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VRBO changes the way it remits taxes

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Wednesday, November 20, 2019
Downtown Sylva. Joe Pellegrino photo Downtown Sylva. Joe Pellegrino photo

The explosion of online vacation rental booking options like VRBO and Airbnb has completely changed the tourism industry, and while it’s been beneficial for Western North Carolina communities, it has also presented a challenge for counties trying to collect occupancy and sales taxes from overnight visitors. 

“We’ve seen Airbnb rentals grow tremendously — the first year from Airbnb we received $13,000 in taxes, in 2017-18 we got $75,000,” said Nick Breedlove, executive director of the Jackson County Tourism Development Authority. “We’re seeing month over month growth. In the tourism world we consider them a disruptor, but it’s not a negative connotation — it’s the same thing Netflix did to DVD rentals or Uber did to the taxi industry.”

One of the biggest challenges for county tourism directors has been trying to make sure all vacation rental owners utilizing these online booking services are paying their fair share of sales and occupancy taxes. 

“Everyone who owns an accommodation has to pay room tax to the county if the stay is under 90 days. Before there was VRBO or Airbnb, the owner would register with the state and get a number from the county so they could manually file the taxes themselves and some still do that,” Breedlove said. 

But now owners can just register with one of the online booking companies, which is all fine and good, but the problem is that counties aren’t able to truly know if everyone is paying their taxes because VRBO’s process was to remit the tax revenue to the property owner.

“With VRBO, there had been an issue with the lodging and sales tax being collected by VRBO, and then remitted directly to the property owner to pay to the proper government authority,” said Mary Ann Baker with the Swain County Tourism Development Authority. “The Swain County TDA had some concerns as to the compliance of property owners in remitting the tax that they received from VRBO and other similar listing sites.”

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Baker said the Swain TDA talked with Host Compliance — a national company that tracks lodging tax compliance — in April of this year and their data indicated that on a national basis only about 20 percent of property owners remit the tax that they have received from booking listing sites.

On the other hand, Breedlove and Baker said Airbnb’s process for collecting taxes has been much better from the very beginning. Airbnb started in 2007 and almost immediately struck a deal with the North Carolina Department of Revenue — the company agreed to collect the taxes on a rental upon a customer’s check out and send one check to the state to be distributed to the county in which it was collected. 

“That was a great move for us because before that we were relying on the homeowner to remit that money and while it’s likely that a majority of our accommodations did remit the taxes, there’s also a good possibility that some of them were not remitting,” Breedlove said. “That really helped level the playing field. Now it’s an automatic process when people check out and the people listing the properties didn’t have to deal with all the reporting required — Airnbnb took all that over.”

VRBO, after several mergers and buyouts, was the dominant powerhouse for vacation rentals before Airbnb took off. VRBO was really one of the first online platforms to be able to manage the tax process for owners. The company started in the early 2000s and was then purchased by Homeaway in 2006. Now Expedia owns Homeaway. 

Tourism leaders recently learned that VRBO would soon begin a similar process as Airbnb by collecting the occupancy and sales tax and remitting it directly to the state. It was a relief to hear considering many TDAs have been struggling to find a way to ensure everyone is paying their fair share into the system. 

“This policy helps the Swain County TDA in a couple of ways. It brings an equality and fairness to the local lodging industry in that vacation rental owners are compliant in remitting the tax in the same way that the local hotels, motels, resorts, and B&Bs are,” Baker said. “Secondly, it will bring additional income to the TDA to be used for marketing and infrastructure.”

TDAs in each county leverage an occupancy tax on accommodations. Haywood, Jackson and Swain counties have a 4 percent rate while Macon County has a 3 percent rate. That tax revenue is then used to promote and grow the tourism industry in those counties. County government coffers also benefit from the sales tax revenue that results from overnight stays, food sales, retail purchases, etc. 

“Prior to this change, TDAs have been looking at ways to close the gap on who was not remitting. It’s been a consistent challenge for every destination countrywide,” Breedlove said. “Entire firms exist with the sole purpose of finding people not remitting, but that’s a lengthy expensive project because VRBO doesn’t list addresses for the properties so you can’t compare apples to apples and there’s no way to match it up from the tax listings.”

Breedlove said the Jackson County TDA Board of Directors had been in discussions about doing an audit of all its vacation rental properties, but it was going to cost $16,000. The last audit was done in 2012 when the TDA was first established. 

“The cost was prohibitive in my estimation because I don’t believe we would have recouped the cost in the increased collections,” he said. “You want to be fair to those who remit and pay their taxes but it’s hard to justify $16,000 for an audit.”

