Back in September 2015, the city council discussed the issue of short-term rentals via internet platforms, specifically Airbnb. At that time, the council decided not to create additional regulations, but instead directed staff to work with Airbnb and the public and return at a later date.
Staff reports that, while a public forum has yet to occur, the city staff and city attorney’s office have worked with Airbnb on a draft agreement for them to pay transient occupancy tax to the city.
Transient Occupancy Tax (TOT) in Davis is 12 percent of the cost of a room night. Staff writes, “It is unknown how many Airbnb rentals there are in Davis or how many room nights are used each year.
As of this report “the Airbnb website showed 266 rentals with an average price of $79. If each of those locations rented out for 20 room nights per year, the revenue to the City would be approximately $50,000.”
In addition, “if Airbnb hosts apply for a business license, additional revenues will flow to the City. These revenues will, like the TOT, range from $13 per host upward depending on gross receipts.”
However, staff reports, “the City does not have access to data to know the locations or the average number of room nights through Airbnb in Davis.” This is critical because, “The Municipal Code 
already requires a short term rental like those facilitated by Airbnb to pay transient occupancy tax (TOT), but the City has no way to know locations, terms and usage of such properties without the assistance of the online platform, hence the need for an agreement with Airbnb to provide the required TOT.”
Staff notes that the proposed agreement still would not provide the city additional information about individual properties as “no location, rental nights or prices are disclosed.”
However, “It does, however, provide that Airbnb will collect and remit to the City the 12% transient occupancy tax, in the same manner as existing brick and mortar hotels in Davis.”
Staff is recommending that the council authorize the city manager to execute the agreement. In addition, staff recommends that the city’s policy should be to require a business license for anyone who rents out a room for a short-term rental. Similar to any home-based business, a business license allows the city to know where in residential areas business activity is taking place and to collect the appropriate tax for revenue generated through that for-profit enterprise.
A business license is currently required for traditional hotels and for single-family homes that are used as rental units. A business license is based on gross receipts, so the more a host makes, the higher the business license tax. A host would pay $13 per year, up to $10,000 gross receipts and a sliding scale beyond that (the total cost for gross receipts up to $30,000 would be $25).
According to a draft of the agreement, beginning on the “effective date” Airbnb would agree “to commence collecting and remitting TOT on behalf of Hosts, pursuant to the terms of this Agreement, at the applicable rate, on Taxable Booking Transactions. Airbnb would have no obligation or liability to collect TOT for any transaction prior to the Effective Date.”
Further, “Airbnb agrees reasonably to report aggregate information on the tax return form prescribed by the Taxing Jurisdiction, including an aggregate of gross receipts, exemptions and adjustments, and taxable receipts of all TOT that is subject to the provisions of this Agreement.”
Airbnb “agrees contractually to assume liability for any failure to report, collect and/or remit the correct amount of TOT, including, but not limited to, penalties and interest, lawfully and properly imposed in compliance with the Code.”
The city would have the ability “to audit Airbnb on the basis of TOT returns and supporting documentation, and agrees not to directly or indirectly audit any individual Guest or Host relating to Taxable Booking Transactions unless and until an audit of Airbnb by the Taxing Jurisdiction has been exhausted with the matter unresolved.”
—David M. Greenwald reporting
Thanks for the story, David. I am amazed but perhaps not surprised that Davis has taken this long to find this untapped revenue. We have a vacation rental on the coast and we pay 11% to the county for TOT plus business license on both Airbnb and VRBO. I know other landlords that have been caught by the county for registering, renting and not paying the tax. It would not take rocket science to cross check the TOT with the listings and even dig further into the rental’s booking calendar to determine revenue VS taxes. In our case we charge renters the tax as a line item and pay quarterly to the county. I am unaware that Airbnb pays the tax, although in the last few years they have been trying to educate landlords as to possible local tax they are responsible for. I would estimate the last revenue at greater than your figure of $50K. In a University town Airbnb would seem to be a popular alternative to hotels.
