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California: San Francisco passes legislation affecting short-term rentals and tax collection requirements

In late October, the Mayor’s Office of San Francisco announced Mayor Lee’s signing of the Short-Term Residential Rentals Ordinance (Ordinance). The Ordinance regulates users in the sharing economy who rent out their homes to consumers. While drafting the Ordinance, the Board of Supervisors of the City and County of San Francisco found that San Francisco prohibited “hotelization,” the widespread conversion of residential housing to short-term rentals, because the conversions resulted in the loss of housing for permanent residents. The Ordinance carves out an exception to this rule, allowing residents that live in their primary homes in the city to rent them out on a short-term basis. Secondary or vacation homes that do not have permanent residents occupying them are not granted permission.

Tax collections

The Ordinance requires primary residents who want to rent out their homes to obtain permission from the Planning Department by demonstrating that they live in the unit for the majority of the year and carry liability insurance. The permission is good for two years as long as the resident pays transient occupancy taxes and abides by reporting requirements and all applicable laws.

San Francisco’s Office of the Treasurer & Tax Collector lists the following tax and related requirements that apply to all transient occupancy operators:

  • Timely file monthly tax and assessment statements;
  • Timely send a monthly payment of the transient occupancy taxes and assessments collected;
  • Have an approved Transient Occupancy Tax Certificate of Authority issued by the Office of the Treasurer & Tax Collector; and
  • Possess valid permits as issued by the San Francisco Police Department, Fire Department, Department of Public Health, and Department of Building Inspection.

The sharing economy

In the announcement, the Mayor’s Office explained that “the sharing economy, also known as collaborative consumption, uses technology and social media to promote the sharing and re-use of underutilized assets such as cars, bikes, tools, rooms, spaces, skills, and other goods. The growth of the sharing economy has been driven by the success of innovative companies and organizations like City CarShare, ZipCar, RelayRides, Airbnb, Getaround, Taskrabbit, Shareable, Vayable, and more, many headquartered in San Francisco and creating a growing number of local jobs and local economic benefits.”

In the short-term rental context, Airbnb, Inc. and HomeAway, Inc. are two major players. Though they operate under different models, both companies have established online marketplaces that enable those seeking short-term rentals to find such accommodations.

In cities like San Francisco and New York, short-term lodging rates can be very expensive. Even more problematic are housing costs that prevent people from living in an urban center. Indeed, as Mayor Lee noted in the announcement, “[n]ow, San Franciscans who just want to share their home with occasional visitors will have a clear set of rules and restrictions to earn extra money to make ends meet and enjoy a better quality of life in our city for themselves and their families.”

The backlash: HomeAway, Inc. sues the City of San Francisco

The website (HomeAway) declares that it is the world’s number one source for vacation rentals with over one million listings within and outside the United States. The website serves as the online marketplace from which vacationers and others seeking accommodations can browse their options, read other users’ reviews, reserve, and pay for the rental.

Nearly immediately after Mayor Lee signed the Ordinance, HomeAway sued the City of San Francisco in federal court. HomeAway is asking the court to prevent San Francisco from enforcing the Ordinance, and to declare that it violates the Commerce Clause of the United States Constitution.

Revealing that Airbnb played a significant part in the drafting of the Ordinance and political donations to relevant city officials, HomeAway’s complaint alleges that the Ordinance discriminates against non-San Francisco based operators of short-term accommodations by requiring that people who rent out their homes, collect fees, and pay the associated taxes be permanent residents of San Francisco.

A Wall Street Journal blog observed that HomeAway has adopted a business model that centers on supporting the relationship between the provider and user of the rental service, and so does not collect fees or pay taxes itself. In addition, HomeAway is geared toward the rental of vacation and second homes, and not primary homes. Thus, the blog concludes, the Ordinance effectively locks HomeAway out of the San Francisco market because only those who are permanent residents of San Francisco are allowed to rent their properties.

HomeAway alleges that the end result of all of this is a facially discriminatory law which imposes substantial burdens on interstate commerce effectively reducing competition and harming the consumer.

Several states announce changes in tax filing protocols

Colorado requires the use of updated business tax forms

The Colorado Department of Revenue (DOR) reminds business taxpayers that it is switching its tax return processing system to a new imaging system. The DOR warns that all forms delivered to the department must be the latest version and black ink must be used when completing the form.

In addition, the DOR cautions taxpayers that if they “continue to use outdated Colorado business tax forms, the Department of Revenue cannot process these forms, which may result in a late filing penalty and loss of the vendor/service fee (timely filing discount).”

