Ski towns take aim at short-term rental taxes
November 10, 2010
By Reid Armstrong
From Breckenridge to Park City, Utah, western mountain towns are moving forward with plans to hunt down illegal vacation rental owners through their online advertisements.
Ski towns like these estimate that they may be losing hundreds of thousands of dollars in sales tax revenue through non-compliant owners of short-term rental properties.
In response, the Colorado Association of Ski Towns (CAST) has contracted Virginia-based Eye Street Solutions, which has developed a software program that crawls the Internet in search of vacation rental advertisements. The software program cross-references the information gathered from the Internet with existing databases of short-term rental properties.
Towns will pay for this service in one of two ways, explained CAST Executive Director Joyce Burford:
One option is for a town to pay a fee of $1 per property per month to maintain the database, plus $25 for each new property identified. The second option is for a town to enter into a revenue-sharing agreement with Eye Street, paying 20 percent of any new revenue acquired through the program. The second option requires a two-year commitment and includes database management.
Option one puts the burden on the front end, which may be better for towns like Winter Park or Breckenridge that have a larger pool of unidentified properties that need more data management, Burford said. Option two places the burden on the back end, which may be better for towns like Fraser that don’t have as much money to shell out up front each month or towns like Grand Lake that already have a good handle on their vacation rental properties.
The onus then falls to the town to enforce their laws, Burford said. Most towns will start by sending a letter and alerting the property owner of the town’s requirements.
Colorado’s home rule towns have more leeway for enforcement than statutory towns, she added.
“Home rule towns can place tax liens on properties if they so desire. Statutory towns have to try to get the state involved.”
If a town doesn’t have an enforcement program in place, it can enlist Eye Street’s partner Hot Spot Tax Services out of Evergreen, which specializes in working with short-term property rentals to help bring property owners into compliance.
Ultimately, “It comes down to the honor system,” Burford said. “Even if a property becomes compliant, towns have to rely on the owners to report accurate information. It’s hard to know if they’re being honest or not.”
CAST is helping get the program off the ground, providing feed money on behalf of all communities that want to participate. After two years, each town will be asked to enter individual contracts with Eye Street. Communities and counties don’t need to be a member of CAST to be involved in the program, Burford added, noting that Grand County and Summit County are among those considering the program.
“I excited and proud that we’ve made this much progress in a year’s time, and I know that there are several towns that are moving on with this and are excited to be on board,” Burford said.
This is the first program of its kind in the country, she added: “All eyes are on us,” from the East Coast beaches like Hilton Head to the Great Lakes region.
“This isn’t just happening with CAST,” Burford said. “It’s happening on a broader nationwide level, making news everywhere.”
As part of the program, many towns will begin to require a special business license for short-term property rentals (defined as properties rented for less than 30 consecutive days). These special licenses will help municipalities keep track of which properties are legit and which are not.
The No. 1 argument for having a special short term rental license is tracking – “getting the short term rental owner on the town’s radar,” as Burford put it. “We also can do it through a normal business license, we just need to sort out the short-term rental owners versus everyone else.”
A special license, however, makes tracking easier, especially for a town that has a lot of vacation rental properties.
“It lets homeowners know that they have a special and unique business that needs to be treated in a special way -they are technically operating a business on property that may not be zoned for business,” Burford said.
Grand Lake has been one of the most progressive towns in the state when it comes to cracking down on vacation rentals, she said.
About 5 years ago, Grand Lake passed new regulations requiring a $400 business license fee for short term rentals plus a $150 application fee.
“That’s huge,” Burford said. “If they have 100 short-term rental properties, that’s $40,000 not including tax revenue.”
Grand Lake built their short term rental license fee using a very specific formula that calculated the difference between property taxes paid by commercial and residential properties.
Other towns are pondering what amount would be fair, said Burford, who also serves on Fraser’s board of trustees: “Fraser is deciding if we’re going to do it and, if so, what that amount will be.”
For homeowners just trying to bring in enough each month to cover their mortgage, the addition fees and requirements will be an added burden.
“I completely understand that this will be a hardship for some people,” Burford said. “All we are trying to do is level the playing field.”
Among the biggest proponents of this crackdown are property management companies that find it hard to compete with rates offered by homeowners listing their properties online.
As businesses, property management companies generally pay much higher commercial tax rates in addition to their own business license fees, which sets them behind online rental companies from the start.
While bricks-and-mortar property management companies generally charge, collect and pay taxes on their clients’ behalf and insure their clients have the necessary licensing, most online firms indemnify themselves from responsibility for collecting or even informing their clients about local and state lodging taxes.
Beyond that, in late October USA Today published an article about how some online booking companies like Expedia and Orbitz are defrauding towns and municipalities, collecting taxes they never remit – costing cities an estimated $1 billion in revenue that would have gone toward promoting tourism and paying for municipal services.
“That’s a whole different story,” Burford said. “We’re just trying to get VRBO to share their information with us.”
Earlier this year, CAST sent out a letter to several big firms, like VRBO, that advertise vacation rentals online asking them to inform homeowners of the municipalities’ requirements for short-term rentals and to share information from their database of registered clients with the state and local governments.
“That was the first prong of two-prong approach,” Burford said. “We got no response.”
As the second prong is put into action, “It’ll be interesting to see what happens,” she said. In this economy, “a lot of people just want to make ends meet. They are trying to hold on to their property so they don’t have to go into foreclosure, and they’re not going to be happy about this. But municipalities and businesses also are struggling.”