As the number of Airbnb and other short-term rentals continues to increase across North Carolina, more local governments grow concerned about the regulation and taxation of these properties. To help, my School of Government faculty colleague Rebecca Badgett and I created a half-day workshop available for on-demand viewing and a related book on this sometimes controversial topic.

One important issue we discuss is how local governments can best collect occupancy taxes on rentals made through third-parties such as Airbnb or traditional rental agents. The good news is that many short-term rental (“STR”) websites and rental agents are sending monthly occupancy tax checks to North Carolina local governments.  The bad news is that those checks are often lump-sum payments with no way to identify the rental properties to which they relate.  This lack of detail makes it almost impossible to know if these third parties are satisfying their occupancy tax obligations. What’s more, North Carolina law lets most property owners off the hook for unpaid occupancy taxes on rentals made through STR websites or rental agents. To make things even more confusing, the General Assembly recently amended the law governing tax liability for these third-party rental facilitators.

Here’s a summary of where the law now stands.

1. STRs booked through websites and rental agents are subject to local occupancy taxes.

I cover the basics about occupancy taxes and exemptions here and here.  Essentially all STRs are taxable unless they are extend longer than 90 consecutive days, are at a private residence rented for fewer than 15 days per year, or are part of a school, college or camp program.  This is true regardless of whether the rental is a hotel room, an oceanfront mansion, or simply a spare bedroom and regardless of whether the rental is booked through a third-party such as a STR website or rental agent or directly with the property owner.

       2. If the rent for an STR is collected by a third party, that third party is likely responsible for any unpaid occupancy taxes instead of the property owner.

To understand how this occurs, we first need to look at the applicable definitional section:

Section 105-164.3. Definitions

(1)        Accommodation. – A hotel room, a motel room, a residence, a cottage, or a similar lodging facility for occupancy by an individual.

(3)        Accommodation facilitator. – A person that contracts, either directly or indirectly, with a provider of an accommodation to perform, either directly or indirectly, one or more of the activities listed in this subdivision. The term includes a real estate broker as defined in G.S. 93A-2. The activities are:

1. Market the accommodation and accept payment or collect credit card or other payment information for the rental of the accommodation.
2. List the accommodation for rental on a forum, platform, or other application for a fee or other consideration.

Under this new (as of 2020) provision, the term “facilitator” now includes both STR websites such as Airbnb and VRBO as well as traditional (and usually local) rental agencies.

We then need to turn to another provision to learn how and when a facilitator is responsible for occupancy taxes:

Section 105-164.4F. Accommodation rentals.

(b) Tax. – The gross receipts derived from the rental of an accommodation are taxed at the general rate set in G.S. 105-164.4. Gross receipts derived from the rental of an accommodation include the sales price of the rental of the accommodation. The sales price of the rental of an accommodation is determined as if the rental were a rental of tangible personal property. The sales price of the rental of an accommodation made by an accommodation facilitator includes any charges or fees, by whatever name called, charged by the accommodation facilitator to the purchaser of the accommodation that are necessary to complete the rental. The tax is due and payable by the retailer in accordance with G.S. 105-164.16.

(b1) Retailer. – Except as otherwise provided in subsection (c) of this section, the retailer of the rental of an accommodation is one or more of the persons listed below that collects the payment, or a portion of the payment, for the rental of the accommodation. In the event the person who collects the payment cannot be determined or is a third party that is not listed in this subsection, and subsection (c) of this section does not apply, the provider of the accommodation shall be considered the retailer of the transaction. The retailer is liable for reporting and remitting the tax due on the portion of the gross receipts derived from the rental of the accommodation that the retailer collects. The retailer may be one or more of the following:

(1) The provider of the accommodation.

(2) An accommodation facilitator.

Reading theses provisions together, we arrive at this conclusion: if a on-line STR platform or a rental agency lists a property and collects payment for the rental of that property, then that platform or agency is responsible for collecting and remitting occupancy taxes on that rental to the appropriate local government. (It is also responsible for collecting and remitting sales taxes on that rental to the state.)  The owner of the property being rented is not responsible for those taxes.

This is not ideal from the perspective of North Carolina tax collectors, because it is obviously much easier to collect delinquent taxes from a local property owner than it is from San Francisco-based Airbnb or Austin-based VRBO. Local property owners have local bank accounts to attach and local personal property to levy upon and sell.  Airbnb and VRBO do not.

