[IMGCAP(1)]When taxpayers rent out a room on Airbnb, they may realize that any compensation they receive is subject to income tax. Lodging tax, however, is probably not on their minds.
What is lodging tax and how does it differ from income tax? Those are questions that everyone that lists on a VRBO (vacation rental by owner) type of business should be asking, but most aren’t, according to Rob Stephens, CPA.
“This is an area that CPAs need to explain to their clients,” he said. “But in our experience, the rank and file CPA is not well versed in these industry-specific taxes.”
“Lodging tax is the same tax a hotel pays and it is charged for each night’s stay,” he explained. “Short-term rental owners must pay the same tax. Renters should be charged the tax, just like in a hotel, and those who list need to collect and pay this tax. Not only is the tax legally due to the state and local agencies, there is also registration and licensing paperwork that is necessary to fill out before a home is rented.”
To make the issue more complicated, each state has different compliance rules, Stephens indicated. “Some state taxes are supposed to be paid quarterly, while some are due on a monthly basis. As short-term rentals continue to grow in popularity, so do the unpaid taxes due to each state. And tax agencies are starting to crack down and come after those who aren’t paying.”
Stephens, a short-term rental owner himself, realized the complexity of the market and co-founded MyLodgeTax, an Avalara product, to help home owners renting out their residences quickly and painlessly deal with this tax issue. The product is geared both to CPAs and to individual clients.
“As the marketplace grows, consumers will benefit from knowing that when they stay at a rental, a tax is owed, and for those that are listing their homes, they need to know it should be charged and paid to the state and local agencies before penalties and back taxes are due,” he said.
“We sell to people who own a second home who use Airbnb, VRBOs and similar websites to rent their home,” said Stephens. “We charge $10 to $12 a month for all filings. The accountant may recommend us to the client, or they may use our platform so that we do the filings, and they bill the client. Our customers can report to us online their total rent for the month. Once they click submit,’ we calculate everything, file and pay the taxes electronically.”
MyLodgeTax’s business model is based on leveraging technology and scale, Stephens said. “For example, we’re integrated directly into the Florida Department of Revenue. We push a button and transmit data for 2,000 accounts along with payments. It took a lot of software development and integration, but once it was built it’s very scalable.”
Lodging is taxed in every state, although different states have different names for it, Stephens observed. “Half or more of what we pay is sales tax, with a lodging or hotel tax layered on top of it. In most states, it’s sales plus occupancy, while some states have a different tax specifically for lodging. Then there are states like Oregon which don’t have a sales tax but have a Room Occupancy or lodging tax.”
The degree of noncompliance varies according to segment within the industry, according to Stephens.
“There’s the property management side, where professionals manage your property—that’s highly compliant,” he said. “The rent by owner segment is somewhere in the middle. Those are people who have made a significant investment and own a second home and rent it out to help cover expenses. The Airbnb segment is likely to be highly noncompliant, not because they’re tax cheats but because they just didn’t know they had the obligation. These are people usually renting their primary residences who will stay with a friend and rent out their apartment for a weekend, or rent while they are traveling.”
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