Let’s say you want to rent out your home through a website like Airbnb or VRBO. Until October, if you rent out your place in New Jersey, you can still just do it and collect your money.
But as of October 1, a law signed by Gov. Phil Murphy in July will ask you for state sales and use taxes on top of hotel occupancy fees on short-term property rentals. As of then, if you want to rent out your house through a home-sharing website, you will essentially be in business as a provider of accommodations — which means you need to register with the state and pay taxes, often more than one, for renting out your home in the short run, and to add 5 percent in short-term taxes to guests’ bills and remit them to the state.
If that sounds like a tax grab, it’s actually not uncommon, says Rob Stephens, co-founder and general manager at Avalara MyLodgeTax, a Colorado-based firm that facilitates tax payments for vacation rental property owners. And that extra-specific niche should be a clue to how common it is for property owners in other states to have to file these kinds of taxes.
In fact, Stephens says, New Jersey has been one of the last handful of holdouts when it comes to collecting taxes from short-term renters. What makes it confusing is that this tax is part of a layer of taxes that providers of accommodations need to be concerned about. There’s the state’s 6.625 percent sales tax and, if you own property in places like Jersey City or Atlantic City, local hotel taxes, and property owners will have to make sure that all these different taxes to different Caesars are rendered accordingly.
‘It’s very easy to get your property rented. But a lot of these taxes are not well-known.’
Hotels and motels, of course, already know how to deal with this, Stephens says. So while a tax on short-term rentals is a new concept only in New Jersey, it’s always a new concept to everyday people who can list their house on a website but don’t know how to run a lodging as a business.
“This is the most common problem we hear about,” Stephens says. “It’s very easy to get your property rented. But a lot of these taxes are not well-known.”
In Stephens’ experience, the lack of paying those taxes isn’t some mom-and-pop criminal scheme. “People aren’t trying to avoid these taxes,” he says. “They just don’t know about them.”
This very issue was the core of why Stephens co-founded what was then called HotSpot Tax in 2002. People everywhere were finding themselves on the receiving end of some pretty assertive mail from tax collectors because they didn’t realize that they had to give states and municipalities part of the money they were getting from renting out their house for three weeks.
The idea of a business that did the calculations for you started from Stephens’ own experiences renting out a condo in Vail. Born and raised to missionary parents outside of Denver, Stephens went to Colorado State to study finance and accounting in 1986. He began his career as an accountant with Arthur Andersen in 1990, followed by a few other finance positions throughout the ensuing decade.
And like a lot of people who can afford to do it, Stephens wanted to have some real estate. At barely 30 years old he and a friend/business partner bought a small condo in Vail, which they rented out to skiers, in part to help pay for the enormous cost of actually owning a place in Vail.
Part of that overhead involved a 50 percent fee to the property manager if they wanted him to manage the place and make sure people were treating it kindly. Stephens and his friend learned about VRBO — Vacation Rentals By Owner — which was the big dog in the short-term rental space before Airbnb became synonymous with the temporary rental space.
VRBO, Stephens says, “was fantastic for generating rent” and for saving carloads of cash from paying the property manager to rent out and maintain the place on their behalf. But going the VRBO route meant learning quickly how important it was to collect rent and the taxes that always seemed to come from nowhere. Stephens’ spark was the epic-yet-simple realization that “this tax is a real headache.” And rather than getting out of the rental game, like most people do when the myriad bills get overwhelming, he started a business.
At its heart, the business, which Stephens and his partner sold to Avalara in 2008, has much in common with its reason for existence. It’s a simple website through which anyone wanting to rent out their property can login and let the software figure out all the complexities. And what started as a niche business in a pretty small pond (there were about 9,000 listings at VRBO at the beginning of the business) turned into a niche business in an ocean that now sees 4 million properties from almost 200 countries listed on Airbnb alone at any given time.
The growth of short-term rentals through websites like these, Stephens says, makes a business like his almost inevitable.
“The industry’s successful because travelers love this situation,” he says. “We’re not going to be able to put this back in the bottle.”
Consequently, he says, a website that does the work for you can be a lucrative niche. But if you decide to do it on your own, Stephens says it’s not particularly complicated, just tedious, and it’s easy to miss something. Did you even know the state tax in New Jersey is about to be a thing until you read this?
Stephens’ advice is to make sure you know all of the rules. First, you need to register with the state before you can legally list your property for short-term rental. Next, call your municipal clerk and ask what taxes you might have to pay locally. Then “work your way up,” Stephens says. Call the county and then the state to make sure you know what you’re getting into.
And for the record, if you think you can just list your house occasionally on Airbnb and no one will know you rented it out, you might be right, for a while, Stephens says. But your property will be part of a large electronic trail that tax enforcers will look at, and the penalties can be severe.
Last thing to know: People think of taxes as a quarterly or annual thing, but like retail and sales taxes, those for short-term rentals are due every month. Which you wouldn’t know if you were not a businessperson used to that kind of setup — and most people listing their properties online are not.
Stephens offers an admitted sales pitch as an easy solution.
“Software like ours will make all the pain go away,” he says.