Some Arizona residents complain about streams of strangers showing up at neighboring vacation rentals.

Some complain about loud parties every night of the week.

But there may be a financial complaint, as some worry that short-term rentals aren’t paying their fair share in taxes.

Glendale first began noticing problems when the city hosted the Super Bowl in 2015. City officials saw many residents making money renting out their homes to visitors but didn’t see it reported, said Vicki Rios, an assistant city manager in Glendale.

The growth in short-term rentals since then has only compounded the problem, she said.

“Most of the reason why people don’t pay it is because they’re completely unaware they owe it,” Rios said. “It’s a matter of education and getting people to begin reporting it themselves.”

Glendale and other cities, including Mesa and Phoenix, are now working with the Arizona Department of Revenue to try to provide greater oversight of sales-tax collections, whether the short-term rental industry or others.

Sales taxes, a large chunk of city budgets, have gone uncollected because of flaws in a new state program created to make the process more efficient, according to a report from Arizona auditors.

What taxes do vacation rentals have to pay?

Nearly 26,000 homes, apartments, condominiums, RVs and bedrooms in metro Phoenix were listed on Airbnb, one of the popular vacation rental websites, in February.

Other property owners use other vacation rental websites, property management companies or market the rentals on their own.

All short-term rentals are required to have a transaction privilege license with the Arizona Department of Revenue and pay sales tax on the short-term stays, according to Ed Greenberg, a spokesman for the department.

If rentals are registered on websites like Airbnb, the website collects and remits the taxes to the state. Similarly, if homeowners use a property management company to oversee short-term rentals, those companies must file the tax collections.

“Our agreement with the state streamlines tax collection and remittance for all parties and ensures our community is paying its fair share in taxes,” Laura Rillos, a spokeswoman for Airbnb, said.

A short-term rental that operates without a proper license could face a misdemeanor charge and other fees.

Those who use their properties as short-term rentals pay property taxes like any other homeowner, unless the properties are not used as the owner’s primary residence. Then they fall into a different property-tax class.

How much do vacation rentals contribute?

Arizona won’t say how big the sales-tax hauls are from short-term rentals, which took off after legislation was passed in 2016 that expanded protections for short-term rentals.

That’s because state law prohibits the disclosure of sales taxes paid by individual businesses. Until more than three short-term rental websites, such as Airbnb or VRBO, registered with the state, the sales-tax collections specific to that industry were not released. That information should be available in 2020, Greenberg said. 

For the broader industry that includes short-term rentals, hotels and motels, the Arizona Department of Revenue saw sales-tax collections climb by nearly 20 percent from fiscal year 2016 to fiscal year 2018.

• In 2015-2016, before the state law regarding short-term rentals went into effect, $155.05 million was collected from sales tax for transient lodging, hotels or online marketplaces.
• From 2016-2017, the first year the law was in effect, $168.23 million was collected.
• In 2017-2018, $183.86 million was collected.

What’s slipping through the cracks?

The Arizona Department of Revenue has fully collected sales tax for the state, counties and cities since 2017, calling it one of the largest tax reforms in Arizona’s history.

Former Gov. Jan Brewer pushed for the statewide collection system, saying it would make it simpler for businesses to comply and easier for the state and cities to collect.

Previously, businesses may have filed two or more sales-tax returns, one with the state and another with the city where the transaction occurred. 

But a recently released audit by the Arizona Auditor General’s Office dinged the state revenue department for lax oversight of sales-tax collections from businesses overall.

Greenberg said the department is focused on education, holding workshops to educate homeowners in the short-term rental business on licensing and paying sales taxes.

In the meantime, Glendale and other cities are working with the revenue department to track short-term rentals and other businesses and bring them into compliance.

“We know our area, we know our residents better, so it’s a little bit easier to work with those individuals,” said Rios, the budget director. “We have more interest in it because we’re close to our community.”

Since last June, the city has collected $1.9 million in sales tax from businesses that were out of compliance, with $88,000 coming from residential rentals, she said.

“This can be a big revenue source for the city,” Rios said. “It’s also a matter of fairness. If it’s owed and one person is paying it and another isn’t, it’s not fair to those that are in compliance.”

Have a tip out of Scottsdale? Reach the reporter Lorraine Longhi at [email protected] or 480-243-4086. Follow her on Twitter @lolonghi.

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