Connecticut moves important sales tax filing deadlines

The Connecticut Department of Revenue Services (DRS) notifies taxpayers that as a consequence of 2014 legislation changes, the due date for filing and paying Connecticut sales and use tax will move from the last day of the month to the 20th of the month following the close of the reporting period. This deadline change also applies to the business use tax, room occupancy tax, and prepaid wireless E 911 fee.

The DRS will implement this legislation for tax periods beginning on or after Jan. 1, 2015. The filing and payment due date for taxes impacted by this change will be:

  • Monthly: Feb. 20, 2015
  • Quarterly: April 20, 2015
  • Annually: Jan. 20, 2016

Massachusetts rolls out a new tax portal

The Massachusetts Department of Revenue (DOR) informs taxpayers of the development of a new tax system, GeniSys. GeniSys is a web portal that allows taxpayers to register, submit returns, make payments, request information, and review correspondence with the DOR.

As of Nov. 12, 2014, the new system is available for these tax types: International Fuels Tax Agreement (IFTA), Alcoholic Beverages Excise, Ferry Embarkation Fee, and Non-Resident Motor Vehicle Excise.

The 2014 rollout includes nearly 5,000 taxpayers. The largest group of taxpayers is IFTA taxpayers who are required to register annually for truck decals and file quarterly returns with the state.

The second largest group is the Alcoholic Beverages Excise taxpayers, who are required to file monthly returns and make payments based on the amount of alcohol manufactured in the state.

There are currently only seven Ferry Embarkation Fee taxpayers. They are required to file quarterly returns with the commonwealth.

Finally, the Motor Vehicle Excise pertains to bills directed to taxpayers with addresses outside of Massachusetts who owe unpaid Massachusetts excise tax on motor vehicles.

The timeline of deployment for the remaining tax types is scheduled as follows:

  • Dec. 2015 rollout: Corporate and trustee taxes
  • Dec. 2016 rollout: All remaining excise taxes
  • Dec. 2017 rollout: Individual income taxes

Ohio: Farmers’ property taxes are on the rise

According to a recent Cleveland Plain Dealer article, Ohio farmers are seeing significant spikes in their property taxes—as much as 400 percent—even though grain prices, primarily corn and soybeans, are crashing. The article blames Ohio’s current agricultural use value (CAUV) calculation methodology, which relies on previous years' prices and not what farmers are now getting for their grain. In recent years, thanks to favorable growing conditions and technology, bumper crop yields have benefitted farmers, but during 2014, prices have fallen.

Here are some facts about the CAUV, as detailed in a fact sheet created by the Ohio State University Extension (OSU).

What the CAUV is and how it is calculated

  • The CAUV is a differential real estate tax assessment program that provides owners of farmland with the opportunity to have their parcels taxed according to their value in agriculture, rather than full market value;
  • It is the result of a referendum passed by Ohio voters in Nov. 1973;
  • The Ohio General Assembly subsequently passed Senate Bill 423 in April 1974, establishing CAUV program by law.

Current agricultural use values for taxing farmland are determined by calculating the farm's projected gross income from agricultural production, subtracting projected non-land production costs to get the farm's net income, then dividing this by an adjusted capitalization rate to arrive at the farmland's agricultural worth.

Pros and cons

OSU recognizes that the CAUV inspires public debate. Those in favor of it cite these benefits:

  1. It corrects inherent unfairness to farmland owners in the real estate tax system. The premise for this argument is that farmers use relatively few local public services, which are funded via local real estate taxes. Because farmers often own the largest amounts of land in rural taxing districts, they would be taxed at a rate that is unfair relative to their usage of the public services.
  2. Farmers generally pay a higher portion of their income in taxes than do other sectors, so reduced taxes help prevent farmers from being pushed out of business due to increasing operating costs. Even though developers offer advantageous deals that lure some farmers to sell, tax incentives can preserve long-term food security, protect wildlife habitat and groundwater recharge, and mitigate flooding, which are important reasons to continue farming Ohio land.

Those against the CAUV offer these arguments:

  1. The CAUV is inefficient because land is not taxed according to its full market value.
  2. It is unfair because it shifts the local property tax burden to residential, commercial, and industrial users of lands who are not eligible for special treatment (assuming service costs remain the same).

The CAUV affects millions of acres in Ohio

The CAUV is in effect in all 88 counties in Ohio, with over six million acres enrolled. This ranges from just several dozen acres in Cuyahoga County to several tens of thousands of acres in some of the state's northern and western rural counties.

Other states that use a tax relief program for farmland

All states have some form of agricultural tax relief programs. Some utilize a system similar to Ohio’s, referred to as a differential assessment, where the farmland is assessed at its agricultural use value rather than its fair market value.

The other category, the circuit breaker program, allows farmers to claim state income tax credits to offset their local property tax bills when they exceed a certain percentage of household income.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

David H. Godenswager, II

Susan Millradt McGlone

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.