Picture this: You’re the attorney for a small town that is not commonly visited by tourists. There are only about five short term rental properties in your jurisdiction listed on Airbnb. One of these rental properties is in a quiet residential neighborhood on a dead-end street. The neighboring property owner is furious that the property is being used as an STR. He claims that STRs threaten neighborhood safety and demands that the town act NOW to ban transient rentals. What’s a town attorney to do? The answer: maybe nothing. It’s really up to the municipality to consider the pros and cons of regulating this market.

In my first blog on short term rentals (which I suggest reading first), found here, I note that the great majority of North Carolina’s cities have not enacted separate ordinances to regulate short term rental properties (“STRs”). This is likely because there is no need for additional regulation (STRs are not problematic) or because a preexisting ordinance sufficiently regulates this area. Thus, if you’re concerned that your municipality has lagged behind by not taking action to regulate this market, fear not. There may not be a need to regulate unless you have valid concerns that fall within the scope of the police powers. See here for more on this.

For those of you who are interested in adopting some type of regulations, this blog is for you. Its purpose is to discuss the varied aspects of regulating STRs and provide local governments with a better understanding of how to collect the taxes generated by these types of rentals.

Our city is considering regulating STRs—now what?

The regulation of STRs does not have to be an all or nothing proposition, meaning there can be a happy medium between banning all STRs and no regulation whatsoever.  A municipality may want to consider allowing STR use subject to some reasonable restrictions and requirements. Importantly, the municipality must understand what it hopes to accomplish through regulation and must ensure that it has a feasible plan (and the requisite funds) to enforce the new regulations.

If you want to move forward with regulation, note that STR ordinances usually define the different types of STRs (e.g., homestays or whole-house) and establish zoning-type regulations and licensing and tax regulations as appropriate. Some considerations include: (1) whether whole-house rentals will be regulated differently than homestays; (2) whether there will be a limit on the number of guests or bedrooms rented in homestays; (3) whether there will be a parking space requirement; (4) whether there will be an insurance requirement; (5) whether there will be a licensing or registration fee; and (6) how tax collection will be enforced.  This is certainly not an exhaustive list. The interesting (and somewhat frustrating) catch about short term rental regulation is that each municipality can (and has) put its own twist on how it defines and regulates these properties.

Remember that enforcement can be time consuming and expensive. It may require additional staffing to be done well. Some cities simply rely on neighbor complaints to identify violations; however, other cities take a more proactive approach (see more on this below). Asheville now outsources its enforcement to an independent company dedicated to catching hosts that are breaking local laws, and it is happy with the results. Outsourcing enforcement may be an option for those municipalities with a large number of STRs, but it may be financially burdensome for those with a smaller STR market.

What can our county do to capture lost tax revenue?

STRs present counties with two kinds of tax revenue possibilities: sales tax and, in many places, occupancy taxes. And one common reason for STR regulation is to create a plan for tax collection. The sales tax applies to everyone throughout the state. However, a local act is needed to establish an occupancy tax. For more on the occupancy tax, see this blog.

Airbnb and HomeAway (owner of VRBO) now collect occupancy taxes from all its North Carolina hosts and remit it directly to the appropriate taxing authority. However, there have been complaints that, while Airbnb remits a monthly check, it does not include sufficient data about who/how many STR stays occurred, which makes it difficult for local governments to keep accurate records. For those counties wishing to be included in the Airbnb tax program, it is necessary to work directly with Airbnb. The other sites, like VRBO, do not yet offer the same tax collection services in our state. I’m guessing that in the future most STR platforms will offer some form of tax collection services, particularly because doing so may help limit local regulation.

Not all hope is lost for those wishing to collect the occupancy tax from local hosts. The Town of Ocean Isle has been extremely resourceful (and successful) in its approach to collecting the occupancy tax, and, according to tax collector Wendy Barbee, all it takes “is a little investigative work.”

Barbee explained that the investigative work (which is handled by one customer service representative) includes scrolling through the online booking sites to identify new listings, locating those properties on the Brunswick County GIS, and notifying the homeowners of the requirement to pay the occupancy tax. To help with enforcement, the town sends a letter each December to property owners asking if they plan to rent their property in the following tax year. If so, the homeowner receives an occupancy tax coupon book to use in remitting the tax bill on a monthly basis. New homeowners are automatically sent a letter informing them of the obligation to pay local taxes on STR income. Barbee admits that the task of creating a master list of all STR properties was initially labor intensive. However, now the town primarily focuses on identifying new rentals, which they estimate to be about 40-50 properties per year.

The takeaway here is that local governments may want to get creative in their tax collection efforts, even if they opt out of regulating the overall use of STRs. Educating homeowners on this topic and making compliance easy are ways to ensure that your local government does not miss out on a sizable portion of funding.

Summary:

For now, it is up to your jurisdiction to determine the benefits and burdens of taking regulatory action. Consider whether you have the resources to enforce total prohibitions or onerous regulations. This industry shows no signs of slowing, so the key is to devise regulations that are clear and easily enforceable. For more information, see my first blog on this topic.  I welcome feedback and comments on this topic. My email is rbadgett@sog.unc.edu.

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