Top 5 misconceptions about short-term rental lodging taxes

Tax season! Perhaps not the most wonderful time of the year. But tax compliance is a critical part of operating a successful short-term rental (STR) property. This time of year, federal and state income taxes get all the attention as the annual April filing deadline approaches. But there’s another tax STR operators need to know about: lodging tax.

Lodging taxes are levied by states, counties, cities, or special districts on accommodations, including short-term rentals. They’re very local in nature, so the location of your STR is key to which taxes apply to your property. Generally, lodging taxes are calculated as a percentage of the amount charged for the stay, added to the bill, and paid by the guest. While these taxes don’t come out of your pocket, as a short-term rental operator, you’re typically responsible for collecting these taxes from guests and paying them to the right tax authorities on time.

Because many new STR hosts aren’t familiar with lodging taxes, they may make assumptions based on their experience with other types of taxes. But these misconceptions can have serious consequences. Lack of tax compliance can result in fines, back taxes, and other trouble with tax authorities. Here are a few of the most common misconceptions:

I don’t need to worry about lodging taxes because:

1. My accountant (or friend/family member) files my taxes in April
2. My short-term rental isn’t a business
3. My short-term rental isn’t a hotel
4. I don’t have very many guests
5. Vrbo or Airbnb collect and file all lodging taxes for me

Let’s break these down and talk about the truth behind them. Learning how lodging taxes really work can get you ahead of the curve for compliance and smooth operations that allow you to focus on running a successful STR.

One of the biggest misconceptions about lodging tax is thinking it’s the same as income tax. There are big differences between the two.

Income taxes are levied by the federal government and most state governments as a percentage of your total income, including income from operating STRs. They’re due once a year and you pay these out of your own pocket.

Lodging taxes are levied by local jurisdictions on sales of lodging. They’re paid by the guest, but the owner of the accommodations collects and remits them to the local government. Lodging taxes can have many different names, including sales tax, tourism tax, transient tax, hotel tax, and more. These taxes can be due monthly, quarterly, or annually, depending on the jurisdiction.

For both types of taxes, you can be penalized if you don’t follow the rules for compliance, so it’s important to understand the differences and your obligations for each type of tax.

Many STR hosts use their properties as a part-time side hustle to bring in some extra money. But it’s the money part that’s the kicker — if you’re setting out to earn money from providing accommodations to paying guests, you’re most likely considered a business by local authorities, and you’ll need to follow local rules for business operation and taxes.

Because STR tax laws are local in nature, you’ll need to check with your local tax jurisdiction(s) to determine:

• How short-term rental businesses are defined for tax purposes
• Which lodging taxes you need to add to your guests’ bills and the correct rates
• The steps you need to follow for tax registration, collection, filing, and payment

You may have tax obligations to more than one jurisdiction, which could be your city, county, state, a special district, or any combination of these.

In Panama City Beach, Florida, for example, vacation rental operators are required to obtain a state tax certificate, collect state lodging taxes from guests, and file lodging tax returns with the Florida Department of Revenue. Panama City Beach STR hosts must also register with Bay County and collect County Tourist Development Tax.

In most cases, your short-term rental operation is a business for tax purposes even if you don’t make a profit. Lodging taxes are based on the amounts guests pay for accommodations, not on your income. So the balance sheet of your business doesn’t come into play for lodging tax compliance.

If you don’t have any short-term rental income to report and didn’t collect any tax within a tax period, you might assume you don’t have to file a lodging tax return. However, many jurisdictions require you to file every reporting period, regardless of whether you had any short-term rental income or any short-term rental taxes were collected. Such filings are commonly known as “zero dollar returns” and disregarding this requirement can result in penalties.

Your short-term rental may not be a hotel — but often, it’s taxed like one. It used to be that STRs were often exempt from lodging taxes that applied to hotels, but a growing number of jurisdictions now have laws on the books that specifically include STRs among the types of accommodations that are subject to lodging taxes.

For example, Loudoun County, Virginia, passed an ordinance in November 2023 that made short-term rentals with fewer than four bedrooms subject to the county’s 8% tourism tax. In addition to county taxes, Virginia STRs are also subject to Virginia’s 6% state sales tax and are required to register with the Virginia Department of Taxation.

If you charge guests for accommodations, the number of guests you host isn’t relevant in most jurisdictions. What matters is guests are paying for accommodations, and this is subject to tax.

However, exceptions exist. For example, in Massachusetts, if you operate a short-term rental for less than 14 days a year, you aren’t required to collect state lodging taxes. But, this doesn’t apply to other jurisdictions. Again, it’s key to understand the rules in the tax jurisdictions where your STR is located. In most places, you’re required to collect lodging taxes from the very first paying guest.

A well-known guideline for federal income tax often creates confusion for short-term rental operators. If you only rent out your home for 14 days or fewer over the course of the year, you don’t need to report that income on your federal income taxes. This is known as the “Masters Rule,” and only applies to income taxes, not state or local lodging taxes. There is no nationwide 14-day exception for lodging tax requirements.

Short-term rental marketplaces such as Vrbo and Airbnb collect lodging taxes for their short-term rental hosts in some jurisdictions, but neither of them collect taxes in all jurisdictions. And in some places, they may not collect all the taxes that are required in one location.

For example, STR operators in Memphis, Tennessee, are required to collect the city’s occupancy privilege tax and an assessment of $2 per bedroom per night from guests and remit them to the city. Airbnb has an agreement with the city to collect these taxes for its listings, but Vrbo does not. Hosts are responsible for any taxes that are not collected on their behalf.

In short, don’t rely on the assumption that your marketplace will take care of tax compliance for you. It’s up to you to find out what they do or don’t do and fill in the tax compliance gaps yourself.

While it’s important to correctly understand the ins and outs of lodging taxes for short-term rentals, it’s not always easy. We can help. Avalara MyLodgeTax automates and simplifies short-term rental tax compliance, including registration and filing with state and local tax authorities, to ease the burden. If you have tax questions related to your STR, drop us a line and we’ll get back to you with answers.