How Cities Should Regulate Short-Term Rentals

Tax compliance is one of the major issues in the short-term rental market. In San Diego, demand for short-term vacation rentals through websites like Airbnb, VRBO and Home Away have spiked in recent years, exacerbating the need for more stringent regulation of the market. To find out what the laws are regarding short-term rentals and how cities, like San Diego, can encourage compliance, we sat down with Rob Stephens, co-founder of Avalara MyLodgeTax, a company that helps find simple compliance solutions for vacation rental owners and operators. Here, he tells us about the demand for short-term rentals in San Diego, the tax requirements in the city, and how it can encourage compliance.

GlobeSt.com: What is the short-term rental activity like in San Diego?

Rob Stephens: San Diego is a major tourist destination and an attractive and sizable short-term rental market. Just clicking on VRBO this morning shows me they list over 7,300 rentals in San Diego—and this is only one of the leading short-term rental websites in the area. The beaches and attractions, such as SeaWorld and the zoo, make San Diego especially appealing for families, which is one of the biggest consumer groups of short-term rentals. Through Avalara MyLodgeTax’s platform, we are seeing 60% to 70% year-over-year growth in revenue reported and tax remitted to San Diego, so the short-term rental market continues to see healthy growth.

GlobeSt.com: What are the short-term rental tax requirements in San Diego, and have users been compliant?

Stephens: Each rental property needs to be registered and licensed with the city. There is a 10.5% occupancy tax for any homes rented out for less than a month. Once registered, the occupancy tax must be reported and paid to the city each month and the license must be renewed each year. The monthly filing requirements catch many people by surprise, as they are accustomed to filing income taxes annually. San Diego is a bit unique in that vacation rentals pay a lower occupancy tax compared to hotels.

There are two segments to think about with respect to the compliance level. Property managers and commercial operators typically have a high compliance rate. Historically, the other segment, for rent by owners or hosts, has not fared well in terms of compliance. But compliance is certainly on the rise as the tax becomes a bigger issue in the industry and people are more aware of the requirements. In the past, people were simply unaware of their tax responsibilities, or they had some level of awareness but were not familiar with how to achieve compliance. Transient occupancy tax is a business tax and a significant number of people are currently simply unfamiliar with those business tax processes. The Avalara MyLodgeTax business model is dedicated to ensuring compliance by managing these taxes and licenses, specifically for these individuals who are unfamiliar with these taxes and may want help. We take care of all the forms, registrations, filings and tax payments for our customers so they don’t have to worry about it.

The industry leaders certainly view compliance as important, work to educate their users on these requirements and, in the case of Airbnb, they are paying the taxes directly to the city on behalf of their hosts.

GlobeSt.com: How do you think that cities should be regulating this industry and encouraging compliance with the rules? 

Stephens: It is up to each city and community to determine the proper short-term rental environment and appropriate regulatory framework. At Avalara, we are agnostic as to what policies each community adopts. Our role is to make following the rules and paying the taxes very simple for our customers based on whatever rules are adopted by a city. I would add, our experience is that intensive regulation often doesn’t work, is difficult to enforce, drives the industry ‘underground’ and doesn’t really meet the goals of the regulation in the first place. We advocate fact-based policy decisions, the debate over short-term rentals can be very passionate and heated, and not everyone understands what the industry is about.

GlobeSt.com: What is your outlook for the short-term rental market, and how do you anticipate these issues with regulation and taxation will unfold?

Stephens: We expect short-term rentals to continue strong and robust growth, largely driven by rising traveler demand. The more travelers experience short-term rentals, the more they like it. Leading short-term rental platforms are making the industry easier, more accessible and increasing accommodation options.

Regulation and taxes is certainly one of the primary issues the industry is dealing with and will need to solve. I believe we are in the relatively early stages of working through the tax and regulatory issues. Again, each community needs to determine the appropriate tax and regulatory framework for their community, but I am confident that over the next several years the industry will continue to grow and find regulatory solutions that work for communities and the industry.

In the short-term, some communities will heavily restrict or ban short-term rentals in some cases, but I don’t believe, broadly speaking, that this will be the norm across the U.S., especially over a three- to five-year time horizon.