Hotels push Delaware lawmakers to tax Airbnb

By Dan Linehan

Topher Swanson’s one-bedroom guest house in Rehoboth Beach isn’t a hotel according to Delaware tax laws, but it’s rented out like one through Airbnb.

To Swanson, who lives full time on the Caribbean island of St. Croix, it’s a distinction without a difference. “If you quack, walk like a duck, look like a duck, you are a duck,” he said.

The property owner pays hotel taxes on similar short-stay rental properties on the island, but not in Delaware. Here, rental bookings made through online platforms like Airbnb are not taxed like hotel stays, which are subject to an 8 percent statewide tax and an additional 3 percent tax levied by some cities.

The state’s hotel owners and tourism officials are trying to persuade state lawmakers to change that. They argue taxing short-term rental stays booked through online companies like Airbnb would put them on more equal competitive footing. Nearby states have already made this change, most recently New Jersey in October.

Whether Delaware should tax Airbnb hosts is the latest example of the state struggling to keep pace with digital upstarts edging their way into long-established industries.

Airbnb itself is willing to collect taxes on behalf of the “hosts,” who rent out their homes for short-term stays through the platform, but it’s hesitant to fork over customer information.

The sticking points may be in how taxes are collected. Airbnb prefers voluntary tax agreements that allow it to keep data about its hosts to itself, while the hotels want a more stringent law. Right now, the hospitality industry is having difficulty finding someone in the General Assembly to sponsor legislation and there’s no voluntary collection agreement in place in Delaware like there is in many other municipalities across the country.

The disparity cost Delaware at least $1 million in lost tax revenue in 2018, just from Airbnb hosts.

Swanson says he’s fine with being taxed like a hotel — he even welcomes it. Paying taxes that support public services is the right thing to do, whether you’re in Delaware or on a tourism-dependent island like St. Croix, he said.

“You need to pull up your pants and pay taxes like other people are,” he said.

A new player emerges

Airbnb and other platforms have a simple premise: Property owners have an asset they’re not using to its potential. By pairing up these owners with visitors willing to stay in a private residence rather than a hotel, a company like Airbnb can help property owners earn extra money while taking a cut itself. Some Airbnb hosts are regular homeowners renting out part of their house, while others are professional property managers.

Scott Thomas, executive director of Visit Southern Delaware, a tourism organization funded in part by the state’s 8 percent accommodations tax, says the expense of marketing Sussex County
is funded by taxes that only the hotels are paying.

That marketing therefore focuses on those hotels, though if companies like Airbnb were contributing, promotion efforts could feature them as well, Thomas said.

One percentage point, or 12.5 percent, of the tax also funds beach replenishment, which is crucial to help match federal money to help maintain what Thomas called the “tourism anchor” of Sussex County.

Bill Sullivan, a board member at the Delaware Hotel & Lodging Association who owns a Courtyard by Marriott hotel in Newark, first noticed Airbnb’s presence in big cities and resort areas.

“But as its momentum increased, it’s penetrated to other cities and copycat companies have started doing pretty much the same thing,” he said.

Without paying taxes, though, these companies “aren’t competing on an apples-to-apples basis” with hotels, Sullivan said.

By 2018, Airbnb had 1,100 hosts in Delaware who collectively earned about $13.5 million, about 87 percent of it from Sussex County, according to a press release from the company.

Whose deal is it?

When Airbnb makes another of its hundreds of voluntary collection agreements, as it did with Pennsylvania in 2015, it agrees to collect the tax on behalf of its hosts instead of asking each to register with the government individually. The company has paid $21.2 million in taxes to the state of Pennsylvania over the past three years.

“We’ve embraced voluntary collection where we collect and remit on behalf of our hosts,” said Brandon Hatton, a public policy associate at Airbnb.

This can simplify matters for regulators but concerns some hotel owners.

Bill Silva, who manages a handful of Delaware hotels and is chairman of the lodging association, said these collection agreements with other state and local governments make it difficult to verify that the correct tax is being paid.

“We’ll make sure the language isn’t as vague as Airbnb wants it to be,” he said.

Though the state’s hotel and tourism industries are lining up behind a bill to tax Airbnb stays, the legislative appetite for such a change isn’t clear.

Potential challenges

The lodging association has retained lobbyist Joe Fitzgerald, who predicts the effort will face some resistance in the General Assembly. It may come mainly from Sussex County lawmakers under pressure from constituents who rent out their properties using Airbnb. Securing more stringent requirements than are usually seen in voluntary collection agreements will be another challenge.

For example, some hotels want Airbnb to register each host with state officials to ensure the accurate amount of tax is being paid.

“Airbnb has mounted a fairly effective campaign of self-regulation,” Fitzgerald said. However, “when you find an industry seeking to impose regulations on themselves, they’re seeking the most favorable outcome for them.”

Fitzgerald said the goal is to get a bill passed during this two-year legislative session, though they don’t yet have a sponsor. Former Rep. Deborah Hudson last year authored a similar bill, though she was defeated in last fall’s election.

Learning to compete

Even if Airbnb stays are taxed like hotels, the bricks-and-mortar industry still faces the long-term challenge of competing with the online entrants. Airbnbs can sometimes offer a lower price and a more authentic experience, and hotels are being forced to change.

Silva, the lodging association chairman, said the industry is starting to adapt to online booking companies by offering amenities similar to those seen at home.

“Ultimately, it’s going to make travel more competitive,” he said.

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  1. What also needs to be considered is that many of these units are currently being taxed as residential units when in fact they are being used for commercial purposes. The property tax assessments on these units needs to be re-evaluated. Picture two identical properties, one has a Delaware family living in it. The other is a full on revenue generating property benefitting from the low taxes and pocketing profits.

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