Airbnb Tax-Free? Not in These Ten States

San Francisco startup Airbnb is a vital part of what’s known as the sharing economy as it connects property owners with travelers seeking travel accommodations. Often these listings come with a more affordable price tag than hotels, resorts, and other similar establishments. According to Airbnb, the site boasts over 2,000,000 listings in 191 countries and has been used by over 60 million guests, but the majority of Airbnb’s listings are located in the United States. Airbnb has grown exponentially in the years following its 2008 founding. According to The Wall Street Journal, the company recently reported revenue of $340 million on $2.2 billion in total bookings for Q3 of 2015 alone.

Though the emergence of sites like Airbnb has been welcomed by millions of travelers seeking a unique lodging experience in a new place, many hotel industry leaders view Airbnb with skepticism. In an interview with The Washington Post, Marriott CEO Arne Sorenson said that “there’s a lot of tension between the grass-roots nature of it, the unregulated nature of it, and then this question of ‘okay, well shouldn’t they play by at least some of the same rules?’ So in the hotel space that would mean lodging taxes”.

Some state officials appear to also share these concerns, particularly with regard to tax revenues. In a highly publicized 2014 report, New York Attorney General Eric T. Schneiderman alleged, among many other damning accusations, that New York City Airbnb hosts largely failed to remit owed taxes to the tune of over $33 million from 2010 to 2014.

University of Massachusetts-Amherst Professor Brad Tuttle recently wrote about Airbnb host tax compliance in an article for Time Magazine. “How many Airbnb hosts actually hand over hotel taxes to the local tax collector? No one really knows, but it’s likely that the percentage is tiny—perhaps even zero”, said Tuttle. As states are increasingly seeking more revenues for various needs, ensuring the collection of tax revenues from sites like Airbnb is becoming a popular option.

All but five U.S. states have a state sales tax and the average of those that do have one is 5.64 percent. Additionally, 24 states have some form of lodging or occupancy tax with an average of 5.55 percent. However, much like in the case of New York City, Airbnb hosts across the country may often either be unaware of taxes they are required to collect and remit or they may be willfully refusing to do so. This lack of tax remittance by Airbnb hosts and the lack of enforcement by many states suggests, at the least, tens of millions of dollars in uncollected revenue to the states.

A recently published study from Pennsylvania State University examined Airbnb transactions across 12 large American cities from September 2014 through September 2015. In three Texas cities, Dallas, Houston, and San Antonio, Airbnb transactions during this time totaled over $23 million. With the Texas sales tax rate at 6.25 percent and the state lodging tax at 6 percent, state tax revenues owed from Airbnb listings in these three cities alone total nearly $3 million. In three California cities, Los Angeles, San Diego, and San Francisco, transactions during this time totaled over $527 million. With the California sales tax rate at 7.5 percent, owed state taxes (California does not have a state lodging tax) from Airbnb in these three cities alone total nearly $40 million.

Additionally, the Penn State study found that “nearly 30 percent of Airbnb revenue is derived from…full-time hosts”. This group is defined by hosts that have their rentable properties listed for 360 days or more, meaning that there are year-round business-like entities that are almost entirely unregulated and not collecting and remitting the required taxes. Researchers found that the 2,675 hosts recognized as full-time collected nearly $380 million in revenue, or an average of $142,331 per full-time host.

Some states have entered into an agreement with Airbnb to require the site to collect and remit taxes on behalf of hosts. For example, Airbnb inked an agreement in February 2016 with the Alabama Department of Revenue that required Airbnb to collect and remit taxes for its hosts in the state. In a press release from the Alabama Department of Revenue, Commissioner Julie Magee said that “this agreement will increase compliance in this area, and I commend Airbnb’s willingness to take the steps necessary to ensure that the appropriate taxes are being remitted. It’s a win for both the state and for Airbnb customers”.

In Connecticut, the Department of Revenue negotiated an agreement with Airbnb to collect taxes starting July 1, 2016. The state, which levies a 15% tax on lodging, believes that this agreement will be a significant addition to the $100 million already collected each year from hotels and other lodging establishments.

Other states have instead opted to pass legislation mandating that Airbnb collect and remit applicable state taxes. In the 2013 legislative session, Oregon Governor John Kitzhaber signed HB 2656, which sought to increase tax compliance by requiring every transient lodging entity like Airbnb to collect taxes and file a return with the State Department of Revenue. South Carolina Governor Nikki Haley signed similar legislation, SB 985, in June of 2014.

According to Airbnb, the company will collect and remit taxes in ten states as of July 1, 2016: Alabama, Connecticut, Florida, Illinois, North Carolina, Oregon, Pennsylvania, Rhode Island, South Carolina, and Washington.  The company estimates that by partnering with the largest fifty American cities, Airbnb could have collected a total of $200 million in tax revenues in 2015. Over the next 10 years, even if Airbnb’s exponential growth were to cease, this would represent $2 billion in tax revenue.

As some states find themselves in budgetary binds, looking to Airbnb and similar businesses for additional revenue may prove a popular option. In regards to his state’s budget shortfalls, Connecticut Department of Revenue Commissioner Kevin Sullivan said in an interview with the Hartford Business Journal, “when you’re in a situation like this, you want to be sure you’re collecting tax revenues that you’re supposed to collect. It’s never a question of whether these sales are taxable. It’s only a question of who pays and collects the tax”.