In mid-February, the short-term home rental service Airbnb will begin collecting taxes on behalf of residents in the District who treat their homes — or single rooms in them — as a makeshift alternative to hotels. With the voluntary agreement, the District joins a handful of cities where the tech company has worked out tax deals to resolve at least one of the thorny problems posed by a business model that has turned thousands of people into innkeepers in their own homes.
These agreements could mean millions in additional revenue for cities where residents using Airbnb and other web-based services like it have been unaware or baffled by their legal obligation to pay hotel taxes. For Airbnb, the promise to remit that money straight to city coffers will help legitimize a service that in many places is still not strictly legal.
In the cities where Airbnb has agreed or been required to do this, it will automatically collect the local hotel or occupancy taxes, which run from about 5 percent to 14.5 percent in the District, on every transaction. Airbnb will then pay the cities in a regular lump sum, omitting details about individual hosts or guests.
Airbnb began collecting these taxes in Portland, Ore., last July and in San Francisco in October. Between those two cities so far, the company says it has already paid about $5 million in taxes (it has not put back taxes on the table anywhere). On Feb. 1, it will also begin doing the same in San Jose and Amsterdam. Feb. 15, it will start collecting taxes in the District and Chicago. All of these cities are among the company’s largest markets.
“In many cases, these taxes were designed for hotels and folks with teams of lawyers and accountants, and the reality is that the person who’s renting out his basement in Cleveland Park once a month probably doesn’t have tax experts on payroll,” says Nick Papas, an Airbnb spokesman. “You shouldn’t need a lawyer and a tax specialist if you want to rent out your house.”
Stephen Cordi, the deputy chief financial officer in the Office of Tax and Revenue in the District, acknowledged that some residents in the city haven’t been paying this tax as they should.
“It’s undoubtedly true that people particularly at the bottom end of this probably didn’t know what to do,” he says. Airbnb hosts should have been registering with the city and collecting the tax, which supports both a convention center fund and the city’s general fund — and, ultimately, services like the fire and police departments. “This will eliminate the need for them to do that.”
Airbnb approached the District, Cordi says, not the other way around. This now means, in Washington at least, that Airbnb hosts have a formal mechanism for paying taxes on an activity that's still not exactly recognized by D.C. law. The District has yet to pass new regulation that would formally legalize the kind of short-term rentals Airbnb has made possible.
In many cities, short-term rentals of fewer than 30 days are illegal. These laws have seldom been enforced, though, leaving Airbnb users across the country in a regulatory limbo. In some cities, including Portland and San Francisco, local governments have adopted new laws explicitly legalizing the activity under certain conditions. Beth Adair, Airbnb’s global tax director, said the company’s processes for negotiating new laws and paying taxes are separate.
“They almost always involve different pieces of bureaucracy and different sets of laws,” she says. “So they cannot be tied together very tightly. We are often working on both pieces at the same time.”
Voluntarily offering to resolve the tax piece of the puzzle, though, no doubt makes it easier for Airbnb to argue its case in a city where it needs new regulation. Airbnb's recent tax overtures also represent a shift for the company, founded in 2008. In its younger — much younger — days, Airbnb argued that hotel laws and taxes didn't apply to a company that doesn't run hotels.
Its offer to collect those taxes now meanwhile creates complications for other vacation rental companies like VRBO. Airbnb would like its competitors to collect taxes too, Adair says, so that the company doesn’t face a disadvantage in a market where other platforms offer untaxed homes that appear cheaper. HomeAway, the parent company of VRBO, counters that requirements for short-term rental platforms to collect hotel taxes, as in San Francisco's new, don’t apply to it (the city of San Francisco recently agreed).
“Should the New York Times collect and remit taxes for Macy’s because they advertise in the New York Times?” says Carl Shepherd, HomeAway’s co-founder. “That’s HomeAway.” Homeowners merely advertise their vacation properties on the platform, he says, and the company never touches the money that changes hands between them and their renters. Airbnb, on the other hand, manages all transactions for its users.
“They’ve chosen to be the merchant,” Shepherd says. “That’s the business model they’ve chosen. What they’re asking if they want us to [collect taxes] is they want us to change to their business model.”
Shepherd adds that most of HomeAway's users are still required to pay hotel taxes. But its companies like VRBO tell users they must comply with all local laws, rather than that managing that compliance for them.
Part of the complication for these companies lies not just in their business model but their scale. HomeAway lists homes in 19,000 locations around the world, each with different tax and rental laws, according to Shepherd. And the few cities where Airbnb will soon be collecting taxes represent just a fraction of all the global markets where the company now operates.
Philip Auerswald, an associate professor at George Mason who studies innovation and entrepreneurship, argues that cities really ought to be responding to the rise of companies like Airbnb by broadly rethinking where and how they collect tax revenue in the 21st century.
“It’s not particularly interesting or insightful to say ‘since hotels are taxed this way, it’s only fair,’” he says. “That makes sense as long as you think that whatever the status quo is is where we want to end up.”