April 18, 2019. By Matt Okaty:
Regulations often lag behind innovation, and this is certainly true of the short-term rental market which has exploded over the past ten years. AirBnB and HomeAway, the two biggest companies in this space, have transformed the lodging industry to the delight of millions of travelers and enabled virtually anyone with a spare bedroom to participate in this multi-billion-dollar industry and earn extra income. But with innovation comes disruption, not only to traditional hotels, but also to neighborhoods and communities. Studies have shown the adverse effect short-term rentals has had on the availability of affordable housing in highly impacted communities, as investors swoop in to cash in on this lucrative market; not to mention the concerns many residents have with the transient flow of strangers in their immediate vicinity.
Lawmakers have thus been grappling with how best to balance these competing interests, and in just a few months significant new regulations go into effect in Massachusetts. Starting July 1, 2019, operators of short-term rentals in Massachusetts will be subject to the following three major changes:
1) Taxes – Except for properties rented less than 15 days a year, short-term rentals will now be subject to the same occupancy excise tax as hotels equal to 5.7% as well as a local tax option for cities and towns up to an additional 6% (6.5% for Boston). Similar to hotels, short-term rentals in select cities (Boston, Cambridge, Worcester, Springfield, West Springfield, and Chicopee) will also be subject to the Convention Center Financing Fee equal to 2.75%. There are two additional taxes unique to certain categories of short-term rentals. The first is a Community Impact Fee up to 3% that municipalities may impose on professionally managed units or units that are not the operator’s primary residence (i.e. investment properties). The second is the Cape Cod and Islands Water Protection Fund excise tax equal to 2.75% for rentals located on Cape Cod and the outer islands such as Martha’s Vineyard and Nantucket.
The taxes apply to the total amount paid by guests, including any service and cleaning fees that might be charged. Operators of short-term rentals are responsible for collecting the excise taxes from guests and filing a return and paying any amounts due on a monthly basis electronically via the Department of Revenue’s MassTaxConnect site. However, if an intermediary (such as AirBnB) enters a written contract with the operator to facilitate the collection of rent and other payments, then the intermediary would be the one required to collect and remit such taxes to the state and local authorities (be aware, though, this does not necessarily shield operators from liability in the event of non-payment). AirBnB has already started doing this on behalf of hosts in other states.
2) Registration – All operators of short-term rentals will be required to register with the state, even those who rent out properties less than 15 days a year. Registration is done via DOR using MassTax Connect (DOR is currently working on making changes to the process due to the new law and registration many not be open until July 1). The registry will be publicly available, although it will only list the city and street name (people’s names and specific addresses will be left out). This will at least allow the general public to learn the density of short-term rentals in their communities. While many cities and towns already have registration requirements and have created public registries, this is the first statewide registry enacted in the country.
3) Insurance – Operators of short-term rentals will also be required to carry liability insurance of at least $1 million for each short-term rental. However, this requirement can be fulfilled if an intermediary or hosting platform maintains equal or greater coverage (AirBnB appears to offer this coverage to hosts on its platform). Additionally, operators will be required to notify their existing homeowners or renters policy insurer of their intent to operate such a short-term rental.
These new regulations have the potential to generate millions of dollars in additional tax revenue for Massachusetts. According to an article by WBUR which cites AirBnB as the source, there were 1.2 million people who stayed in AirBnB rentals in Massachusetts last year alone, generating a combined $256 million for hosts. There are over 15,700 AirBnB hosts in Massachusetts, according to the article as well. Enforcement and collection of taxes could be tricky, however, without the cooperation of hosting platforms.
AirBnB is actually the plaintiff in a lawsuit right now with the city of Boston over certain provisions of the city’s regulations that AirBnB finds overly burdensome. Boston’s ordinance, which went into effect January 1st, places strict limits on the types of properties eligible to be rented on a short-term basis within its jurisdiction (one such requirement is that the property must be owned by or adjacent to the primary resident, i.e. investment properties are generally not eligible). The ordinance requires booking agents such as AirBnB to essentially police its own site for ineligible listings and remove them, and it also risks a fine of $300 per violation per day if it collects fees from ineligible listings. AirBnB also objects to the ordinance’s data sharing requirement in which it would have to provide the city with a detailed monthly report that includes a breakdown of all the listings and rental activity in the area.
But Boston is not alone in its fight with AirBnB. Cities across the country that have enacted similar regulations are meeting the same stiff resistance from AirBnB, either by way of lawsuits or deep-pocketed lobbying efforts. San Francisco, Palm Beach County, San Diego, Miami, Honolulu, Nashville, New Orleans, New York City – the list goes on. According to Ulrik Binzer, CEO of Host Compliance, which helps municipalities draft rules for short term rentals, AirBnB is engaged in a “city-by-city, block-by-block guerilla war” against local governments and “need to essentially fight every one of these battles like it is the most important battle they have.”
The law in this area is still very much unsettled and raises several federal and constitutional issues. It will thus be interesting to see how the lawsuit in Boston plays out as it could have national significance.