In recent years, many U.S. cities have seen an unprecedented surge in short-term rentals (STRs). This boom was driven by several factors, including the rise of peer-to-peer online platforms like Airbnb, the expansion of the gig economy, and the influence of social media on travel trends. For reference, between September 2022 and September 2023, the number of homes used as STRs in Vermont increased by 16%.
This rapid growth has significantly impacted local communities, infrastructure, housing markets, and governance. To maintain the character of these areas while promoting economic growth, local governments must thoughtfully implement policies for short-term rental taxation and operation.
This article offers a comprehensive overview of how software for government can aid in achieving these objectives.
Understanding Short-Term Rentals & Tax Collection
Before adopting software solutions for government, the first step toward effective short-term rental tax collection is to define and classify STRs.
Definition & Types of Short-Term Rentals
A short-term rental, also known as a vacation or holiday rental, is a property leased out to guests for temporary stays. The exact definition of a short-term rental can vary by jurisdiction, but they generally share these characteristics:
- Duration: They are rented for brief periods, typically not more than 30 consecutive days.
- Unit type: STRs can include entire properties (e.g., single-family homes, apartments, etc.) or parts thereof (e.g., accessory dwelling units, rooms, etc.).
- Minimum rental days: Some jurisdictions may mandate a minimum number of days per year that the property must be rented out.
- Exclusions: Lodging establishments like hotels, motels, and bed and breakfasts may not always qualify as short-term rentals, depending on local regulations.
Other than property type, there are primarily two types of short-term rentals:
- Owner-occupied: The property owner resides in the unit for a significant portion of the year and rents it out intermittently.
- Non-owner-occupied: The property is solely dedicated to short-term rental purposes, with the owner not residing onsite.
Government agencies overseeing STRs should conduct discovery missions within their jurisdiction to classify these properties. Establishing a clear classification system will facilitate future regulation and tax collection efforts.
Importance of Tax Collection for Short-Term Rentals
Failing to collect taxes on short-term rentals may result in missed revenue opportunities for local governments. This additional income is essential for maintaining and enhancing both the STR ecosystem and overall local services.
Governments can benefit from STR tax collection in several ways:
- Revenue generation: As the short-term rental market expands, STR taxes are becoming an increasingly vital revenue stream for governments.
- Leveling the playing field: Since lodging providers like hotels are subject to taxes, taxing short-term rentals ensures fair regulation.
- Data collection: The tax collection process provides important data on the number, location, and characteristics of short-term rentals. Governments can use this data to make better policy decisions and improve urban planning.
- Supporting tourism: Tax revenue from short-term rentals can be used to maintain, enhance, and expand tourist attractions. This, in turn, boosts the short-term rental market, creating a positive cycle of growth.
- Community benefits: Tax revenue from short-term rentals can mitigate negative impacts like housing shortages and pollution by funding affordable housing, neighborhood improvements, and environmental conservation.
Legislation & Regulation of Short-Term Rental Tax Collection
Once short-term rental regulations are established, a robust system for identifying and classifying short-term rentals can be implemented to great effect.
Current Tax Laws for Short-Term Rentals
Short-term rentals are often subject to a variety of taxes imposed by government agencies. One of the most common taxes imposed on STRs is lodging tax. This tax is known by various names in different locations, such as Transient Occupancy Tax (TOT), Transient Room Tax (TRT), and Hotel Occupancy Tax (HOT).
- Transient Occupancy Tax (TOT): TOT is calculated as a percentage of the rental amount charged to STR guests. It is collected by the STR owner or operator and remitted to the local government within a specific period, usually within the month following the collection period. The rate of TOT varies widely across different jurisdictions, ranging from 6% to 15% or more of the gross rental or leasing charge. For example, in popular tourist destinations like San Francisco or New York City, TOT rates can be as high as 15% to 20%.
- Surcharges: In addition to TOT and other taxes, many local governments impose surcharges on STRs. These surcharges are additional fees added on top of the base TOT rate and vary depending on the specific jurisdiction. For example:
- Vermont: Requires STR owners to collect a 3% surcharge on rents, in addition to a 9% Rooms Tax and any 1% Local Option Tax already collected by the operator.
- Chicago: Imposes a 6% surcharge in addition to the 4.5% base rate for a total city tax rate of 10.5% of the gross rental charge.
Compliance & Collection
Local governments require operators to register their short-term rentals, obtain necessary permits, and collect and remit taxes on a regular basis. To assist STR operators, many cities have implemented online platforms or third-party services to facilitate tax collection and remittance. Failure to comply with tax requirements can result in penalties and fines.
Tax Exemptions
Certain STR stays may qualify for exemptions from tax collection. For instance:
- Federal or state government employees traveling on official business may be exempt.
- Stays of 30 days or more are often exempt as they are classified as long-term rentals rather than transient stays.
Proposed Regulations for Improved Tax Collection
While the short-term rental industry has been around for ages, the relatively new online-based structure of STRs is still young and rapidly evolving, which has created regulatory challenges. To keep up, governments must continuously monitor the STR market, update existing regulations, and propose new ones.
