In a previous blog post, we addressed general definitions and federal tax impacts of a short-term rental activity. In the following blog posts (series 2 – 4), we will look at state and local implications of these sorts of properties.
First, be aware of the recent change in State law effective July 1, 2019 (for reservations made on or after January 1, 2019). This has dramatically changed the rules of the game for short-term rental operators (in many areas bringing Massachusetts in conformity with the laws in other states, but in some cases going much further). The Massachusetts law also allows municipalities great leeway to further regulate and tax these activities.
There are a few types of rooming arrangements which are not impacted by the new rules. Short-term rentals are defined as rooms which are rented out by an operator via advance reservations. This definition does not include traditional hotels, time-shares, and month-to-month leases, and rooms rented for less than $15 a night. It also doesn’t apply to active military members that rent out their homes while deployed. Finally, these don’t apply in dormitory settings or convalescent homes, et al.
The following are a few of the areas impacted by the new legislation, including registration, taxation, and oversight.
All short-term rental operators will need to register with the Massachusetts DOR, if they haven’t done so already. In a first-in-the-nation move, a public registry of short-term rentals will be available to the public. As part of this process, the state is setting up a committee to study the availability and use of short-term rentals in the case of emergency and wide-spread need for evacuation and relocation.
The Massachusetts excise tax on short-term rentals is 5.7%, with local communities being allowed to add their own taxes up to 6% (or 6.5% in Boston). The Act also allows municipalities to charge community impact fees up to 3% on certain rentals, as well as other fees that are payable directly to the municipality. The community impact fee must be used at least 35% for affordable housing and local infrastructure projects. Local communities will be able to regulate and fine operators for violations of these rules. Examples of local fees are the convention center financing fee of 2.75% in the Boston and Worcester areas and the Cape Cod and Islands Water Protection Fund fee of 2.75% in certain communities.
As an example of the total taxes to be withheld and remitted, a short-term rental in Yarmouth would have a state tax of 5.7%, a local tax of 6%, and a Water tax of 2.75%, for a total tax of 14.45%. These taxes apply to the gross rental charges, including services such as cleaning fees and service charges.
An operator can engage an intermediary or third-party agent to file the tax returns on their behalf. In the future, Airbnb and other services may be able to make an agreement with the state to collect, remit, and file all returns on the behalf of hosts, but there’s no indication yet if or when this will happen.
In addition to the taxes and fees associated with the new measures, cities and towns may regulate the existence and location of short-term rentals. They may also require registration, health and safety inspections, and enforce new local codes. Fees can be charged to perform this inspection and oversight function. In all cases, information must be posted in the rental regarding the location of fire extinguishers, gas shut off valves, fire exits, and fire alarms.
Operators must also keep liability insurance not less than $1 million unless the hosting platform already offers that coverage (Airbnb).
Operators who rent out leased apartments should be aware of restrictions upon that type of activity by the homeowner’s association or building owner. In rent-controlled properties, the short-term rental rate shall not be higher than the prorated amount of maximum rent.
Please see Mass 2018 HB 4841 for further information on the new law.
If you are overwhelmed by all of this, you are not alone. Airbnb has protested the new rulings, but likely without effect. If you are currently operating a short-term rental in Massachusetts, please take the time to review your legal obligation and make use of third-party service providers if necessary, to help you remain compliant.