there is an efficient solution to this challenge: requiring the marketplace to calculate, collect, and remit tax on rentals booked via the marketplace where the marketplace serves as the financial intermediary. This is similar to the way in which consumer sales taxes are collected: while they are levied on the consumer, the retailer collects and remits the taxes due.
Short-term rental marketplaces already collect the necessary information required to ensure proper tax compliance (such as the amount paid by the renter, the number of nights booked, and location of the property) and also possess the necessary technology to facilitate monetary transfers between property renters and property owners. This makes them the obvious remittance point when crafting a system that isn't overly burdensome for renters, hosts, or governments.
Because of the existing tax disparity between new and traditional forms of lodging (and the revenue pressures many governments faced over the last few years), many states and localities have pursued a quick (but subpar) option: confidential collection agreements in which a rental marketplace agrees to collect and remit taxes on behalf of hosts if the taxing entity agrees to certain stipulations (such as annonmyzed user data and prohibitions on data sharing with other governmental agencies, such as those responsible for regulatory oversight).
An investigation into some of these agreements (only a handful of them can be viewed publicly) was conducted by Dan Bucks, former Director of the Montana Department of Revenue and Executive Director of the Multistate Tax Commission. He found that these agreements have serious flaws, including “unjustified favoritism of [the platform] and its lodging operators,” “violating standards of transparency and democratic governance,” “undermining compliance with tax and regulatory laws,” and “spreading undesirable precedents through state laws patterned after the agreements.” According to Mr. Bucks,
“Because of the serious problems created by the agreements, the report recommends that tax agencies stop signing…agreements and oppose legislation that would incorporate those features in law. Agencies that have signed those agreements should reevaluate them and consider termination. As a better alternative, agencies should seek legislation updating lodging tax laws to ensure proper compliance and undertake a comprehensive lodging tax compliance program.”
Tax officials in some localities have rejected such agreements. Doug Belden, the Tax Collector in Hillsborough County, Florida, passed on a deal with one lodging platform because “the company wouldn't be liable for any past tourism taxes uncollected,” it “would bar county access to information about individual…users” and without that data, the county would not be able to verify that the correct amount of taxes were being remitted. There were also concerns that confidentiality requirements were in violation of open records laws. Hillsborough did ultimately end up entering into an agreement, but one where the platform is required to “report information on accounts to the tax collector for auditing purposes and to make sure the appropriate taxes are collected.”
Voluntary collection agreements create a system lacking in certainty and stability for governments (they can be terminated at any time) and lacking in transparency for all parties involved (except for the platform). They make proper oversight from tax officials difficult, if not impossible. And they don't achieve parity: by definition, they apply only to those entering into the agreement.
There is still significant uncertainty for states when it comes to the taxation of short-term rentals, and legislative discussions in many states will likely continue (and expand) in 2018. Of all the short-term rental bills we followed this year, just five were enacted. Regulatory-only legislation was approved in Nevada, Utah, and Virginia, and legislation imposing strong tax remittance processes were enacted in Wisconsin and Idaho. That leaves a majority of the states still left with ambiguity when it comes to taxation of home sharing, making it a top issue for state lawmakers to pursue during their next legislative session. Lawmakers in New Hampshire and Maine have already signaled interest in 2018—short-term rental bills have already been prefiled in these states, and they likely won't be alone.
Copyright © 2017 Tax Management Inc. All Rights Reserved.
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