The Challenges State Governments Face When Collecting Taxes from STRs

According to the Center on Budget and Policy Priorities, state governments will see $555 billion in budgetary shortfalls due to COVID-19 for the next two fiscal years. But there is a growing market that could help bolster these shrinking budgets: short-term rentals (STRs).

This fast-growing segment of the tourism market can replenish some of the tax revenue lost during the pandemic and provide funds moving into the budgetary constraints of the coming years. But in order to reap the revenue benefits of STRs—via lodging or transient occupancy taxes, property or state income taxes and registration fees—state governments need to properly identify and regulate these properties.

The inherent challenges of STR tax collection

In order to identify the taxable STRs, state governments need to enforce their tax laws. But the nature of online rental listing platforms makes this difficult. With over 100 platforms for rental property owners to choose from and none of them sharing specific data (like addresses) with governments, proactive enforcement takes multiple resources and a lot of time.

The limited resources and bandwidth of state governments also make it difficult for states to effectively address this problem.

“What states, cities and counties don’t have is the resources to handle [STR tax code enforcement], and asking them to do so is actually very short-sighted,” explained John Spuhler, a Senior Account Executive at Granicus and former Mayor of Garden City, Utah, in a recent webinar. “In Utah, for example, the state government has dedicated only 70 hours per year to monitor over 33,000 listings.”

Technology to the rescue

Here’s where technology comes in. Solutions—like Granicus’ Host Compliance—can help governments improve their enforcement efforts and get around the difficulties created by the closed nature of the platforms. Machine learning (a form of artificial intelligence) gathers available data on all state STRs on over 60 short-term rental booking sites, which represents over 99% of listings. From there, the solution identifies “evidence points” on local rental properties (like pictures of a property, its relative location to other local establishments).

“On average, a singular listing contains about 200 evidence points,” said Spuhler. “We pull all of that information into a machine learning environment and then compare it to other known data points to find non-compliant hosts.”

Granicus’ Host Compliance solution also provides the resources necessary to enforce laws on non-compliant hosts. Once Host Compliance locates operators in an area, it then reviews a state’s laws and compares them with tax registration records to locate non-compliant hosts. If a law states that any property that is rented for less than 30 days has to receive a license from the local government, for example, the solution can provide governments with data on all of the properties that aren’t operating in accordance with that rule—allowing agencies to swiftly and easily cite the properties.

The problem with VCAs 

Another way governments have tried to streamline STR tax collection is by signing voluntary collection agreements (VCAs) with online rental listing platforms. With VCAs, the platforms remit taxes on behalf of all the local hosts using their site. However, because they are issued in bulk and anonymously, state governments can’t audit these payments. As a result, they can’t know if hosts are paying taxes on all of their applicable fees and commissions, such as additional cleaning or pet payments.

The inability to audit STRs also creates unfair applications of state tax laws. For example, states reserve tax exemptions for primary residents, or individuals that live in a state for a certain amount of time every year. STR hosts can falsely apply for these rebates, even if they are operating their rental properties remotely. Hosts are also supposed to remit income taxes for the state where their rental property is located, even if they don’t live there and operate it remotely. Without the ability to audit hosts, state governments can’t catch remote hosts who aren’t paying this tax.

How else can technology help?

Again, a technological solution like Granicus’ Host Compliance can help governments navigate the loopholes that make tax remittance so difficult. Using the “evidence points” collected by the solution, governments can also gather enough information to audit hosts and find out who is under-paying. Because the solution helps gather hosts’ contact information, governments can send STR owners a monthly or quarterly communication reminding them of their tax reporting and remittance obligations.

As a result, Host Compliance eliminates the need for VCAs. With Host Compliance, governments have the information and auditing capabilities necessary to enforce STR tax remittance independently. The solution can also provide support by reviewing a city, state or county’s tax regulations to ensure that they cover short-term rental properties and clearly state how and when these property types have to pay taxes.

It’s clear that if governments continue to use manual tracking or bulk remittance methods, they will only be collecting a fraction of the funds available. A technological, automated solution is the better option, and can provide governments with the resources necessary to rival the fast-paced and increasingly digital nature of short-term rentals.

For more information more effective short-term rental tax collection, and to learn more from Granicus’ John Spuhler, watch the full webinar here.