Continued rise of vacation-rental sites and listings creates issues, opportunities for municipalities
By Joshua Nelson, Samuel L. Emerson and Todd R. Leishman.
Beach to ski town and every city in between, it’s easier than ever to book vacation rentals.
Today, travelers and homeowners are directly connected through the home-sharing websites Airbnb, VRBO, HomeAway, FlipKey, and others that place masses of short-term rentals within a click of their users. It’s a rapidly expanding and lucrative industry providing significant benefits to renters and owners — but one that has created a litany of regulatory, taxation and nuisance issues for local residents and cities.
The good news is: Municipalities have tools to address these issues.
Home-sharing sites have created a surge in short-term rentals, but regulating and taxing such properties isn’t an entirely new problem. With a little imagination, existing municipal laws dealing with land use and taxation can be easily applied to short-term vacation rentals.
Regulating Short-term Rentals
Making a threshold choice is step one in regulating short-term rentals: How stringent will the rules be?
It’s a question that the City of San Diego is currently grappling with. In November, the city council rejected an outright vacation-rental ban, but it’s now considering three options to govern short-term rentals. All options would allow these rentals to operate in residential areas but would require a permitting process.
On the lenient end, the city could choose to just require a ministerial permit and payment of a nominal fee (or make it free). Alternatively, San Diego might allow the pendulum to swing the other way with a strict 21-day minimum stay at short-term rentals. The city is also considering a special permit for larger homes with six or more bedrooms and those that can accommodate 10 or more guests.
There is no one-size-fits-all approach to rental regulations.
Given a community’s needs, vacation-rental rules can take many different shapes. Often they involve limitations placed on occupancy, location and density, and frequency of stays, coupled with regulations regarding noise, supervision and parking.
Once a city or county identifies its regulatory objectives, land-use guidelines regarding lodging can cover a wide range of uses, including home exchanges, home sharing, traditional rental homes and website rentals. But they can also be the first layer of rules for sober-living homes and other unlicensed group residences, which are subject to generally applicable transitory-lodging rules to the extent that state or federal laws don’t require otherwise.
Here are a few ways that cities may regulate rentals:
- Occupancy: Caps based on the number of rooms, square footage and available parking
- Density/Quantity: Set maximum density limitations and implement separation requirements — such as requiring 300 to 1,200 feet between short-term rentals
- Frequency/Duration: Limit the number of tenancies allowed per month or year or require a minimum rental duration in days or weeks
- Supervision/Accountability: Require a homeowner to be onsite, maintain the property as a primary dwelling or have a 24/7 contact that can be reached immediately if issues arise
- Noise: Require the owner or management company to enforce quiet rules
An all-out ban of short-term rental properties is also an option.
Be mindful though that cities in the coastal zone have external forces at play.
The California Coastal Commission has become an ally for vacation-home proponents. The agency sees short-term rentals as a way to fulfill the Coastal Act’s stated policy of maximizing access and promoting low-cost visitor and recreational facilities near California’s coast. The Commission often takes a hard look at transitory-lodging restrictions in the coastal zone.
Bed-tax, Permitting-fee Collection
Most cities have had transient-occupancy tax on the books for decades. These not only cover hotels but also other properties rented to transients — guests staying for less than a month — such as vacation rentals.
Most cities also have business license requirements that can clearly be applied to short-term rentals.
When addressing TOT collection and enforcement, cities should ask a few questions:
- How aggressive do we want to be with collection efforts? Cities could operate with a zero-tolerance policy or have an amnesty program that allows owners time to come into TOT compliance as online listing sites haven’t been diligent about informing its users about local tax requirements.
- How will staffing needs be met? TOT collection and enforcement could impact many departments, including planning, finance, public safety, legal and economic development. Cities could need more hands on deck to handle the influx of work. This leads to the question: Where will funds for enforcement come from?
- Who will be responsible for collecting TOT? Home-sharing websites have not traditionally been interested in collecting TOT on behalf of agencies, so it has fallen to owners and rental operators to report earnings, collect taxes and submit these funds to municipalities.
Collection of the TOT opens a catalog of issues. To start, how will violators be located?
- Locating Violators: Cities can operate on a complaint-only basis or be more proactive, such as by using in-house staff to perform sting-like operations or by contracting with a third-party investigator and auditor.
- Issuing Warnings: Once a violator is found, how to proceed? Cities may choose to send a warning letter or perform an audit, which can further complicate things.
- Estimating Taxes: If a city goes the audit route, it must decide how to estimate taxes. The method should be simple and well-communicated in the ordinance. It must also decide how far it will go in second-guessing and testing an operator’s self-declared short-term-rental
- Obtaining Information: Operators may provide income information voluntarily but, if needed, a subpoena for information could be sought out. Typically, once a general amount is known and taxes are calculated, a hearing is held. From there, one question remains: How do you collect?
Whatever approach is taken, the permitting and taxing regulations need to clearly be written into the ordinance. Consistency, clarity and a clean methodology are key.
It’s important to note that implementing a new tax and making certain changes to the TOT ordinance and its enforcement may require voter approval.
In sum, communities striving to protect residents’ needs while catering to visitors should consider how best to regulate short-term rentals and enforce local transient-occupancy taxes, as well as other assessments.
Many oversight tools needed are already on the books. With short-term rentals on the rise, it’s time to evaluate current rules and assess regulatory options.
Learn more by watching a video of a recent BB&K webinar “Short-Term Rentals: Burdens and Opportunities.”
Joshua Nelson, a partner in Best Best & Krieger’s Municipal Law practice group, provides general counsel services to public agencies and is city attorney for the cities of Gustine and Jackson. His practice is centered on municipal law and public safety with specific focus on telecommunications, utilities issues and code enforcement — including short-term rental regulations. He is in BB&K’s Sacramento office and can be reached at firstname.lastname@example.org.
Samuel L. Emerson, of counsel at Best Best & Krieger’s Sacramento office, represents municipalities and public agencies on a variety of matters including land use, code enforcement and property issues. Part of the Municipal Law practice group, he is experienced in litigating receivership actions and advises clients on laws pertaining to short-term rentals. He can be reached at email@example.com.
Todd R. Leishman, of counsel in Best Best & Krieger’s Municipal Law practice group in the Irvine office, represents public and private clients on issues in land use, environmental and municipal law. Working with cities, water districts and other agencies, he helps ensure compliance with environmental, zoning, planning and other laws affecting development in municipalities. He can be reached at firstname.lastname@example.org.