The Other Complication for Airbnb and the Sharing Economy: Taxes

Few people involved in the sharing economy know what taxes they're supposed to pay, nor how to pay them. Because the rules are unclear, enforcement is almost nonexistent, and the feeling that "sharing" shouldn't be taxed at all, very few people do pay them.

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Sharing economy businesses like Airbnb, RelayRides, and FlightCar have come under fire recently, with participants accused of failure to comply with insurance regulations, building codes, and other rules. In addition to those complications, which I wrote about in the recent issue of TIME magazine, there’s the problem of taxes. Namely, it seems as if almost no one involved in the sharing economy knows exactly what taxes they’re supposed to pay, nor when or how to pay them. And for several reasons — the rules are unclear, enforcement is almost nonexistent, and many feel that “sharing” shouldn’t be taxed at all – very few people pay them.

One part of the equation is fairly straightforward: Money earned from renting out a room in your apartment, loaning your car to a stranger, or from any other sharing economy business is considered income, and participants therefore may have to pay income taxes on those earnings. Airbnb, in fact, sends 1099-Misc forms to all hosts who are supposed to pay taxes on their rental income.

The site also mentions that a state or locality may require that other short-term rental fees or taxes be paid, and this is where things get really, really messy. According to Airbnb, it’s entirely up to the host to include the proper taxes in their rental listing rates, and then it’s up to the host to pay them. “You are responsible for managing your tax and other regulatory obligations,” Airbnb’s Taxes FAQ section says. “Please contact a tax professional or city compliance department for advice about your tax status and compliance.”

How many Airbnb hosts actually hand over hotel taxes to the local tax collector? No one really knows, but it’s likely that the percentage is tiny—perhaps even zero. Most cities haven’t even clarified if short-term hosts should be paying hotel taxes on their rental income, because such a stipulation would implicitly tell residents that short-term rentals are legal — which is itself unclear in many cases.

In the spring of 2012, San Francisco made it clear that short-term rentals are indeed subject to hotel taxes. The treasury office announced that its interpretation of existing laws require “anyone who rents out a guest room to pay the city’s roughly 15 percent transient occupancy tax — commonly referred to as the hotel tax,” as the San Francisco Chronicle explained. Over the last few months, however, Steven T. Jones of the Bay Guardian has repeatedly pointed out that no Airbnb listings in San Francisco mention the hotel tax. The paper estimates that the transient occupancy taxes (TOT) that should be collected by Airbnb, or Airbnb hosts, amount to at least $1.8 million per year.

(MORE: Sharing Is Hard: Legal Trouble for Airbnb, RelayRides, FlightCar)

The city won’t say how much, if anything, it collects in hotel taxes from Airbnb rentals. What’s more, there seems to be some mystery as to who should be paying the taxes—Airbnb or the individual hosts? And how does this work? Should somebody just be dropping off a bag of money at city hall?

Greg Kato, policy and legislative manager for the San Francisco treasurer and tax collector, clarified over the phone that there is indeed a process for an Airbnb host to collect and pay TOTs. First, the host must register as a business with the treasurer and get a certificate of authority to collect the tax. There are some application fees involved (like $25), and quarterly filings of taxes with the city.

Simple, right? Actually, the forms and red tape probably seem like quite a hassle to the individual who just wants to rent a room out for a few days a year. I’m not running a business, many will think, why should I be registering as one? (Officially registering with the city would also seem scary to anyone with an inkling that their building or neighborhood doesn’t allow short-term rentals.) What’s more, the certificate of authority form is plainly written with hotels in mind, asking for things like the “hotel name.” To which a sensible Airbnb host might respond, I’m not running a hotel, and my apartment doesn’t have a name.

Kato said that regardless of the verbiage, the forms apply to short-term rental hosts. And when money is changing hands as it does in the Airbnb arrangement, the host is undoubtedly running a business in the city’s eyes. Because the business directly involves transient occupants (i.e., Airbnb guests), payment of the transient occupancy tax is required. Kato also pointed out that there’s a misperception about what the TOT is. “It’s a tax on the transient occupant, not on the hotel or person hosting a short-term rental,” he said. “If I am a visitor in San Francisco, I am the one personally being taxed, regardless of whether the space is in an apartment or a 20-story hotel.”

(MORE: Amazon’s New Grocery Service: For $299, You Never Had to Leave the House Again)

In the 14 or so months since San Francisco announced that short-term rental operators should be paying the TOT, Kato says that people have occasionally contacted his office asking for guidance. “I haven’t been overwhelmed with calls,” he said. “Maybe 20, and most were anonymous—people saying they were calling for a friend or something.” And how many Airbnb hosts have followed the proper steps for registering and are now paying hotel taxes? No one knows.

Airbnb hosts in other cities have little reason to worry about paying hotel taxes, but that’s only because in many municipalities, it’s not entirely clear if Airbnb rentals are legal. And how would anyone pay taxes on a business arrangement that’s not acknowledged as lawful?