It’s unclear why the General Assembly chose to make facilitators rather than individual property owners responsible for sales and occupancy taxes.  The legislature likely assumed that the large companies running STR websites have deeper pockets than do the property owners.  It also may have also assumed that it is easier to deal with one taxpayer that is responsible for many tax payments rather than many individual taxpayers. While both of those assumptions sound reasonable, the end result is a bad one for local tax collectors who have almost zero leverage over well-financed companies located outside of North Carolina.

Of course, local rental agencies are much easier to target with enforced collection remedies such as bank account attachment than are Airbnb or VRBO.  And local rental agencies are liable for occupancy taxes on any rentals for which they collect the rent, even if the properties in question are also listed with an on-line STR platform. As a result, liability for occupancy taxes on a particular STR property may be split between on-line STR platforms and a local rental agency depending on which entity collects the rent for each rental period.

Problem is, there’s no way for a local tax collector to know which entity collected which rent. I think the best approach is for a local tax collector to assume that all occupancy taxes on any property listed by a local rental agency are the responsibility of that agency.  If the agency wishes to dispute that tax obligation, then the agency will need to prove with appropriate documentation that payment for some rental periods were collected by an on-line STR platform.  Liability for taxes on those rentals would then shift from the agency to the on-line STR platform.

A property owner remains responsible for occupancy taxes on any rentals for which the owner collects payment directly from the tenant and not through an on-line STR platform or rental agency.  As suggested above for rental agencies, local tax collectors should put the burden on property owners who list their properties with on-line STR platforms to prove with appropriate documentation that payment for all rentals of their properties were paid through those platforms and not paid directly to the owners.

         3.  Airbnb and other major STR platforms are making monthly lump sum occupancy tax payments to  North Carolina local governments.

In 2015, Airbnb signed an agreement with the North Carolina Department of Revenue to begin collecting state sales taxes on rentals in this state.  As part of that agreement, Airbnb initially promised to collect and pay local occupancy taxes in four large counties (Buncombe, Durham, Mecklenburg, and Wake).

It’s unclear whether local officials were parties to that agreement or exactly what Airbnb promised to do with regard with local occupancy tax reporting, in large part because the Department of Revenue refuses (inappropriately, in my view) to release that agreement to the public. It does not appear that Airbnb has signed tax agreements directly with any local governments in North Carolina.

Regardless, as of 2019 Airbnb claims that it collects local occupancy taxes on rentals in all 100 North Carolina Counties. Local tax collectors confirm that Airbnb is sending monthly tax payments but, as mentioned above, those payments do not identify the properties to which they relate. Some North Carolina tax collectors told me that Airbnb provides a single address for all of their hosts’ properties in their towns, 888 Brannan Street. That’s the address of Airbnb’s corporate headquarters in San Francisco.

This mirrors Airbnb’s approach across the country. The company has signed hundreds of “voluntary collection agreements” with state and local governments, almost all of which prevent those governments from learning the names or addresses of Airbnb’s hosts. The company fights tooth and nail protect this “shield of secrecy,” suing local governments that attempt to require host properties to be identified and altering the latitude and longitude of each property’s geocode so it can’t be accurately located on a map.  It has spent millions of dollars lobbying state legislatures to pass laws limiting the ability of local governments to regulate and tax STRs.

VRBO and Expedia (which operates a variety of STR platforms including Orbitz, Hotels.com, and Travelocity) have adopted the same Airbnb modus operandi of lump sum payments without any supporting detail.  The only difference is that none of these companies appear to have signed formal agreements with the state or any of our local governments.

Officials in a few towns report that Expedia recently began providing details about the properties covered by each monthly payment.  Blowing Rock officials told me that this occurred soon after they were able to get an Expedia employee on the telephone and plea for additional detail to be provided along with Expedia’s tax payments. If your local government has had similar success in convincing any of the STR websites to provide details behind their monthly payments, please share how you accomplished that in the comment section below.

4. Tips for STR tax enforcement.

The bottom line is that the party that collects payment for an STR is responsible for occupancy taxes on that rental.  This could be an on-line STR platform, a local rental agency, or the property owner.  If it is unclear who is collecting payment for a particular STR, then a local occupancy tax collector may send estimated occupancy bills to the property owner or the rental agency with which the property is listed and thereby put the burden of disputing that tax bill on that party.

Finally, a property tax note. Don’t forget that any personal property made available with a rental property (furniture, appliances, grills, bikes, etc.) is taxable business personal property and should be listed and taxed as such.