The Effect of Retroactive Taxes on Short-Term Rentals

Taxes Permit Short Term Rentals

Credit: Burrtec.com

[Alvin Brickman for Metrosetter Wire]

If you’re renting your property short-term in a resort town, tax free, enjoying the period before an inevitable ordinance is authorized to regulate your business, this period of enjoyment could be for nought — if your city council decides to implement a tax program that is in effect retroactive. La Quinta, a resort city in Riverside, California, has approved a tax that could be interpreted as such.

The exact terms of the program have not yet been published by the City Council, but this is reasonable to surmise if one looks at the only article published immediately after the program was approved.

Here’s an excerpt from the article from MyDesert.com:

“The La Quinta City Council on Tuesday approved a short-term rental program that will allow the city to recoup as much as $300,000 in unpaid taxes from rental homes in its first year” (Brambila, 2012).

Judging from this excerpt, one can infer that the short-term rentals program was (at least) designed with the motivation of recovering revenue that the city had failed to earn from short-term renters before the program was implemented.

And on projected tax revenue:

“Council’s unanimous vote in favor of the short-term rental program was its latest effort to shore up the city’s $2 million budget shortfall. City staff projects the cost of the program could be about $5,000. But they anticipate capturing as much as $600,000 annually once the program is up and running.

La Quinta is one of the last cities in the valley to look at collecting taxes on homeowners who rent their residences during events such as the Coachella Valley Music and Arts Festival and Stagecoach: California’s Country Music Festival” (Brambila, 2012).

Credit: KillingtonHouseRentals.com

It seems that short-term rentals are an easy source for a city to exploit for additional revenue, but taxing them could also have the opposite effect of negating the incentive for property owners to rent short-term at all, even more so when the tax is retroactive. But what effects does this tax have on resort towns in particular?

In 2009, Cristina Kumka wrote about Killington, VT, a resort town in a similar situation as La Quinta, involving share-housing. It’s likely that the retroactive tax — in part — drove private ski shares out of the community.

“[The Vermont Department of Taxes’] …compliance division began issuing notices to homeowners and lessees of private ski shares in Killington…, asking that they register with the state as a business so they will be billed the state’s 9 percent meals and rooms tax.

A typical ski share house arrangement consists of someone leasing a property from the property owner, then collecting rent from people who want to pay for a specific amount of time. In most cases, rooms are rented for weeks at a time, and in others weekends only.

According to the state, the meals and rooms tax doesn’t apply to long-term renting or leasing relationships, but short-term renting does.

Some ski-share lessees were asked to submit financial information and the date they began renting, while others received bills ranging from $6,000 to $32,000, according to lessees….

Lessees said they were shocked by the retroactive tax bills and will consider not renting out a home on the mountain again” (Kumka, 2009).

Credit: Bloomberg.com

While there’s no way to precisely measure the consequences of this tax since its implementation in 2009, it’s interesting to look at some of Vermont’s statistics in 2010, which indicate that, according to Bloomberg.com, the state’s resort towns experienced significant losses in population and tourism.

“Battered by a collapse in the second-home market and a slow tourist economy, residents fled southern Vermont’s ski region from 2000 to 2010, census figures show. Three other resort towns — Killington, Ludlow and Wilmington — collectively lost 1,119 residents, or 19.4 percent of their population, even as the state gained 2.8 percent to 625,741.

“I’ve had good times, and I’ve had bad times,” said Richard Moore, owner of a Killington-based construction company. “Right now, I’m having really bad times.”

Killington, which has the state’s largest ski resort, lost 25.9 percent of its population, falling to 811 full-time residents. Census figures show the number of new housing permits dropped from 20 in 2000 to three in 2009. The town now has 2,609 housing units, or more than three for every resident” (Bass, 2011).

The tax was certainly not responsible for these numbers, especially because they are accounting for the entire decade of 2000-2010, nine years of which the share hotels were allowed to exist tax-free, but it’s interesting that the City decided to tax them after it had already experienced significant losses in tourism.

Works Cited

Bass, Frank. “Vermont Ski-Town Population Slides on ‘Bad Times'” Bloomberg. Bloomgberg, 18 Apr. 2011. Web. 18 Oct. 2012. <http://www.bloomberg.com/news/2011-04-19/vermont-ski-town-population-slides-on-bad-times-census-shows.html>.

Brambila, Nicole C. “La Quinta City Council OKs Rental Home Program.” The Desert Sun. MyDesert.com, 17 Oct. 2012. Web. 18 Oct. 2012. <http://www.mydesert.com/article/20121017/NEWS01/310170031/La-Quinta-City-Council-OKs-rental-home-program>.

Kumka, Cristina. “If You Want Less of Something-Tax It.” Old Nabble –. N.p., 8 May 2009. Web. 18 Oct. 2012. <http://old.nabble.com/If-you-want-less-of-something-Tax-It-p23455761.html>.

Images Cited

La Quinta. Digital image. Burrtec.com. Burrtec.com, n.d. Web. 18 Oct. 2012. <http://www.burrtec.com/templates/photos/City_Logos/la_quinta.png>.

State of Vermont. Digital image. Bloomberg.com. Bloomberg.com, 18 Apr. 2011. Web. 18 Oct. 2012. <http://www.bloomberg.com/news/2011-04-19/vermont-ski-town-population-slides-on-bad-times-census-shows.html>.

Welcome to Vermont. Digital image. KillingtonHouseRentals.com. KillingtonHouseRentals.com, n.d. Web. 18 Oct. 2012. <http://www.killingtonhouserentals.com/img/2.jpg>.

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