I have no problem going after AirBnB taxes.
My question, are we paying more in manpower hours in seeking the tax than we’ll get in return?
$50,000 gets eaten up pretty fast.
As I read the contract it appears that it would be pretty low maintenance, and you have to figure that Airbnb has this kind of arrangement with a lot of localities.
A nickel here, nickel there….all adds up. So Airbnb offers a contract to collect the $ for the locality? Was not aware of that; what is their cut? With the coastal county, it is ‘honor system’ but according to what I said, there is mechanism to catch the ‘dishonored’…..however we have never been audited.
Darn good question… deserves an answer…
Verification and enforcement is not cheap in terms of staff hours… particularly if the City decides to exercise their ‘ability to audit’…
Unless the City has direct obligations from individual “hosts”, I’d rather answer those unsolicited phone calls “from Microsoft”, with the heavy accents from a call center, and have them take over my computer to “fix” the viruses on my machine. Which I am too savvy to do.
This smells… and I say that knowing I’ll never be a ‘host’…
Taxing incomefrom these operations should be IRS & FTB leadership/enforcement, and the City taking our ‘cut’…
“Taxing incomefrom these operations should be IRS & FTB leadership/enforcement, and the City taking our ‘cut’…”
How is TOT from hotels collected?
My point is,it is income, which should be taxed, subject to auditing income, by IRS/FTB… based on those records, we could reasonably compute TOT… at least as well as the suspicious way proposed…
If every host had a business license, and if the City pursued the TOT in the same way it does hoteliers, that theoretically makes sense, but it then goes to the question of whether the revenue is net, given the costs of collection/enforcement…
It pains me to agree with Keith, but here and now, he asks a damn good question…
As far as I can tell, these taxes are collected at the local level. IRS wouldn’t have any involvement except for the personal income of the owner, which is different. FTB doesn’t do that kind of thing. State Board of Equalization doesn’t appear to. It’s either collected and administered by the county or the city in the examples I can find online.
Initially, almost certainly, as it takes time to negotiate, write and implement the contract. Once the contract is in place, however, there will be little expense beyond receiving and accounting for the payments, so over time, the initial expense will be covered. Whether or not the City demands an audit should depend on the revenues. $50K per year, probably no value gained from an audit. $500K per year, perhaps. Just because an audit is possible does not mean the City has to demand one.
First of all, I see the failure of the city, so far, to collect the TOT as simply walking away from a source of revenue. To execute an agreement between the city and AirBnB does not REQUIRE an audit at any time.
Criticizing the cost of an audit sounds like looking for a reason not to execute a contract at all. An audit would be voluntary on the city’s part and in response to evidence to believe we’re being cheated significantly.
I would be surprised if annual revenue came in below $250,000 based on what I have seen down the street from my house.
AirBnB has every reason to accurately collect and remit the TOT. Failure to report accurately if found out could, and I argue should, result in simply outlawing AirBnB like many other cities have done. AirBnb would not want that, and they are acutely aware of cities that have prohibited them from operating. We’d be back to the present state of no revenue, but at least residents would have a lever to push back on the unpleasant and ridiculous behavior that sometimes accompanies these short term rentals.
The contract should contain a provision to exact triple damages in the case of failure to report by AirBnB. That should cover the cost.
Can’t wait until the City goes after couchsurfing.com, requiring a business license for anyone with an available couch, not to mention a health department inspection of said couch (would any pass?), paid for by the couch owner, of course!
So you believe that the city should tax hotels but not Airbnb?
Cheap… not what he said at all…
Yet, you seem to ignore the basic question… what would the NET revenue be, after subtracting ALL administrative/enforcement costs of the proposal?
Yeah, what he actually said was a sarcastic comment which had a clear implication to it, so I figured I’d clarify it.
Given that the city has paid salaried staff, and they aren’t adding to them, is there any administrative cost at all?
Come on, you’re smarter than that.
