Washington State and Local Tax Compliance for Short-Term Vacation Rental Businesses

Posted on Oct 10, 2018

By Joe Haberzetle, JD LLM, Shane Ratigan, JD LLM and Jennifar Hill, JD LLM

One by one, Washington cities and towns are beginning to regulate vacation rentals offered for rent by owners of residential properties.  Regulatory permits and licenses, however, are not the only compliance requirements imposed on short-term rental businesses; they also need to consider state and local tax requirements. This article will provide short-term rental businesses with an overview of potentially applicable Washington state and local tax requirements.

But first, let’s define a short-term rental business. For both tax and regulatory purposes in Washington, short-term rental business is typically defined as lodging provided by an owner or operator for less than 30 consecutive days in a dwelling or residential unit for a fee. The term therefore does not include hotel or motel lodging, residential rentals for 30 or more consecutive days, or residences operated by a charitable organization for specifically excluded purposes.

“Short-term rentals” generally include short-term house, condo unit or apartment rentals, or renting a room in a house, condo unit or apartment.  If a property owner does any of the following, it is presumed to be conducting a “business” that may be subject to state and local taxes:

  1. Advertising a property for overnight accommodations on an online platform (for example, Airbnb and VRBO);
  2. Hiring a property manager to manage a property rental; or
  3. Selling three or more short-term rentals in one year.

Washington Business License

The State of Washington requires most businesses to obtain a state business license and to register with the Washington Department of Revenue, including businesses that will gross over $12,000 per year and those that will make any retail sales subject to sales tax.  Since short-term rentals are treated as retail sales (discussed below), any owner or operator of a short-term rental should obtain a state business license.

State business license applications may be completed by filling out a paper form and submitting it by mail, or by completing an electronic application.  The paper form and electronic application are available through the Washington Business Licensing Service’s website.

There is a one-time $19 application fee.  After registering, businesses are issued a unified business identifier (UBI) number that is used to identify taxpayer accounts with the Washington Department of Revenue.

Washington State Taxes and Tax Returns

Washington excise tax returns are filed monthly, quarterly or annually, depending on the frequency assigned by the Washington Department of Revenue.  One excise tax return form is used to report state business and occupation (B&O) taxes and most taxes collected from customers, including state and local sales taxes, local lodging taxes, and convention center taxes.  Monthly and quarterly filers are required to file electronically using the Department of Revenue’s online filing system.

Washington imposes B&O tax on gross business income, including income from short-term rentals located within the state.  The state B&O tax has numerous classifications, each of which may have a different rate.  Gross revenue from short-term rentals is reported under the retailing B&O tax classification, which is imposed at a rate of .471%.  Importantly, a short-term rental business with less than $90,000 in annual gross income will likely owe no state B&O tax because a small business credit applies to reduce the B&O tax liability to $0.

Short-term rentals are subject to state and local sales tax that is generally collected from customers.  The state sales tax rate is 6.5% and local sales tax rates differ by city, ranging from 1% to 3.9%.  Both the state and local portions of the tax are reported on the Washington excise tax return and remitted to the Department of Revenue.

In addition to sales taxes, many localities in Washington impose hotel/motel taxes and convention center taxes that are also reported on the state excise tax return.  The tax rates and fees differ by locality.  The Department of Revenue publishes the local rates in a quarterly publication.

Beginning January 1, 2019, short-term rental businesses located in Seattle must begin collecting a 7% convention center tax. Short-term rental businesses that advertise rentals on online platforms (for example, Airbnb, VRBO and HomeAway) should confirm whether the platform(s) they use collect and remit taxes on behalf of hosts.  It appears that most major online platforms currently collect Washington sales and lodging taxes on rentals booked through their respective platforms.

B&O taxes are imposed directly on the property owner/operator and are not reported by the online platforms; therefore, short-term rental businesses should still file state excise tax returns.  The returns will report gross amounts for B&O tax as well as sales tax, hotel/motel and convention center tax, but if all rentals are made through a platform that reports the latter taxes directly, the owner/operator would deduct the full amount of such receipts so that they are not taxed more than once.

Local Tax Registrations

Many Washington cities and towns require short-term rental businesses to obtain a general business license, which is different from the regulatory permit or operator’s license that may be required.

For example, the City of Seattle requires businesses operating in city limits to obtain a business license tax certificate from the city. Business license tax certificates must be renewed annually. Seattle’s renewal fees are determined according to the gross income of the business during the last complete calendar year.  Fees for 2019 business license tax certificates range between $55 and $2,400, with the minimum $55 fee charged if a business had less than $20,000 in annual gross income, increasing to $110 if the business had between $20,000 and $500,000 of gross income.

Other Washington cities, like Bellevue, charge only a one-time registration fee ($90 in 2018), and the registration is valid for the life of the business (i.e., no renewal fees).

City B&O Taxes

More than 40 Washington cities and towns impose a local B&O tax, including most of the more populated cities like Seattle, Bellevue, Tacoma, Renton, Everett and Issaquah. The list of all Washington cities that impose a B&O tax is available here.

Many cities have a minimum annual gross income threshold that must be reached before city B&O tax is due, and the thresholds vary by city.  For example, the threshold in Seattle is $100,000, Bellevue’s minimum threshold is $160,000, Everett’s is $20,000 and Tacoma’s is $250,000.

Unless a city has expressly granted a taxpayer permission to not file a B&O tax return, short-term rental businesses should file returns with the city where the rental property is located, even when no city B&O tax is due. City B&O tax returns are typically due on a quarterly or annual basis, and they are filed directly with the applicable city. Some cities that impose a B&O tax allow taxpayers to file returns electronically.

Other City Fees

Many city governments have passed non-tax ordinances to restrict or regulate short-term rental activities within city boundaries. Furthermore, conversations amongst city officials, property owners and other stakeholders regarding short-term rental properties continue to occur, as increasing short-term rental activities create new dynamics in local housing markets.

Notably, Seattle enacted regulations governing short-term rental businesses. Beginning January 1, 2019, short-term rental businesses located in Seattle must obtain an operator’s license from the city.  The annual fee for an operator’s license is $75.

Seattle also passed an ordinance that would have imposed a per-night fee on short-term rentals within the City beginning on January 1, 2019; however, the short-term rental tax ordinance was repealed in June 2018.  As of the publication date of this article, we are not aware of any other Washington localities enacting a short-term rental tax.

What if your business has been offering short-term rentals in Washington without a state or local tax registration?

If your short-term rental business has not been complying with Washington and/or local tax requirements, we recommend that you discuss the issue with a state and local tax professional.  The Washington Department of Revenue and many of the B&O tax cities offer voluntary disclosure programs that may allow the business to avoid otherwise applicable penalties if it agreed to pay any taxes that would have been due for the prior four years and to remain in compliance going forward.

Questions?

Contact your Clark Nuber tax professional or our SALT team members if you have any questions on how state and local taxes may impact your short-term rental properties.

 

Jennifer Hill Clark Nuber

Co-author Jennifar Hill is a manager in Clark Nuber’s state and local tax practice team.

© Clark Nuber PS, 2018. All Rights Reserved

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