South Bethany has joined a long list of municipalities wondering if homeowners are really paying all the taxes they owe. It’s a tricky situation that’s not always easy to prove: Is someone renting their house to vacationers, and do they owe rental taxes?
Every town has different rules and fees for short-term lodging. But when property owners can rent out their homes privately on the World Wide Web, there’s little paper trail for municipalities to use.
South Bethany officials said they have no idea how much money the Town is losing in unpaid rental taxes.
“How do we assure ourselves we’re actually getting the tax rentals from those internet rentals?” asked Mayor Tim Saxton.
Major websites for such rentals include Airbnb, HomeAway, Vrbo, Rentals.com, Booking.com and VacationRentals.com.
“Every municipality is having this problem,” said outgoing Councilman Jimmy Oliver.
For instance, in a cursory look at various websites, Oliver had found 73 South Bethany properties listed, explained his father and incoming council member, Dick Oliver.
“He is not sure that we are collecting tax revenue. … I would be willing to be you that a large percentage of those do not have rental licenses or pay rental taxes,” Dick Oliver said. “I think it’s worth looking into how the Town can more effectively collect these rentals.”
Right now, it’s just Town Hall staff visiting each website, one by one.
“We go … online, look for all houses that show up in town,” then cross-check various lists to determine if the property is located in town limits and has obtained a $150 rental license,” said Finance Director Renee McDorman. “We just remind them that we have a code that says you are subject to 8 percent rental tax. … Sometimes we get a response right away. Sometimes it takes a couple letters.”
“We don’t want to spend staff time having to track down whether people are submitting or not,” said Councilwoman Sue Callaway.
There are nuances to these websites. Some of them actually do collect the lodging taxes for people and governments. And some homeowners book online, but collect and submit rental taxes to the Town. Other people may use the websites for advertising to find customers, but ultimately ask renters to book through a local real estate office (which also collects and submits the taxes).
People may also have single-room rentals, in which the resident homeowner rents travelers a spare room.
There is software that helps municipalities scour the internet to find such properties. But Sussex County’s coastal towns haven’t jumped to hire a company based on the West Coast, and the Town of Lewes found it too expensive to invest in the service, said Town Manager Maureen Hartman.
“It just didn’t seem like it matched our needs on the East Coast, and no one else was interested it,” Hartman said.
She agreed to investigate the company’s services a bit more, for more information or at least some ideas.
Even state legislators are brainstorming how to help Delaware towns collect lodging taxes, including getting all of Delaware on the websites’ tax-collection lists.
Roughly 300 rental licenses are issued in South Bethany each year, said McDorman. South Bethany did receive $556,000 in rental taxes in the 2019 fiscal year, which ended April 30. That means the town’s property owners made millions of dollars, collectively, by letting other people stay in their homes. Indeed, that’s how many people can afford the mortgage on a beach house.
But, ultimately, property owners are responsible for paying their own taxes, even if a real estate or rental website helps with collections. South Bethany’s penalty for failing to pay rental tax is a monthly 1.5 percent late fee until it is paid in full.
By Laura Walter