Manpower hours used on anything is a cost. If they have spare time to work on other projects other than their normal duties than maybe we have too many paid salaried staff. I think you can see how that works.
It’s not like we’re reinventing the wheel here – Airbnb operates anywhere and I’m sure they have a process to handle this issue that must exist everywhere
Damn! Have to agree with Keith again! I truly hate that, but ‘it is what it is’… in this limited case, I say he speaks truth…
Actually, it was more of a cynical comment assisted by a dark metaphor with a cyclic, applicable connotation (he says sardonically)
Ha, maybe Howard P will agree with you “in this limited case” even though it pains him.
Well said…
I’m an Airbnb host here in Davis and if the TOT are part of the Airbnb booking system, it would be nearly impossible for individual hosts to get around it. So, the auditing would really be ensuring that Airbnb is actually remitting all of the taxes. Hopefully, whatever auditing process the City has in place or will put in place will be cost efficient.
BTW, I still have a few days available during Christmas week available if anyone needs space for visiting family members. Mention “Vanguard” when you book, and I’ll give you a discount! 😉
Audits cost money… to procure the auditor, the auditor’s work, and follow-up… $50 k doesn’t appear to cover that… requiring business licenses might make it ‘break-even‘… so why do?
Do you currently have a business license?… easy enough for anyone to check… public record…
Are you prepared, to report TOT (if enacted) and make payment to the City? Timely?
Keith’s question remain unanswered… at this point, I believe deliberately…
Can we use the Vanguard staff to audit whether this discount is actually and properly applied? Since there will be no new staff, there will be no administrative cost for this audit! [Now THAT is a sarcastic comment with a clear implication.]
Howard – Well, I literally applied for the business license this morning after reading this article! Cost me $14. From the article, it didn’t sound like licenses are currently required for short-term rentals, but might as well do it now. I also pay federal and state taxes on the rental income. I’m not sure I’m your typical host though in terms of honestly paying all required taxes. So, your point is taken.
Alan – I think David should send one of his interns to audit my Vanguard Friends & Family discount.
Cindy… wish all ‘hosts’ did what you do… thank you for your candor and ‘trying to do the right thing’…
Funny thing tho’… years ago staff pointed out that the City costs of doing the business license thing for folk like you and us (when we owned a rental property) exceeded the revenues derived… CC exempted those uses for a time, then re-instituted… dumb.
Which raises an interesting point… all those serving Davis by uber or lyft, etc. as drivers, are technically doing business within the City… guess how many have a business license!
Perhaps a dumb question:
In general, is there supposed to be some relationship between the (extra) costs incurred by a city for a particular activity (e.g., the cost impacts of a hotel or a short-term rental), vs. the tax that is levied? (Or, for that matter – the costs to the city from Uber, Lyft, etc., since Howard mentioned those.)
Or, can such taxes be legitimately and legally viewed as a “revenue-generator”? (I think I know the answer, but not sure.)
In any case, it seems to me that the TOT is being viewed as a (net) revenue-generator, for cities (not just Davis).
You need a primer about the difference between taxes and fees… will give you a hint… if someone pays income taxes on $50 k / yr, do they have 1/10 services of someone who pays income taxes on $500 k /yr? (forgetting tax brackets)
[same is true on property taxes]
And you work/worked in auditing? Very scary…
Howard: Thanks for the response, and good example. Seems to me that “fees” are viewed as a revenue-generator.
Although I never audited taxes or these types of fees, I’m pretty sure that such auditing does not deal with the “why’s”, regarding tax/fee structure. (Not sure why you think it does, or why you’d make such a statement.) Of course, it presumably could examine the relationship.
For the most part, auditing deals with regulations/laws “as is”, and not what “should be”.
I was also thinking of your repeated comments regarding the reason that new development cannot pay more than its costs, in taxes. (Seems like an “exception” is made in that case.) I guess with anything else, it’s “o.k.” to charge more than costs incurred.
Actually, property taxes are anything but a “good example”, when considering Proposition 13 (and parcel taxes).
