The summer festival season is officially underway. For host communities, this means carefully managing a momentary population boom that can strain municipal resources, try the patience of residents and add to short-term-rental challenges.  

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Festivals such as Bonnaroo, Lollapalooza or the legendary Newport Jazz Festival are among an extensive list of events that draw big crowds into communities. Just about every month of the calendar features some big annual event, starting with New Year’s Eve at Times Square, continuing with the Super Bowl in February, followed by spring events such as the Kentucky Derby in Louisville and the Indianapolis 500. Then come the summer festivals. 

The short-term population booms can be substantial. Sturgis, SD, a town of about 7,000 residents, draws more than 400,000 people to its annual biker rally in August. Park City, UT, sees its population of about 8,500 explode to more than 100,000 during the Sundance Film Festival. 

While the crowds bring their wallets and appetites, giving local economies a boost, they also create challenges. Visitors have to sleep somewhere, and short-term rentals (STRs) have become increasingly popular in the era of Airbnb and Vrbo. For local hosts, who transform just about any rentable space to supplement their income, the events are an opportunity. 

But for neighbors and the community at large, it’s not so simple. STRs create plenty of controversy around the country. Hosts don’t always bother complying with vacation rental regulations and taxation obligations. Neighbors often complain about increased traffic, noise and excessive partying.  

Taxation Frustration 

STRs also can be difficult for municipalities to track for the purpose of enforcing vacation rental laws and taxation. Noncompliant STRs have the potential to cause the most problems and generate no tax, license or registration revenues. Some local authorities work with Airbnb and Vrbo to enforce regulations and collect taxes. 

For example, Maui County in Hawaii now requires hosts to submit government-issued Tax Map Key (TMK) numbers indicating property locations before listing them on the online rental platforms. Maui also has prohibited STRs in residential areas. In San Diego, new rules went into effect May 1 requiring STR owners to complete a Short-Term Residential Occupancy (STRO) application process and comply with all host requirements before they can rent their properties. 

Other municipalities have enacted their own versions of STR controls, and more are sure to follow. The question is how far should these regulations go? How can cities and towns strike the right balance to avoid short-term-rental challenges and locking themselves out of the economic benefits of STRs? 

Compliance Solutions 

Various municipalities are trying different approaches to deal with non-compliant STRs. Fort Worth, for instance, now requires an initial $150 registration fee for hosts that must be renewed yearly for $100. The city is using compliance officers to enforce STR rules. But Fort Worth and more than 20 other municipalities are looking at technologies such as artificial intelligence (AI) to enforce compliance

AI solutions employ data mining to scrape information from STR booking platforms to identify active properties. The information is compared with property data held by tax authorities to determine if the properties are following rental rules and paying their taxes.  

If adopted widely, such an approach could be a game changer and ease short-term-rental challenges. For hosts who have operated under the radar of local and tax authorities, it could mean the party is over. But it doesn’t have to be – if these hosts opt to take a proactive approach to compliance.  

Rather than wait for authorities to catch up with them, property owners can leverage technology that simplifies compliance. Automated tax management solutions for STRs handle all compliance-related tasks, from licensing and permits to calculating tax rates to processing returns. 

Such a solution can identify state and local tax authorities in order for hosts to legally rent their properties and avoid non-compliance fines or penalties. A common reason for non-compliance is hosts’ lack of awareness or education on navigating rental codes and tax regulations, which can change over time. If shown a clear path to compliance, the likelihood is that many would take it. And if their properties happen to be in communities that host large annual events, they can make a positive contribution to the event and its surrounding community rather than adding to the challenge. 

Author: Pam Knudsen is an executive at Avalara, leading multi-tax teams including Lodging, Beverage Alcohol, Communications and Sales & Use Tax. She is a leading voice in vacation rental tax compliance and regulation, in addition to bringing in-depth experience across software/SaaS technology and ERP systems.