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Barrier to the beach: The ‘AirBnB tax’ clouds the outlook for the summer season at the shore

By this point in the spring season, most property owners renting out summer homes on the 130-mile Jersey Shore are completely booked with tourists. But many  have run into trouble, thanks in part to a quirk in the transient accommodation, or “AirBnB” tax, signed into law as part of the 2019 budget.

Denise Payne, member of the Jersey Shore Renter’s Coalition, rents out her shore home during the summer. She says many renters cancelled their plans after learning about the new tax. (AARON HOUSTON)

Initially aimed solely at transactions brokered by online property rental site AirBnB, Assembly Bill 1753 established an 11.625 percent levy in most municipalities for short-term rentals — those under 90 days — with $15 million in anticipated revenue for the 2019 fiscal year. Summer rentals typically last a week, so language was written into the law providing that the tax would not be charged on rentals booked through a licensed real estate broker.

The problem, according to Jersey Shore Renters’ Coalition Committee Member Tim Krug, is that few summer rentals are done via brokers anymore. Many people — both the homeowner and renter — opt to do the transaction via online outlets Facebook and Craigslist or through word of mouth. Thus, the tax hit a group of owners and renters it was never intended to.

Many municipalities not on the shore support the measure as a way to regulate AirBnB. And owners of small hotels and inns see the tax as a fairness measure — imposing some of the same costs they incur as part of their businesses. But the summer rental business is crucial to the state’s economy and if the tax reduces tourism, a wide swath of businesses that depend on summer visitors could be hurt. So the Legislature has begun the process of amending the law, balancing the interests of the different business constituencies while remaining consistent with constitutional requirements and federal law. That’s a difficult job, and with the summer season fast approaching it’s unclear whether lawmakers can enact the fixes in time to beat the heat.

Some people who own a second home either inherited it from a family member, or bought the property as an investment. In the latter case, owners often keep houses to themselves for a few days of the summer for their own vacations.

‘Rough summer’ ahead

Most families book their rentals by February, and homeowners complained that they have struggled to fill up the entire summer with rentals and still have several empty weeks during peak season.

“I decided to use a realtor, so instead of charging and collecting and paying taxes, I’m using a realtor, and even using a realtor, I have to pay them a commission, so now I’m increasing my costs, calling it a realtor booking fee to pass onto the guests,” said Duane Wallington, who rents out a property in Ship Bottom on Long Beach Island.

“It’s going to be a rough summer,” he added.

“A lot of people … they’ve been having the same renters every year. But now they’re unable to really afford the addition of the tax which can be anywhere from an additional $300 to close to $2,000 depending on the size of the house,” said Denise Payne, another Renter’s Coalition member, who has been renting out a historic house in Beach Haven since 2014.

Many families and couples will still rent, Payne suggested, but the cost of the tax or realtor fee will eat up their budget, which would otherwise go to restaurants and other local businesses.

“Now that restaurant owners and shop owners are coming back, they begin to open in May, they’re going to feel it this summer,” Payne said. “A lot of them have been away in winter and are not as up to the minute [with] information as homeowners that rent out.”

Krug said he goes through a realtor who charges commissions of 6 percent at most, but other realtors might charge upward of 15 percent, all of it passed to the families that rent these houses.

“What I did is I told my renters ‘this is how it is, there are a couple of realtors on [Long Beach Island] who are willing to do a reduced rate of commission to handle the transactions,’ instead of their normal 10 percent, a couple are willing to do it for 5 or 6 percent,” Krug said.

Wallington said that he uses a realtor who charges a 10 percent commission, which is on par with the “going rate” of between 10 and 12 percent for realtors operating on Long Beach Island. But that amount ultimately gets handed down to the customer.

“The tax is 11.652 percent, so I’m saving my guest a whopping 2 percent going to a realtor,” Wallington said. And with his average rental price at $5,000 a week for families, that could mean roughly $600 more families have to spend just on the rental.

“People when they heard there was a tax, cancelled their reservations, either saying they’re not going to go on vacation or they’re going to look for different areas outside of New Jersey,” Payne said.

Protecting small properties

Much like dominant internet companies Uber, Amazon, Google and Facebook, AirBnB has drawn increasing scrutiny from regulators and lawmakers both in New Jersey and nationwide.

The argument for the AirBnB levy is that the measure levels the playing field between the online business and hotels and motels, which charge occupancy taxes.

Indeed, that is a point driven home by the Murphy administration’s “Budget in Brief,” which projects how much money the state will make by the end of the 2019 fiscal year, as well as the proposed revenue and departmental appropriations for the coming fiscal year.

Lawmakers pegged the total revenue at $15 million for the the 2019 fiscal year, which ends on June 30.

But they lowered their estimate by $3 million, which treasury spokesperson Jennifer Sciortino said was because the tax was not fully implemented until Oct. 1, by which point the state missed the chance to capture revenue from summer transactions.

“Tax fairness, we feel is important. If you’re going to act like a hotel, you should be paying the same taxes like a hotel,” said Marilou Halverson, president and chief executive officer of the New Jersey Restaurant and Hospitality Association.

Halverson said she supported the application to the tax to homeowners that rent out their seaside summer house.

“If a place is operating and provides a service or a product, the same as another company, what does it matter if it’s a person or a corporation?” she asked.

