Short-term rental permits, business registrations, tax licenses, oh my!

Operating a short-term rental can be a fun and rewarding business — but it is a business. That means following business rules, which includes getting the permits, licenses, and registrations you need to legally operate.

Whether you’re renting out an extra room to short-term guests, making the most of your vacation home, or buying a property specifically to operate as a vacation rental, you’ll need to follow the business regulations set by local governments. These serve a variety of purposes: protecting customers by requiring businesses to follow certain rules, ensuring buildings are safe and comply with local zoning laws, and facilitating tax revenue collection.

Depending on where you operate, you may need to apply for several different types of permits and licenses — including businesses licenses, short-term rental permits, zoning permits, tax licenses, and more — and you may need to get these for more than one jurisdiction.

Keep in mind that different jurisdictions use different terms to refer to their registration requirements. What’s called a zoning permit or business license in one area may be called a short-term rental permit in another.

It’s best to get information from each jurisdiction directly because they are separate entities. For example, a city website should tell you what kind of licenses you need on the city level, but it may not mention the state requirements that apply to you, and vice versa.

Figuring out which licenses you need as a short-term rental host can definitely get confusing. We’re here to help with explanations of the different types of licenses and permits you may need to know about as a short-term rental operator.

Governments from the city to the federal level require businesses to obtain a license or permit to operate within that jurisdiction. Requirements vary widely among jurisdictions and depend on the type of business, so it’s important to look into the specifics of the jurisdictions that apply to you. In general, you’ll be required to offer information about your business and pay a fee to apply.

You may be required to get a business license in more than one jurisdiction, such as on the state level as well as with your city, for example. It’s a good idea to start at the state level when you research license requirements. Often license and permit applications at the local level will ask for a state business registration identification and/or tax number, so you’ll need that before you apply for local licenses.

In many cases, short-term rental hosts must obtain licenses and permits beyond a general business license. In Mount Pleasant, South Carolina, as an example, short-term rental hosts are explicitly required to apply for both a city business license and a short-term rental permit.

Business licenses or registrations from the city to state level often also act as registrations or licenses for taxes such as corporate income tax or sales taxes. In Seattle, for example, a business license also acts as a business and occupation (B&O) tax license.

Local zoning laws determine which kinds of businesses can operate in which areas of the city. If you’re in a zone where short-term rentals are allowed, you most likely won’t need to apply for a zoning or land use permit, but there are plenty of exceptions to this rule.

For example, in Southport, North Carolina, vacation rentals are prohibited in residential parts of the city. However, short-term rentals that were operating when the city’s short-term rental ordinance was adopted (July 8, 2021) were allowed to continue, but required to obtain a zoning permit from the city within 60 days of the law’s adoption. Raleigh, North Carolina, also requires all short-term rental operators to apply for a city zoning permit.

In many locations, zoning permits are not needed because zoning requirements are built into short-term rental permits. In these cases, you must be in the correct zone in order to apply for the short-term rental permit.

While there was a time when short-term rentals were largely unregulated at the local level, a growing number of local governments are now requiring vacation rentals to have some type of permit to operate.

Most often, these are issued by your city or town. To obtain a license, applicants must meet certain requirements. These are often designed to make sure that short-term rentals don’t negatively affect a neighborhood and can include provisions on:

• Zoning
• Distance from other short-term rentals
• Parking
• Occupancy
• Insurance
• Safety and building codes
• Primary or secondary residency

In Tuscaloosa, Alabama, for example, short-term rentals must be located in an approved zone, undergo an inspection by a licensed home inspector, and meet building and fire codes. Applicants must provide proof of insurance and have a city business license.

To understand how a lodging tax license differs from other types of licenses, it’s important to know the difference between income taxes and lodging taxes.

Income taxes are based on the income of a person or business and are paid out of pocket by the taxpayer. Lodging taxes, meanwhile, are paid by the guests of lodging businesses and may include accommodation taxes, sales taxes, other taxes and fees, or a combination of several types of taxes. The lodging business operator does not pay these out of their pocket, but they are required to collect the taxes from guests and pass them on to tax authorities.

A lodging tax license authorizes and obligates a business to collect these taxes. Lodging tax license holders are required to report and remit the taxes they collect by filing regular lodging tax returns with the proper tax authorities.

Short-term rental operators may be required to obtain lodging tax licenses with several different entities. Short-term rental hosts in Denver, for example, are required to collect city lodger’s tax and state sales tax from guests. Before they can collect these taxes, hosts must register for tax licenses with both the city and the state.

Figuring out licensing rules and completing the paperwork can be time-consuming, but operators can incur serious penalties for failing to obtain the right permits. In Honolulu, for example, penalties for operating a vacation rental without a legal short-term rental permit can run as high as $10,000 per day.

MyLodgeTax can help you determine which state and local lodging tax licenses you need and assist you in completing your registrations, as well as automate your lodging tax return filings. For more on lodging taxes, see our Vacation Rental Tax Guides for each state. If you have tax questions related to vacation rental properties, drop us a line and we’ll get back to you with answers.