Rise in Online Home Rentals Creates Taxing Dilemma

Focus #4 • March 2020


The rapid rise of online home rental services has brought opportunities for travelers but also challenges for governments seeking to collect taxes on those sales, maintain consistency between new providers and traditional hotels, and avoid excessive regulation. Wisconsin has updated state law and ramped up collection efforts, generating small but rapidly rising revenues, and is considering further legislation.

Though still modest, tax collections from internet lodging sales are increasing rapidly for Wisconsin and its local governments. Sales tax revenues from online marketplaces such as Airbnb rose 46.7% in 2019 as the market grew and state and local collection efforts increased in the wake of a key U.S. Supreme Court ruling.

Data provided by the Wisconsin Department of Revenue (DOR) show 2019 sales tax collections on online transactions by registered lodging marketplaces totaled $3.9 million, up from $2.7 million in 2018. Under state law, the increased sales tax revenue must be used to lower state income taxes. Though in size these marketplace collections amount to a mere rounding error in the state’s overall sales tax revenues, they still matter as part of the larger trend toward online commerce. Additional local room taxes also are being generated, with the proceeds used for tourism promotion and to a lesser degree public services in communities around the state.

The rapid growth in state and local collections on these online sales will likely continue with a new state law taking effect in January and further legislation pending in the state Senate. Also, the DOR is reaching out to players in the industry and major 2020 events in Wisconsin are pushing up expectations for this year’s sales. It is just part of a larger shift in how local and state officials tax and regulate this market segment, which until recently had not been clearly subject to the types of licensing, regulations, and taxes imposed on traditional hotels. For that reason, looking at the online lodging market is interesting both in its own right and as a case study in how government approaches the sharing economy.

State Law Promotes Parity

Over the past decade, the rise of online short-term home rental services such as Airbnb, HomeAway, and VRBO has given customers more options but posed challenges for states like Wisconsin and its local governments seeking to collect taxes on these sales. The online platforms initially left it up to the rental owners themselves to collect and remit any taxes on their sales. That often didn’t happen, leading to lost revenues for governments and different treatment for hotels, which must collect state and local taxes from their customers.

Over time, Wisconsin has gradually ramped up its collections efforts and has now updated state law to hold the platforms legally responsible for collecting revenues from these sales. As of January 1, any lodging “marketplace provider” processing transactions for a third-party seller must also collect and remit all applicable state and local taxes on those sales. The DOR has said it recently sent letters to marketplace providers informing them of this new requirement.

The 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. prompted the DOR to require out of-state retailers meeting the threshold in the ruling to collect Wisconsin sales taxes (for more see our brief on the decision.) But it was uncertain whether laws in effect at the time also imposed the obligation to collect local room taxes on lodging websites based out of state.

The new state law makes clear that room taxes would still need to be collected by an online business that has no physical presence or employees in Wisconsin but that meets the test laid out in Wayfair of doing 200 or more transactions a year in the state or annual sales of more than $100,000. The law also says that homeowners renting their property through registered marketplaces are not required to collect taxes on those online sales, even if the platform they are using does not.

On Feb. 20, the Assembly passed on a voice vote a bill that on Jan. 1 of next year would require marketplaces to remit room taxes on a quarterly basis to municipalities along with a report detailing total sales in the municipality, number of nights properties were rented, and the tax rate and total tax collections. If approved by the Senate and governor, the proposal would establish uniform definitions between the local room tax and state and local sales taxes, extend an existing penalty for room tax noncompliance to marketplaces, and require DOR to publish all municipal room tax rates on its website by July 31.

Wisconsin in 2017 first required “lodging marketplaces” to register with the DOR to collect taxes on those sales if the businesses met certain thresholds. As of Feb. 10, 2020, 29 lodging marketplaces had registered with the agency. The San Francisco-based Airbnb appeared on the state registry in May 2019 and remains just one of only three entities based outside Wisconsin. Other major players such as VRBO and HomeAway have yet to appear on the registry, though that may change following the new state law and DOR letters.

Previously, the state relied on a voluntary June 2017 pact with Airbnb to collect and remit state-administered taxes (mainly sales taxes) on its hosts’ behalf. The company has said it passed on to Wisconsin $2.5 million in revenues during the first year on transactions involving over 260,000 guests.

Today Airbnb and other lodging marketplaces covered by the new law should be remitting several different local taxes in addition to the 5% state sales tax:

  • County sales taxes of 0.5% that are or soon will be imposed in 68 of Wisconsin’s 72 counties.
  •  The soon to be phased out 0.1% stadium sales tax in Milwaukee, Ozaukee, Racine, Washington, and Waukesha counties.
  • Premier resort area taxes of up to 1.25% in the tourist communities of Sister Bay, Rhinelander, Stockholm, Eagle River, Bayfield, Wisconsin Dells, and Lake Delton. This form of sales tax is collected from certain businesses serving tourists.
  • Room taxes imposed by more than 290 municipalities and generally limited to up to 8%. The revenues must be used largely for promoting local tourism and overnight stays.
  • Room taxes of 2.5% in Milwaukee County with an additional 7% in the city of Milwaukee that go to the Wisconsin Center District (also known as an exposition district).

Lodging Taxes Growing Rapidly

Though currently modest, local taxes on these marketplaces could see notable growth. Overall room taxes in the state (including those for the Wisconsin Center District) totaled $116.8 million in 2018, up 4.4% over the previous year and 140% since 2000 (see Figure 1). As we noted in our May 2019 report on the room tax, that was among the largest increases for the period of any significant state or local tax in Wisconsin and reflected the growth in the lodging market as well as new communities imposing the tax or increasing the rates of existing ones.

Since room taxes are collected locally, no statewide figures are available on revenues from online marketplaces. But we can look at communities such as Madison, Green Bay, Racine, Kenosha, and Milwaukee that reached voluntary agreements with Airbnb to collect room or exposition district taxes. For example, Madison’s Airbnb tax revenues increased 26.5% to $402,000 in the first three quarters of 2019 compared to $318,000 the same period in the prior year, or more than 10 times faster than overall room tax collections in the city.

In addition, the city has ramped up registrations of “tourist rooming houses,” which are generally short-term lodging other than hotels and bed and breakfasts. In 2016, the city had 18 registered rooming houses, which are subject to licensing and inspection requirements. By 2019, the city had 148.

This segment of the market could see more attention in the state this year. Milwaukee topped Airbnb’s list of top 20 trending travel destinations worldwide for 2020, the company reported last October. The company said Democratic National Convention and the Ryder Cup resulted in a 729% year-over-year increase in Milwaukee bookings for this year, though that was prior to recent concerns over the spread of the coronavirus.

Lesson for the future?

Online lodging sites provide one window for looking at a larger trend in the economy in which new technology disrupts established industries and traditional government approaches to regulation and taxation. As state and local officials begin to extend some form of traditional taxes and licensing to this new lodging market, some have welcomed the moves, saying they provide additional revenue for priorities such as tourism promotion as well as fairness for traditional lodging businesses already complying with these rules. However, skeptics have questioned how much regulation is too much for sites conducting transactions for properties in thousands of communities around the nation and for those hosts who may wish to make only a few sales each year.

As the sharing economy continues to expand, government will have to be both nimble and thoughtful as it responds to new providers and platforms. In the case of online lodging marketplaces, the state has moved relatively quickly in recent years to address the trend and in doing so has set an example that could be applied to other aspects of the sharing economy and online commerce.