Vacation rental reality: Will local taxes offset the impact?
VERDE VALLEY - With Governor Doug Ducey's May 12 signing of SB 1350 allowing residential homeowners to rent their places nightly or weekly regardless of zoning, how do Verde Valley communities plan to handle the impact of increased visitation to their neighborhoods?
One way is through taxation.
In fact, it was taxation that prompted SB 1350 in the first place. The bill provided a mechanism for the state to collect a 5.5 percent tax from online vacation rental sites such as Airbnb and VRBO.
But it doesn't stop there. Many local communities believe they have the right to collect additional taxation as they wrestle with the concept of vacation home rentals. For example, in most local communities, a rental under 30 days is categorized as "transient," triggering the collection of an additional "bed" tax.
What the bill says
In its May 13 legislative bulletin, the League of Arizona Cities and Towns states "the bill prohibits municipalities from banning this type of short-term housing rental, but provides authority for cities to deal with nuisance properties in the same manner that they would handle similar issues involving an owner-occupied or residential rental property."
Mayors of several Verde Valley communities (including Clarkdale and Jerome) have voiced their concern over the additional stresses placed upon water, sewer, parking and public safety caused by overnight visitors in residential neighborhoods. Some view the properties as commercial operations, particularly when continuously rented by out-of-state owners.
However, Item 10 in SB 1350 "Transmitted to the Governor" states "online lodging marketplace are not classified as transient lodging," which typically triggers a local "bed" tax. Also, Item 14 states "the adopted tax a city, town or other taxing jurisdiction levies on an online lodging marketplace is uniform . . . for rentals of lodging accommodations for 30 consecutive days or more" - - not the weekly or overnight stays so prevalent in vacation rentals.
What the League of Arizona Cities and Towns says
Lee Grafstrom, tax policy analyst, League of Arizona Cities and Towns, says, "You have to carefully unpack the language of the new law, and particularly the legislative staff summary related to it. They do a very good job of touching all the major elements, but there are times when the summary is not exactly the same as what the bill."
"In Item 10 ('online lodging marketplace are not classified as transient lodging'), this means the platform company such as Airbnb. Thus, the platform company is not considered to be in the hotel business, but that should not be confused with the 'online lodging operator' (the property owner) who is the person in that business," said Grafstrom.
"Item 14 covers a section of the new law that simply allows cities and towns to have a different tax rate on transient rentals than the state," he said.
Although "not a huge political issue in Camp Verde," Finance Director Mike Showers anticipated the vacation rental situation years ago.
"It's a Pandora's Box," said Showers. "The biggest issue is most cities and towns didn't have this going on. They don't understand what this is and they are kind of reeling right now."
"I had a discussion with the DOR (Dept. of Revenue) last year and I jumped out and said, 'There is no other way to look at it,'" said Showers. "My take is that it is a vacation rental, therefore, hotel/motel tax of 3.65 percent plus a 3 percent 'bed' tax. You have to look at the entire tax code and not just a section."
Showers himself has taken advantage of online rentals during out-of-town conferences. He found them to be "cheaper and providing absolutely beautiful properties."
In Clarkdale, Finance Director Kathy Bainbridge says "if we read the tax code for rentals on a nightly basis, to us, vacation homes fall under that opinion."
She believes they are subject to a 3 percent hotel as well as a 2 percent "bed" tax in Clarkdale.
"We'll see what other communities are doing to see if we need to change," she said, "as well as the League of Cities and Towns."
Administrative Services General Manager Rudy Rodriguez of the City of Cottonwood also anticipates additional revenue from taxing vacation home rentals.
"Vacation home rentals can be both (a 3 percent rental and a 3 percent 'bed' tax), depending on the length of stay," said Rodriguez. "The threshold is 30 days. Under 30 days is a 'bed' tax. Over 30 days is a residential rental."
He sees this as nothing new for purposes of local taxation.
"RV parks have both," he said.
Officials in Jerome may have the most at stake. Mired in a lawsuit brought by the Goldwater Institute on behalf of four owners of vacation rental properties who felt unduly regulated, both parties agreed to a dismissal after SB 1350 became law.
"Right now we are getting clarification from the League of Cities whether vacation rentals are subject to a 'bed' tax," said Candace Gallagher at a June 14 council meeting. The "bed" tax in Jerome is currently 2 percent, proposed to rise to 3 percent Nov. 1 if approved by council.
Council member Alex Barber voiced another concern with additional visitors in residential neighborhoods: Jerome's already overburdened sewer and water systems. The town is currently under voluntary water restrictions due to shortages brought on by drought.
"If they have 30 people staying in a home and we are billing for two or three people, that is not correct," said Barber.