With the new VRBO remitting changes, Jackson and other counties won’t have to worry about whether they’re missing potential tax revenue from the most popular online booking sites. There are over 120 of these types of booking sites and still potential for people to circumvent the system, but Breedlove said VRBO’s change will help the TDA capture the “lion’s share” of tax revenues. 

“We feel like it’s a great thing for compliance and ensuring it’s a level playing field,” he said. “It’s hard to estimate the impact it will have and we won’t know until mid-December (when October occupancy reports come in). We expect to see a boost, but how much remains to be seen.”

Baker said Swain County is still compiling those projections. 

“An ROI (return on investment) indicator provided by Host Compliance shows that Swain County TDA could see a conservative $92,000 increase annually if all online booking listing sites were compliant in collecting and remitting the lodging tax,” she said.

Lynn Collins, executive director of Haywood County Tourism Development Authority, said she didn’t have any projections of what kind of increase Haywood could expect from the VRBO policy change, but she’s hopeful about an increase. 

“I already spend a lot of time on compliance, probably more than many others, but we’re taking a wait and see approach, but I’m hopeful we’ll see an increase in collections,” she said. 

If the number of Airbnb rentals in Haywood is any indication, it’s likely Haywood will be seeing more revenue through VRBO as well. According to AirDNA.com, Haywood’s Airbnb rentals have increased from 49 in October of 2014 to 1,234 in October 2019. 

Jackson County’s tourism dollars are on an upward trend — occupancy tax collections were at $1 million for 2018-19, and Breedlove is projecting $1.2 million for 2019-20 fiscal year. Projections might be higher, but the High Hampton Inn — a large occupancy tax collector — is closed for renovations and could impact final numbers. Vacation rentals in general are making up a larger piece of the tourism pie for Jackson. From July 2018 to June 2019, vacation rentals accounted for 29.75 percent of all occupancy tax in the county while hotels make up 37 percent and cabins and cottages make up about 15.6 percent. Just comparing July collections from Airbnb in 2015-16 to 2019-20, there’s 3136 percent growth, Breedlove pointed out. 

Swain County has also seen a growth in the number of vacation rentals as well as an increase in its room tax revenue, breaking the $1 million mark in 2018-19 for the first time ever. The county uses AirDNA.com to track vacation rental data, and Baker said the data indicates that there are 791 active vacation rentals (on Airbnb and VRBO/HomeAway) in Swain County with a 15 percent quarterly growth since June 2017.

“We think that our visitors continue to see Bryson City and Swain County as a popular destination. The plethora of outdoor recreation opportunities in the Great Smoky Mountains National Park, the Nantahala National Forest, The Blue Ridge Parkway and Fontana Lake, along with the Great Smoky Mountains Railroad originating in downtown Bryson City, means that visitors will continue to seek lodging in Swain County,” she said. “Our marketing plan is specifically designed to reach out to visitors seeking these types of features in their destination selection.”

Linda Harbuck, executive director of the Franklin Chamber of Commerce, said the Macon County Tourism Development Commission hasn’t had any discussions about what the VRBO policy change could mean to the county’s bottomline. 

“From what I know, it would be a good thing because Airbnb has come forth and is submitting monthly checks and if VRBO and others in the business would follow suit it would be a tremendous benefit,” she said. “But we don’t have any projections or anything like that.”

The popularity of the online booking services has also spurred bed and breakfasts to begin listing some of their rooms on the sites to increase their exposure to potential visitors looking for somewhere to stay. 

“These sites are very attractive tools and they’ve become household names. Even if someone is not necessarily seeking out that certain experience, they’re going on those sites to search and the B&Bs are seeing success with more bookings,” Breedlove said. 

While the additional tax revenues coming in from vacation rentals is beneficial to county coffers and the advancement of the tourism industry, one downside is the increasing number of owners turning their long-term rentals into short-term rentals. It’s easy to understand why they do it — vacation rentals can bring in $1,000 a week compared to $1,000 a month for property owners and vacation rentals tend to have less wear and tear than long-term residential rentals. 

However, the trend is exacerbating the housing shortage in the region. 

“We’ve seen a great increase in the number of listings year over year and the number of accounts has increased dramatically,” Breedlove said. “If somebody can rent their home on Airbnb or VRBO and make more than renting it out to the general public — making $1,000 a month versus maybe $1,600 a month off Airbnb, then it’s more enticing to do that, but it does take houses out of inventory.”

There’s also a concern that these online services are taking visitors away from the hotel market, but Breedlove estimates that much of the growth the county is seeing is new demand and new visitors to the area — especially younger visitors — looking for a different experience from a hotel. 

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