Example of Proposed Regulations
In April 2024, the City of Hampton, Virginia discussed a proposal for deciding where STRs should be located and how to streamline the approval process. The proposal was aimed at limiting the impact of short-term rentals on neighborhoods and included these requirements:
- Dividing the city into 51 zones, with only 1% of residences in each zone allowed to be short-term rentals.
- Ensuring STRs are at least 500 feet apart unless they are side-by-side.
Ongoing regulation efforts like these ensure governments stay ahead of the curve in the STR market.
Benefits of Implementing Efficient Tax Collection Processes
Increased Revenue for Government Initiatives
Efficient tax collection processes significantly boost revenue collection by addressing previously unreported or underreported taxes and fixing loopholes where tax revenue may have been lost.
With increased revenue, governments can help fund initiatives such as healthcare, infrastructure improvements, and social welfare programs. For example, Okaloosa County, FL reported a 14% increase in registered taxpayers and over $1 million in additional funds. These funds were pivotal in completing various projects, including deploying artificial reefs for marine life and advancing waterfront park development.
Efficient tax collection thus serves as a catalyst for economic growth, ensuring sustainable funding for essential government initiatives.
Streamlined Tax Compliance Process
By leveraging technology, tax authorities can provide residents with an intuitive tax experience that guides them through their obligations, thereby increasing compliance rates. Streamlined compliance processes also help to build trust between taxpayers and government agencies, decreasing instances of tax evasion.
This trust is vital for maintaining a stable tax base. For example, following the implementation of a digital tax solution, the Town of Gilbert, Arizona reported improved staff efficiency, enhanced ease for short-term rental owners, and broader community benefits. This is just one example of the many that exist in this realm.
Transparency in Tax Reporting
Streamlined tax solutions enhance transparency by providing real-time access to tax data and transaction records. This accessibility facilitates easy collaboration among tax agency staff and speeds up service delivery.
Tax compliance software also includes change-tracking features that uphold accountability in the tax process, reducing opportunities for tax evasion and fraud.
For STR operators, centralized platforms offer detailed reports and analytics, providing a clear understanding of their tax obligations and compliance status.
Best Practices for Implementing Short-Term Rental Tax Collection
Utilizing Technology for Tax Collection
Switching from legacy tax collection processes to cloud-based systems brings significant benefits for government agencies, especially in managing STR taxes. Digital systems:
- Reduce errors with automatic data validation.
- Improve compliance using bulk messaging to notify STR owners of tax obligations.
- Foster cross-department collaboration on tax activities.
These advancements streamline operations and enhance effectiveness across various aspects of tax management.
Collaboration Between Government Agencies
Collaboration between various government agencies provides a comprehensive understanding of the overall STR market. For example, when the planning, tax, and transportation departments work together, they can better assess the impact of increasing STRs on infrastructure such as roads. This collaborative approach allows them to develop well-rounded tax policies and regulatory measures for STRs.
Educating Stakeholders on Tax Obligations
Simply having a robust tax collection system isn’t enough if STR operators aren’t educated about their tax obligations. Sensitization and public engagement are crucial to ensure taxpayers understand and comply with their responsibilities.
Training Programs for Short-Term Rental Owners
Governments can organize in-person or online training programs for short-term rental owners. These programs cover essential topics such as:
- Taxation basics: Fundamentals of STR tax laws, including the list of required taxes and surcharges.
- Reporting requirements: Guidance on accurate income and expense reporting.
- Use of digital platforms: Practical training on how to file taxes digitally.
- Legal considerations: Implications of non-compliance.
A well-educated taxpayer community is one of governments’ greatest assets in achieving universal tax compliance.
Public Awareness Campaigns on Tax Collection
Public awareness campaigns differ from training programs as they aim to inform the general public rather than just STR owners. These initiatives educate both rental operators and the public on their roles in supporting local tax revenues.
They provide essential information, including how taxes are calculated, and highlight the benefits of tax revenues to the community, such as improved infrastructure and services.
Interactive elements like workshops and online resources play a crucial role in achieving public awareness.
Monitoring & Enforcement of Tax Collection
Once a high-tech tax collection system is implemented and the taxpayer base is educated, governments can proceed to enforce and monitor tax collection. Digital tools are vital in this process.
Tracking Tax Payments From Short-Term Rentals
Digital tax systems provide various methods for monitoring tax payments from STR owners. In some cases, owners handle online tax collection and remittance themselves. In other instances, booking platforms like Airbnb partner with local governments to automatically collect and remit occupancy taxes when a booking is made.
These electronic systems allow tax agencies to track compliance in real time and detect any discrepancies.
Penalties for Non-Compliance With Tax Laws
Digital tax systems simplify auditing by quickly identifying irregularities or non-compliance in tax accounts. Non-compliant STRs are often subject to fines or license suspension for offenses like late payments or misreported revenues. In cases of serious fraud, criminal charges may also be pursued.
Simplifying Tax Collection With GovOS
The GovOS Tax & Compliance Suite is a comprehensive platform that gives governments complete control over short-term rental oversight, from registration to continuous compliance monitoring.
We collaborate with your team to customize a solution tailored to your needs and those of your community. Our tools have helped governments identify 98% of all STR properties and achieve compliance rates of over 90%.
Talk to a GovOS expert today to discover how our software can transform your STR compliance process.