“A lot of the shore hotels are not Hiltons and Marriotts,” Halverson added. “It is small, independent hotels … They’re just bed and breakfast, or a small 50-room hotel … You’re talking about competing against these small, little boutique hotels.”

A measure, Assembly Bill 3721, sponsored by Assemblywoman Valerie Vainieri Huttle, D-37th District, seeks to further level the playing field by establishing a set of statewide standards that municipalities can adopt to keep AirBnB under their regulatory purview.

A3721 would allow towns and cities to pass ordinances on any rentals less than 30 days or completely ban Airbnb. The Assembly Tourism, Gaming and the Arts Committee approved it April 12 in a 6-0 vote with one abstention.

The bill allows ordinances that would bar an owner from offering any Airbnb services until they receive a “short-term residential rental registration number” from their town. Municipalities would be allowed to collect a registration fee of up to $250, half of which would go to the town and the other half to the New Jersey Affordable Housing Trust.

“Rather than piecemeal, it would [impose] statewide regulations, it would set something for municipalities to follow. Right now, municipalities have no guidance, they’re looking for a [framework],” Huttle said.

“We’re talking about towns up in my neck of the woods. They have all prohibited these short-term rentals. Why is that? There’s got to be some issues of safety and transparency,” Huttle added.

But Huttle said that summer rentals would not be the target of the legislation, either intentionally or by accident.

“The municipalities that are against this are not the seaside towns,” Huttle said. “If you go down to the shore for a week, that’s an asset to tourism, it’s an asset to our families that are using this. It’s very different than municipalities that just want transparency.”

Jarrod Grasso, chief executive officer of New Jersey Realtors, a trade group representing the state’s real estate agents (or Realtors), said his association pushed for the realtor transaction exemption in the AirBnB tax.

“The specific target of the legislation was always going after transient accommodation groups,” Grasso said. “We did not want to get caught up in the expansion of the sales tax to seasonal rental units.”

But Grasso said that by paying a realtor, buyers generally get value they would not receive by renting directly from a homeowner, another justification for the exemption. “We provide a certain level of services that these transient accommodations do not provide, so they saw fit to provide an exemption for real estate licensees,” Grasso said.

“With those services comes knowledge of the location. They have somebody who will actually inspect the property … If there is an issue on the property they’re there to provide help or assistance. A lot of homeowners aren’t around in the community because they are second homes,” he added.

Constitutional problems

Lawmakers have proposed a series of bills all aimed at exempting summer rentals from the AirBnB tax. But the question is whether any such legislation can withstand constitutional scrutiny, because it might run afoul of the federal statute laid out in the Internet Tax Freedom Act, according to Sciortino.

AARON HOUSTON
Denise Payne’s summer rental at 210 Coral St. in Beach Haven.

That legislation, she said in a statement to NJBIZ, “prohibits taxing online transactions differently” than those involving physical establishments.

“The administration stands ready to work with the Legislature to amend the law to more closely mirror the intent of our original budget proposal, but it would have to be done in a manner that passes legal muster,” Sciortino added.

The most recent legislation is Assembly Bill 4814, which would tweak the definition of “transient accommodations” so it would not apply to seasonal rentals.

The tax would instead be levied on “transactions made through a formal accommodation marketplace, such as AirBnB,” said Assemblywoman Joann Downey, D-11th District, one of the bill’s main sponsors.

“It’s important that we work quickly to protect our long-time informal hospitality economy from the impact of this new tax, and to ensure both the short- and long-term health of our summer season economy,” she said in a statement to NJBIZ.

A prior version of the bill specified that transient marketplaces had to be online, but that provision was removed.

“A marketplace, online or otherwise, allows accommodations to be listed and provides a means for arranging the rental of the accommodation,” reads the bill statement. Those kinds of transient accommodations would still be subject to the tax.

“We don’t believe the original bill considered the impact of imposing these taxes on property owners who earn a living by selling short-term rentals by traditional informal means” such as classifieds and word-of-mouth, said Assemblyman Eric Houghtaling, D-11th District and another bill sponsor, in a statement to NJBIZ.

“We fear that if action is not taken to fix the market, these taxes will damage our tourism industry, which is critically important both to our constituents and to the state as a whole,” Houghtaling said.

A4814 was referred to the Assembly Tourism, Gaming and the Arts Committee in December while the upper house version, Senate Bill 3158, was referred to the Senate Community and Urban Affairs Committee in November.

Another measure, Assembly Bill 4520, would exempt transient accommodations in shore counties — Atlantic, Cape May, Monmouth and Ocean — from the tax.

“It’s complicated relative to hitting the sweet spot to where we’re able to exempt individual homeowners [and] at the same time making certain it’s not so specific that it becomes specialty legislation that doesn’t meet constitutional muster,” said the bill’s sponsor, Assemblyman John McKeon, D-27th District.

A4520 was referred to the Assembly Tourism, Gaming and the Arts Committee in October while the upper house version, Senate Bill 3133, was referred to the Senate Community and Urban Affairs Committee in October

Lawmakers said they hope the measures move in May, the only time between April budget hearings and June budget talks to pass any legislation before the summer.

Daniel J. Munoz
Daniel Munoz covers politics and state government for NJBIZ. You can contact him at dmunoz@njbiz.com.