Senate, House Pass Short-term Rental Tax

By: Tim Wood

Topics: Tourism , Summer residents , Municipal Finance

Summer rentals are likely to be subject to the state room tax beginning in 2019. TIM WOOD PHOTOS

Long-sought Revenue Source Likely To Go Into Effect In 2019

With the backing of both the state Senate and House, it appears as if the extension of the room occupancy excise tax to include short-term room and home rentals is a done deal.

Both houses of the legislature have passed bills authorizing the short-term rental tax, which would apply to summer home rentals of less than 90 days, as well as Air BnB-type rentals.

But the bills are very different and must be reconciled in conference before final legislation is placed on the governor's desk. Local legislators are confident the measure will be implemented, though the final shape of the bill remains uncertain.

“It's not a new idea,” said Rep. Sarah Peake, D-Provincetown. “We're actually the last state in New England to close this loophole.”

“It's been a long time coming,” added Cape and Islands Senators Julian Cyr. The Senate has passed a short-term rental bill three times, he added. “It's just something that makes good sense,” he said.

Both bills include the creation of a new Cape Cod and Islands Water Protection Fund that would be funded through an additional 2.75 percent room tax, on top of the existing excise, to help pay for the projected $4 billion in wastewater infrastructure needed to clean up coastal waters. The logic, the legislators said, is that visitors to the area contribute as much to the nutrient loading problem as do residents and should contribute financially to the solution, which must be scaled to accommodate summer populations. The fund, said Cyr, will help reduce the burden on local taxpayers.

While officials have long seen expanding the room tax to include short-term rental as a way to boost local revenue, folks in the real estate and rental industry see it as a burden on homeowners who already pay hefty property taxes. The tax could mean higher rental costs which might translate to visitors spending less on vacations overall, they say. Most are reconciled to its implementation, however.

“We're not surprised,” said Sonnie Hall, co-owner of New England Vacation Rentals. The company also rents vacation homes in Maine and so has dealt with the short-term rental tax there. “We're ready for it.”

Chatham, Harwich and Orleans all collect a 4 percent room tax on top of the state's 5.7 percent. In 2017, Chatham collected $1.4 million in room tax revenue, Harwich took in $678,000 and Orleans $234,000.

It's uncertain how much revenue the short-term rental tax would raise, locally or statewide. The Senate bill would simply amend the current rooms tax to include short-term rentals; towns which have adopted a local rooms tax option would collect the same rate on short-term rentals as is applied now to hotel, motel and inn rooms.

Under the Senate bill, “most communities will see a doubling of local occupancy revenue,” which will boost general revenues, said Cyr.

The House bill, however, sets up a three-tier rate system based on the number of units being rented. The state tax would be 4 percent for residential hosts renting two or fewer units; investor hosts, renting three to five units, would pay 5.7 percent; and those with six or more units, classified as professionally managed hosts, would pay 8 percent. Towns that adopt the short-term rental tax through a town meeting vote could collect up to 5 percent from residential hosts, 6 percent from investor hosts and 10 percent from professionally managed hosts.

The House bill also mandates that short-term rentals be registered and that towns enact bylaws to require safety inspections. In addition, it requires that half the excise from some of the rentals be dedicated to affordable housing.

There are conflicts as well regarding the water protection fund. The House bill only requires that short-term rentals pay into the water protection fund, while the Senate legislation extends that excise to all accommodations covered under the rooms tax.

“A big impetus for us to do this was fairness,” said Cyr. The additional water protection fund excise should be applied equally to short-term rentals and facilities that pay the traditional room tax, he said.

Much of the complexity of the House bill was designed to address the situation in Boston and the state's larger cities, where Air BnB and similar vacation rental programs are beginning to cause disruption in some neighborhoods, Peake said. City officials realized that the market was unregulated both in terms of health and safety and taxation.

“Suddenly it wasn't just Sarah Peake from Cape Cod and one representative from the Berkshires saying that this is a growing market,” she said, adding that one of the first bills she introduced after being elected in 2007 was a short-term rental tax Provincetown wanted to enact.

Another key difference in the two bills is that the Senate legislation does not require local approval; if towns have already opted in to the room tax, it would automatically be extended to include short-term rentals. The House bill requires that town meeting vote to accept the provisions of the legislation. Chatham Chairman of Selectmen Cory Metters said while the board has yet to discuss the bills, he'd rather see it go before voters.

Selectman Dean Nicastro said he would wait until seeing the final bill before deciding on that issue, but agreed that the short-term rental field has changed considerably in recent years. He was on a finance committee subcommittee which in 2015 recommended against pursing a short-term rental tax.

“The issue has kind of taken on a life of its own beyond the narrow issues we were looking at,” he said, adding that by applying to the entire state, the latest proposal eliminates one of the previous concerns, which was that Chatham or another town that adopted the tax would be at a disadvantage if other surrounding towns did not have the tax.

The water protection fund represents a consensus among town officials, the business community and environmental organizations, Cyr said.

“I think this is really going to be a tool that's going to help jump start wastewater investment, especially in places like Orleans and Harwich,” which have just begun the process.

There is specific language that applies to four Cape towns that have already made significant wastewater investments – Chatham, Provincetown, Falmouth and Barnstable – allowing them to use the fund to refinance debt, Cyr said. The fund is also “flexible” in that it can be used to fund traditional sewer infrastructure such as pipes and treatment plants as well as innovative wastewater solutions. It would also be administrated by an existing state program that provides low-cost sewer loans to communities.

That would be good news for Chatham, which has already approved tens of millions of dollars for sewer expansion and upgrading the town's wastewater treatment plant, said Metters.

“We've already paid for a whole lot and we are leaps and bounds ahead of other towns on the Cape,” he said.

Not everyone is a fan of the short-term rental tax plan. The House bill “overly regulates, overly complicates” the issue and hurts smaller rental agencies and individual homeowners, said Ryan Castle, chief executive officer of the Cape and Islands Association of Realtors. “I think the House will will do major harm to the Cape Cod tourism economy,” he said. The Senate bill is “less intrusive, less regulated, and gets more to what people have been proposing all along, which is simply extending the room tax to short-term rentals.”

The association opposed both bills, but will work to ensure that the final legislation does the least harm to the Cape, Castle said. The agency has no position on the water protection fund surcharge, he added, but if it is implemented, it should apply to all accommodations, not just short-term rentals, he said.

One potential complicated factor, Peake said, is Gov. Charles Baker's suggestion that the first 180 days of short-term rental be exempt, which would essentially eliminate most revenue for the Cape and Islands.

“That would be a shame,” she said. “This is a significant amount of new revenue for all communities and vacation destinations. Just like the existing rooms tax, dollars raised in the communities come back to the communities.” She's spoken to Lt. Gov. Karyn Polito to stress the importance of the short-term rental tax to the Cape and Islands and the Berkshires.

“As things get closer, we'll intensify those conversations,” Peake said.

Both Cyr and Peake were confident that a compromise bill could be worked out.

“I don't have a crystal ball so I don't know what's going to stick,” Peake said. “I'm confident that we will get a reconciled bill before July 31,” when the current legislative session ends.

Both bills now call for the new excise tax to take effect in January.