Critical tax changes impacting the lodging industry

If you thought 2023 would bring pre-pandemic normalcy to the lodging industry, think again.  

True, the lodging industry has largely rebounded from COVID. Short-term rentals experienced phenomenal growth in 2022, and the American Hotel & Lodging Association expects the hotel industry to experience pre-pandemic levels of demand in 2023. So that’s good. 

Yet success usually comes at a price. For some in the lodging industry - notably accommodation platforms, online travel agencies (OTAs) and short-term rental (STR) operators - that price could be greater scrutiny, increased regulation and new tax obligations. 

Technology could help businesses in the lodging sector address these looming challenges, but those businesses won’t be the only ones pinning their hopes on technology. City, county and state officials will increasingly use technology themselves, both to uncover noncompliance and enforce compliance. 

Technology can unearth noncompliant businesses

“2023 is likely to be the year that government adoption of technology to automate auditing short-term rental compliance in their jurisdictions hits its stride,” reports American City & County. Fort Worth and Galveston, Texas, as well as more than 20 other cities, are looking to use data mining powered by artificial intelligence to identify and monitor noncompliant properties.  

A future compliance sweep could include automated audits, whereby AI-powered data-mining technology scrapes information from publicly available STR booking services to identify active properties in a jurisdiction. Tax authorities could then cross-reference that information with what they already know to uncover businesses that aren’t properly registered, permitted or filing/remitting taxes. 

This would be a monumental, resource-eating task if done manually. Machines can do it while humans take care of other tasks - like following up with noncompliant businesses. 

As governments turn to technology to crack down on compliance, STR operators can use it to be better neighbors. 

Ready or not, travel’s back 

After taking a hit due to the pandemic, the travel industry has been seeing a steady resurgence. According to Phocuswright’s Phocal Point data, gross travel bookings globally are expected to reach $1.34 trillion this year and $1.48 trillion next year, surpassing 2019 levels.

Tourism experts from the United Nations World Tourism Organization are “cautiously confident” about the state of the industry. Despite rising inflation and high oil prices, 65% of the experts surveyed expect better tourism performance in 2023 than in 2022.

There will still be long lines. Daily passenger caps will continue until at least September 2024 at Amsterdam’s Schiphol Airport, which is also capping flights to reduce noise pollution and protect the environment. And there could be more air industry strikes, leading to more flight cancellations and delays. During the first quarter of 2023, air travel was impacted by strikes across Belgium, France, Italy, Portugal, Spain and the United Kingdom.

That’s just what happens today when people are on the move. 

Lodging leads the travel recovery charge 

Perhaps more than anything else, people on the move need a place to stay. That could be why the accommodation sector is leading the recovery for the travel industry.  

Occupancy rates at hotels in the United States are improving, though they haven’t quite returned to pre-pandemic levels.  

Vacation rentals have been particularly popular. Short-term rentals accounted for roughly 27% of the U.S. lodging market in 2021, a 10-point increase over 2019. They’re such a successful business model that even traditional hotel companies like Marriott International have entered the space. 

Short-term rentals are practically perfect for bleisure, blended business and leisure travel. 

Business vs. leisure 

Business travel is recovering more slowly than leisure travel, but bleisure is helping to bring business travel back.  

Digital nomads have turned bleisure into a lifestyle. A growing number of people able to work from anywhere (WFA) are traveling for an extended period of time (more than 10 days).   

According to Phocuswright’s report, The New Nomads: Work and Play from Anywhere, 17% of U.S. leisure travelers took more frequent blended trips of remote working and leisure travel or adopted a digitally nomadic lifestyle in 2020 or 2021.

Bleisure, laptop luggers, digital nomads, WFA. As these trends shape our lexicon and alter the shape of travel, they also help contribute to the rise of short-term rentals. 

State and local tax requirements: A pain point for all 

Because they tend to have more influence and clout than individual hosts, many online travel agencies are in a position to advocate for themselves and negotiate with tax authorities. 

Where they’re not required to collect and remit applicable taxes, hosts or property managers are. According to a 2022 study by the National League of Cities, 82% of surveyed cities require short-term rental hosts to remit taxes directly to the city, while only 5% require the platform to collect and remit local taxes on the hosts’ behalf.  

The Vrbo website clearly states, “Property owners and managers are responsible for understanding and complying with the laws and regulations applicable to their property listing. You’re also responsible for collecting and remitting lodging taxes when we’re not liable to do so.”  

Airbnb explains, “As a host, depending on your location, you may be required to collect local tax … from your guests.” It’s made agreements to collect and remit certain state and local taxes on behalf of hosts in some jurisdictions but not others.  

Unfortunately, Airbnb, Vrbo and similar platforms may not tell each host exactly which taxes they do and don’t collect. They’re not tax professionals; it’s not their job or responsibility. 

So STR hosts and property managers have to figure out where they’re required to register and which taxes they’re required to collect and remit. It’s incredibly complicated. 

Some hosts may accidentally charge customers tax that the platform has also collected. Others may simply opt to not deal with tax at all.  

In the long run, playing that game can lead to some serious consequences.