Income taxes are probably a better example of the point you’ve made.
Now you are being completely insipid… what I spoke of were development impact FEES, not taxes. Please remove cranial structure from lower end of the alimentary canal.
Please have someone who cares instruct you about the difference between fees and taxes… huge difference, legally… given your stated ‘profession’, truly scary you don’t get the difference. Even as a voter.
Hint: generally taxes are deductible; generally fees are not…
Actually property taxes are a perfect example… two $600 k houses… one owned before 1977 (when it was bought for $90 k), the other bought in July, this year… impacts, same… benefits, same… property taxes, way different…
Particularly when those two houses were constructed in the same year… but one was re-sold this year…
Howard: Again, I don’t think you understand the nature of auditing (along with the sub-categories of auditing).
In any case, I think I understand your point. Fees are tied to actual costs, while taxes can be the “sky as a limit”. (I can assure you that the types of audits I participated in did not deal with this difference.) Be “scared”, if you like. (I’m sure there’s other auditors and voters who haven’t given this a thought.)
And, TOT is a “tax”, and can “legitimately” (and legally) used to “stick it to” someone. (In this case, visitors.)
Yes – property taxes are actually a good example of your point.
Got it.
Glad… sorry for the ‘pain’ of getting to a realization I’ve had for 40 years…
Still is scary that voters don’t “get it”…
“And, TOT is a “tax”, and can “legitimately” (and legally) used to “stick it to” someone. (In this case, visitors.)” right or wrong, that is a true statement… you are finding wisdom, grasshopper…
Only other question is Keith’s… will the revenue exceed costs of imposition…
Actually, I appreciate the explanation.
An afterthought – can (and do) governments label something as a “tax”, when it’s actually a “fee”? (For the purpose of “sticking it to” someone?) Is this sometimes a source of contention? (Some vague recollections, regarding this.)
On perhaps a related note, I recall something about the governor’s “fee” for fire suppression, in rural areas. (Perhaps that had more to do with “authority” to institute the fee.)
I can only speak to my personal experience… in the public sector… generally, public agencies are very careful to distinguish the two… to avoid litigation… in the late 70’s some agencies passed the same ‘exaction’ as both a fee and a tax, because they didn’t know how Prop 13 would ‘play out’… from what I understand, that’s pretty much gone now… but not a SME in that…
Not sure how helpful that is to answering your question…
While waiting for Howard’s response, I think I’ve stumbled upon a possible “solution” for the budget concerns in cities across California:
Change all “fees” to “taxes”, and proceed to “stick it to ’em”.
Genius, right? 🙂 Such a simple solution!
(Darn it, just saw Howard’s response.) 🙁
Actually, though – how does one consistently determine the appropriate method to pay for costs? (Especially since taxes can be used for purposes other than direct costs?) Why are some costs paid for with “fees”, while other costs are paid for with “taxes” (which more than cover direct costs)?
“Simple” is, in my opinion, a correct assessment…
Ah – voter approval needed for most local taxes, right? (Not for something like income taxes, which can be changed by Congress?)
Just thinking out loud. (Gas tax increase – approved by legislature without voter approval.)
Howard – you’re right, my knowledge is not complete regarding this subject. Hadn’t given it much thought, until now.
In CA, fees are subject to objection, referendum. “Classic” are utility fees… no public vote required to impose, but subject to majority protest, for example. Part of State Constitution…
Well, I guess my “suggestion” isn’t that original, after all. (Although this is a slightly different “twist”.) My “suggestion” was sort of the opposite.
Considerations
Sometimes, a tax will be incorrectly labeled as a fee, often for political reasons. For example, if a politician wishes to keep a promise that he will not raise taxes, but still wishes to increase government revenue, he may push for an increase in certain kinds of taxes that can be labeled as fees. This is because, for voters, a “fee” does not always have the same loaded political connotations that taxes do.
http://smallbusiness.chron.com/differences-between-taxes-fees-17959.html