This post has been updated in 2020 to reflect the latest in vacation rental tax laws.
Just like hotels, vacation rentals are required to collect and remit sales and occupancy taxes.
Understanding what these taxes are, how to collect them, and how to pay them is an important part of operating a short-term rental. If you don’t understand how vacation rental taxes work, you can run into serious problems.
As vacation rentals become more popular in the United States, government agencies are getting more proactive about enforcing short-term rental tax codes. To help you make sure that you’re complying with your tax obligations, we asked our friends at MyLodgeTax to answer the top 5 questions vacation rental owners ask about sales and occupancy taxes.
1. DO I REALLY HAVE TO COLLECT AND PAY SALES AND OCCUPANCY TAXES?
Usually, the answer is yes. This will depend on your location, but the vast majority of states tax vacation rentals. In fact, vacation rentals often pay the same taxes as a hotel.
Sales and occupancy tax obligations are triggered when you bring in revenue from a short-term rental. These local taxes are known by many names: sales tax, occupancy tax, lodging tax, room tax, accommodations tax, bed tax, hotel tax, etc. They are different from income tax, which is filed once a year to the federal government and paid out of your pocket. Local sales and lodging taxes are usually collected from guests and paid to city, county, and/or state tax agencies, generally monthly or quarterly.
2. HOW DO THESE TAXES WORK AND HOW DO I COMPLY?
Sales and occupancy taxes on short-term rentals are determined by the city, county, and/or state where your rental is located, so there may be multiple levels of rules. It’s important to understand and check the requirements with each level of tax agency. Cities, counties, and states sometimes combine their tax collection efforts, but it’s possible that you may need to deal with multiple tax agencies at once.
Many vacation rentals are required to register or obtain tax licenses with multiple agencies (i.e., city and state). If you are outside city limits in your area, you will not have to worry about city taxes, but county taxes may apply.
The basic steps for tax compliance are as follows:
- Register/apply for any required tax licenses and/or accounts.
- Determine the total tax rate that you need to charge guests. This may be made up of a number of different taxes.
- Collect the tax from your guest on each booking.
- File and pay the tax to the appropriate agency each month or quarter. Some jurisdictions may allow annual filing, depending on your revenue level.
- Renew your licenses when required.
- Keep records of your activity and track any tax rate changes.
3. WHAT HAPPENS IF I DON’T COLLECT AND PAY THESE TAXES?
For the most part, the guest pays lodging taxes, but the owner is liable to collect and report to the taxing authorities. If you did not collect the tax from your guest, you are still responsible for the taxes.
A tax collector can pursue current and back taxes from an owner who hasn’t been collecting and remitting required taxes on a vacation rental. The average vacation rental owes several thousand dollars of taxes each year, so the unpaid liabilities can accumulate and become a substantial cost in just a few years.
In addition to the unpaid tax due, tax agencies may also levy penalties and interest, which can be serious. Penalties can be 25% to 50% of the tax due. Failing to collect and pay these taxes can result in significant tax liabilities owed to state and local tax agencies. This can easily be avoided by complying with the rules.
4. WHAT CHARGES AND FEES ARE TAXABLE?
Mandatory fees charged to the renter are often considered part of the amount paid for occupancy and are therefore taxable. Some examples include cleaning fees, nightly rates, extra person charges, credit card fees, pet fees, etc. However, taxability can vary from jurisdiction to jurisdiction. Make sure you check with your tax authority to find out what charges are taxable for your guests.
5. ARE THERE ANY DEDUCTIONS OR EXEMPTIONS FOR THESE TAXES?
Sales and occupancy taxes are charged as a percentage of the total amount paid by the guest. There are no expense deductions for sales and occupancy tax. This is another example of how these taxes differ from income tax, which allows deductions for many operating expenses.
Certain nonprofit groups, church/religious organizations, government officials, and universities are common groups that may be exempt from these taxes, but not always. Exemptions may vary by city, county, or state, and most tax authorities require the exempt organization to have an exemption certificate and pay with organization funds.
It’s important to note that long-term rentals are exempt from sales and occupancy taxes. In many states, long-term rentals are defined as those that are continuous for 30 days or more. However, these rules also vary from state to state. In Florida and Hawaii, for example, the rental must last more than six months to be considered exempt.
MyLodgeTax provides a simple and comprehensive tax compliance solution for vacation rental owners and managers. MyLodgeTax obtains all licenses, files and pays any taxes when due, and guarantees that everything is completed correctly and on time. For more information or questions about MyLodgeTax, visit MyLodgeTax or call 877.589.0207. Evolve owners qualify for a discount!
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