Four years ago, sharing services like Airbnb and Uber gained national momentum, and cities everywhere were forced to change the way they worked with tourists and residents. In the new sharing economy, companies like Airbnb and Uber give residents an opportunity to rent their homes and time to tourists who want to travel cheaply. Unfortunately, this new paradigm has forced many cities across California to address the costs sharing services have on their budgets and economies.
When Airbnb was founded in 2008, mayors, council members, and city managers didn’t think much of it. While it went mostly unnoticed, MuniServices, one of the nation’s leading providers of tax audit and revenue recovery services, was paying attention and trying to figure it out. In fact, they did figure it out, especially its impact on local transient occupancy taxes (TOT), also known as a hotel tax.
“What was initially a $5,000 annual TOT loss now cost some cities upwards of $100,000 a year,” said Julia Erdkamp, Client Services Manager for MuniServices. “Residents saw the income potential. The sharing economy moved beyond a few rentals in tourism cities like San Francisco and Los Angeles to weekly house rentals in smaller communities that serve business travelers. Now, residents are not only sharing homes, but vehicles, clothing, and so much more. This is a phenomena we can no longer ignore.”
Today, Airbnb has grown to more than 1.5 million listings in 34,000 cities around the globe. In a recent search for rooms in the Bay Area, almost every city in the region showed at least one rental. Larger cities showed more than 15. As well, ride-share services like Uber and Lyft have displaced tens of millions of rides away from taxis. This is where MuniServices sees the major problems.
“Cities are losing hundreds of thousands in tax and fee revenue to sharing economy entrepreneurs,” said Erdkamp. “It’s not that they don’t support budding entrepreneurs. It’s that people who rent out their rooms, homes, cars and time don’t pay for increased services and maintenance due to their shared rentals. Costs cities are forced to pick up.”
TOT laws were created as a way for cities and counties to pay for increased service costs due to tourism and benefit from the growth in their tourism industry. TOT rates across California range from 8 to 14%, and can account for more than 10% of a city’s general fund revenue. Through its advocacy for sensible legislation in Sacramento, and vacation rental audit services, MuniServices has led the charge in California to defend TOT revenue.
“Transient Occupancy Tax represents approximately 20% of Sonoma’s General Fund Revenue and, along with sales tax and property tax, is a key source of revenue to fund general services such as public safety, parks maintenance, and streets maintenance,” said staff at the City of Sonoma, a California city that has worked extensively with MuniServices on revenue recovery.
While the emergence of the sharing economy is undeniable, the implications on local government continue to evolve, leaving many cities unsure of the proper approach. By frequently conducting hotel tax and vacation rental property audits, reviewing business licenses and fees, and staying ahead of new laws, MuniServices is helping California’s cities maintain an equal playing field. More importantly, they are putting legitimate revenue back in city coffers.
“Sonoma has taken several proactive steps to manage vacation rentals and the sharing economy including regular audits of sites like Airbnb for new rentals and follow-ups by the City’s Planning Department, City’s Code Enforcement Officer and City Prosecutor,” said City of Sonoma staff. “The City has developed a relatively restrictive use permit process for vacation rentals based on concerns around erosion of neighborhood character and the cost of housing for long-term residents.”
This year, during the League of California Cities’ Annual Conference in October and Municipal Finance Institute in December, MuniServices will be hosting seminars on how cities can manage the challenges and opportunities created by the sharing economy. While city managers and their staff are encouraged to attend, those unable to can get more information on the sharing economy and learn about solutions to mitigate its impacts by contacting Julia Erdkamp at email@example.com.
With more than 900 cities, counties, and special districts as clients, MuniServices is the nation’s leading provider of proprietary revenue recovery, audit and administration services encompassing all general sources of municipal tax revenue. To learn more about TOT recovery and MuniServices, visit www.muniservices.com.