Lodging Taxes 101: Collecting taxes on your short-term rental

Part of the business of operating a short-term rental is lodging tax compliance. The first step in fulfilling your lodging tax obligations is figuring out which jurisdictions require you to collect taxes on short-term rentals (generally defined as rentals of 30 days or less, with some variations). Next, you’ll need to register in those jurisdictions for a tax license or permit.

Once that’s done, you’re ready to start collecting taxes for your short-term rental.

The taxes your guests must pay on the cost of their stay at your short-term rental may be called by different names in different locations, including lodging tax, bed tax, hotel tax, transient occupancy tax, and more. Sometimes they’re simply sales taxes that apply to accommodations.

Often, the total amount of tax your guests pay is made up of different taxes that go to different jurisdictions. You’re required to charge your guests the total for all taxes due.

In Rhode Island, for example, short-term rental guests who rent an entire home must pay a state sales tax and a local hotel tax on the cost of their accommodations. Short-term renters who rent out just a room must pay state sales tax, local hotel tax, and state hotel tax on their rental bill.

Getting tax rates right

By the time you’re ready to collect taxes from your short-term rental guests, you should have done your research so that you already know which jurisdictions’ taxes you need to collect and so that you’re properly registered with those jurisdictions. The next step is correctly calculating how much you need to charge your guests for taxes in each jurisdiction.

This is much easier to figure out in some locations than in others. Some jurisdictions have easy-to-find information and clear rates online — others don’t. If you’re unsure about the right rates, you may need to personally ask the appropriate authority. MyLodgeTax can also help rental hosts make sure they’re charging the correct rates.

It’s important to make sure you’re charging the right tax rates to avoid hassles — and fines and penalties — down the road.

Once you’ve figured out the right rates for each jurisdiction, you need to add them all together to get the total rate you’ll be charging your guests.

In the case of renting out a room for a short term in Rhode Island, for example, your guest is required to pay state sales tax (7 percent), local hotel tax (1 percent), and state hotel tax (5 percent) on their rental bill. So the total charge for taxes would be 13 percent.

What charges are subject to lodging tax?

Along with calculating the correct tax rate to charge, you also need to know which part of the guest’s bill is subject to tax. Laws differ, so make sure you know what the rules are for your jurisdiction.

Generally, however, any amount that you require the guest to pay in order to use the accommodation is subject to tax. This includes the base room rate and any nonrefundable fees such as cleaning fees or pet fees. However, fees that are refundable — such as security fees that are refunded if there’s no damage to the property — are usually not subject to lodging taxes.

Charging and collecting

When you add the lodging tax charge to your guest’s bill, you’ll calculate it as the total rate times the amount of the bill that’s subject to the tax.

Normally, the guest will pay all charges — accommodations, taxes, and any other charges — in one lump sum. It’s up to you to separate out the tax and reserve it. You’ll pay those taxes to the tax jurisdiction when you file.

It’s good practice to separate the taxes that you collect into a separate account, and it’s very important to keep good records of how much you’ve charged guests and how much you’ve collected for taxes. This will be key when it comes time to file your taxes — the final step in the lodging tax process for short-term rental operators.

Tax collection by online rental platforms

If you list your short-term rental with Airbnb, the company may collect and remit your lodging taxes for you automatically when your guests book. However, keep in mind that Airbnb only collects lodging taxes for hosts in jurisdictions where it has a specific agreement with tax authorities to do so. This means that Airbnb may not collect all the different lodging taxes that you owe on your property.

For example, in Texas, Airbnb automatically collects the state Hotel Occupancy Tax that’s due on short-term rentals. But if you’re a short-term rental host in Austin, you also need to collect the city’s Hotel Occupancy Tax, which is not taken care of by Airbnb.

Other platforms, including HomeAway and VRBO, generally don’t automatically collect taxes on behalf of hosts, unless it’s required by law for online rental platforms to do so.

In cases where short-term rental platforms don’t take care of all tax collection requirements, MyLodgeTax can help. MyLodgeTax is an automated service that assists hosts with the entire lodging tax process, including registration, getting tax rates right, and filing.