Little more than a decade has passed since two roommates named Brian and Joe in San Francisco came up with the idea of making their apartment a bed and breakfast by renting out an air mattress in their living room. From this humble beginning was born the behemoth Airbnb. Before long the company had disrupted the entire short-term rental/lodging industry.
In December 2018, in an effort to level the playing field between hotels and online platforms such as Airbnb, Governor Charlie Baker signed into law a bill that extended the state’s room occupancy tax to short-term rentals. The tax took effect on July 1, 2019, but not everyone has had an opportunity to become familiar with it.
Who It Applies To
The law applies directly to real estate brokers, as “intermediaries,” when they sign a contract agreeing to collect rent on behalf of the operator of the short-term rental property. Brokers who act as intermediaries have to register with the Department of Revenue through MassTaxConnect if they have not already done so. They are also responsible for ensuring that the operators with whom they contract are registered, and for collecting the tax and submitting the requisite tax returns.
However, it is only the real estate brokerage firm or principal broker that needs to register on behalf of all of the firm’s agents and to file the returns and remit the taxes. An individual agent whose license is affiliated with a brokerage firm, or with another broker, does not have to separately register or file returns.
The new short-term rental tax applies to houses, apartments, condominiums, and other furnished accommodations where either a portion of the unit or all of the unit, is rented out on an advance reservation basis for a rental period that is 31 days or less, at a rental rate of at least $15.00 per night. Tenancies at will and month-to-month tenancies, in which a tenant occupies leased premises without a definite end date, are not subject to the tax.
The Exceptions
There are some additional exceptions. The tax does not apply to a “bed and breakfast home,” defined as “a private owner-occupied house where not more than three rooms are let and breakfast is included in the rent and all accommodations are reserved in advance.”
To satisfy the breakfast-is-included-in-the-rent requirement, can the owner-occupant go south for the winter and just leave a Keurig and some boxes of cereal on the counter? Or does the breakfast have to be served by someone other than the guest? The answer is unclear.
Regardless, it seems ironic that a law designed to regulate Airbnb and its ilk will not apply to Brian and Joe’s original concept of an air mattress in the living room, with breakfast served in the morning, so long as it is carried out in an owner-occupied “house,” rather than in an apartment or condo.
Another exemption from the statute is that there is no tax if a unit is rented for no more than 14 days in the calendar year. However, this exception only applies if the owner has registered in advance with the Commissioner of Revenue, declaring the intent to rent the property for no more than 14 days in the year. If the 14 days is exceeded, the tax is owed from day one; the first 14 days would not be tax-free in that situation.
There are additional exemptions that are not likely to crop up often in the brokerage context, including for timeshare properties, for properties owned by governmental bodies, for accommodations owned by religious, charitable, educational, and philanthropic institutions if the lodgings are not open to the public, and for rentals to military personnel traveling on official business.
Tax Rate
- The amount of the short-term rental tax rate depends on the municipality where the unit is located. In all cases, there is a state excise tax rate, which, including a surtax, is currently 5.7%. On top of this, there are a bedazzling array of local options that may increase the tax.
- Municipalities can extend to short-term rentals their local room occupancy tax of up to 6%, or in Boston, 6.5%.
- They can adopt a separate “community impact tax” of up to 3% on the short-term rental of “professionally-managed properties” – a somewhat misleading term that simply means that the operator has at least two rental units in the municipality, excluding units in an owner-occupied single-family, two-family, or three-family owner-occupied dwelling. The municipality can also vote to extend the community impact tax of 3% to rental units in an owner-occupied two-family or three-family dwelling. 3.
- There is a 2.75% Convention Center Finance fee in the cities of Boston, Worcester, Cambridge, Springfield, West Springfield, and Chicopee. And a similar 2.75% tax applies in the towns that are members of the Cape Cod and Islands Water Protection Fund, which currently includes only towns in Barnstable County, but the Nantucket and Dukes counties have the option of adopting it, as well.
Fortunately, the Department of Revenue is maintaining a spreadsheet to assist in determining the taxes due in each specific municipality. It can be found here: https://dlsgateway.dor.state.ma.us/reports/rdPage.aspx?rdReport=LocalOptions.Room_Tax_Impact_Fee
Calculations
How does one calculate the rental amount that the applicable tax rate applies to? As anyone who has used an online rental platform knows, the fees that are charged on top of the base rent are ubiquitous in the short-term rental industry. Not surprisingly, the occupancy excise tax on short-term rentals applies broadly to virtually all of the fees assessed to the renter, with the exception of the security deposit.
The tax must be paid on items such as cleaning fees, pet fees, booking fees, linen fees, and any other service fees assessed to the renter. If the renter is paying the broker’s fee that would otherwise be due to the broker from the owner, that too would appear to be part of the rent for purposes of calculating the tax. But if the operator of the unit includes add-ons for items not related to the occupancy, such as a whale-watching cruise or theater tickets procured through another vendor, the cost of those items is not included as part of the rent for purposes of calculating the tax.
Brokers who collect rents for short-term rentals must file tax returns and remit the tax payment owed on or before the 20th day of each month, for occupancies in the previous month. It is highly advisable that brokers who engage in such rent collections for short-term rentals enter into a written agreement with the operator of the property spelling out each parties’ responsibilities.
MAR is in the process of developing a template agreement that can be used for this purpose.