In New Orleans, for instance, the Times-Picayune reported a few months ago that hundreds of short-term rentals are listed at Airbnb and other sites for the French Quarter area, despite a local law banning rentals of fewer than 60 days in the neighborhood (or less than 30 days anywhere else in the city). None of these rentals contribute hotel occupancy taxes to the city, of course, and members of a local business and property owners association “estimated that licensed hotels, motels, inns and bed-and-breakfasts annually lose $13 million in revenue to short-term rental scofflaws,” according to the Times-Picayune. “That adds up to about $1.4 million in taxes and licensing fees the city fails to collect every year, they said.”

(MORE: Why Hotels Aren’t Making a Killing on Fees Like the Airlines)

In the recent case in which an Airbnb host in New York City was fined $2,400 for renting part of his apartment to strangers, the host testified that he did not know if his guest paid hotel taxes — because Airbnb payments go directly to Airbnb. In any case, it would be surprising if anyone did pay hotel taxes in this instance—because the judge ruled the host wasn’t supposed to be renting out the space in the first place! Besides, the city hasn’t explicitly stated that short-term rentals should incur hotel taxes; doing so would basically be an endorsement of the concept as 100% acceptable and legal, and that’s something regulators in New York and many other cities don’t seem ready to do.

In situations where Airbnb hosts are theoretically expected to pay hotel taxes, the obligation strikes many as inherently unfair—because these residents are not running a hotel. Hosts typically view their rental practices as only marginally different than having a friend stay over. It’s not a full-fledged business, they argue, and taxing it as such is wrong. Besides, as one Airbnb host explained to the Financial Times, taxes are already being paid to the locality:

“For us, we’re already paying taxes toward the city: property tax, sales tax anytime I buy something,” said Quynh Yamada, a San Francisco nurse who rents her two-bedroom apartment on Airbnb during the summer. “I don’t see why I have to pay extra.”

While some say Airbnb hurts cities because it competes with the hotel tax-collecting hotels, Airbnb counters that its model helps city businesses in a major way—especially in residential neighborhoods where there are few hotels, and where tourists probably wouldn’t venture if it weren’t for their short-term Airbnb rental. “We know that our community has already had a very positive economic impact on neighborhoods throughout the world,” David Hantman, Airbnb’s head of global policy, said in a statement. “Last year, an independent economist found that activity facilitated through Airbnb contributed $56 million to the San Francisco economy.”

(MORE: Southwest Airlines: We’re Not Really About Cheap Flights Anymore)

Likewise, a new Airbnb study estimates that Airbnb rentals contributed roughly $240 million to the local economy in Paris over a one-year span. This is partly due to the fact that Airbnb guests reportedly take their time visiting the city, with an average stay of 5.2 nights, compared to 2.3 nights for hotel guests.

Airbnb welcomed the recent news from Amsterdam that clarified that, under certain circumstances, short-term rentals were legal in the city. But in many cities around the world, the legality of short-term rentals remains muddled. For Airbnb, the largest priority is making sure that it’s OK for people to earn a little money by hosting travelers. “The first step is clarifying existing laws to ensure that average families can rent out their homes occasionally,” said Hantman.

Having to pay taxes on room rentals, after all, is better than not being allowed to rent rooms at all.

5 comments
JanaClark
JanaClark

I work in the Vacation Rental Industry, and would like to point out none of these subscribers sites, including AirBnB, and VRBO are concerned with either the legality of the rentals they list or tax consequences. So long as the charges clear on your credit card, you can list anything you want. These sites are used extensively by individuals who rent illegally. Not only is this a problem for people in the industry who follow local laws and ordinances, but these subscribers are not screened or "vetted" by the subscriber sites. Many of my clients have complained of arriving to find the homes not as represented, not ready for their occupancy, etc.   These sites do create an opportunity for people to make some money -- but that is not the same thing as "sharing" (imagine a kindergartener offering to share his/her toy for $5 per hour...)  This is just the latest spin language for "underground economy".

ElizabethOlmedo
ElizabethOlmedo

I find things like this very frustrating. It's all about wanting to squeeze the general population wherever possible. Governments and cities don't want to miss the chance to line their pockets. Some are renting in order to supplement their income and make ends met. The last thing they need is to worry about yet another expense. Gotta love living in a world where your possessions aren't really yours and you have to pay for the "privilege" of doing what you want with them.

TomOdda
TomOdda

AirBnB has one and only one rule: Caveat Emptor for both renter and rentee. I am certainly in favor of entrepreneurship and eliminating unnecessary regulation, but regulation has it's place and it's reason.

AirBnB's rosy online brochure paints a pretty picture of your fantasy vacation. But, just like a timeshare on swampland in Florida, when life’s realities crop up then you are on your own with AirBnB’s dishonest policies and disinterested customer service.

I write this as a would-be guest (who got ripped off of 5 nights of charges), although I understand that things are not much better for hosts, $1 million liability guarantee notwithstanding. Hotels are not perfect by any means, but they have a brick-and-mortar reputation to protect, as opposed to a website with no customer service number, an email address never answered, and a “chatline” never staffed. YMMV, but I am sticking to hotels or VRBO

JeanineCastanoliBrennan
JeanineCastanoliBrennan

For years I was a Servas volunteer, UN organization. I offered a room to visitors from around the world. I believe that this is similar, except that you are offering accommodations with a small price. No one is getting rich from airbnb or other social sharing networks. This is the 21st century, it is about sharing and collaborating.