Austin short-term rentals caught between state, local policy

Austin

AUSTIN (KXAN) — Though the City of Austin already has an ordinance on the books regulating short term rental companies, city leaders may soon be reevaluating how that ordinance taxes companies like Airbnb and HomeAway.

This comes as the city continues on its trajectory of phasing out some types of short-term rentals while laws in the Texas legislature, as well as a challenge in the Texas court system, threaten to upend existing city rules. All this makes for a confusing mix of uncertainty around the future of how these properties will be regulated in Austin. 

Short term rentals (or STRS) are residential dwellings or accessory dwelling units (ADUs) that are rented temporarily for periods of less than 30 days. 

In its April 8 meeting, Austin’s Tourism Commission voted to ask city council to take a second look at its 2016 short-term rental ordinance and revisit how the city taxes short-term rental properties. Commissioners are calling on city council to analyze where the gap is between how much money is collected and how much the city could be getting. 

The concern over the lack of tax dollars springs from worries over noncompliance. While the city knows which short-term rental properties are permitted and are paying city taxes, under current rules many short-term rentals in Austin continue operating without a permit and don’t pay into the tax system. 

Reporting from the Austin American-Statesman shows that many properties operate outside the city’s permitting system, and commission members estimate that most of the properties listed on popular sites in Austin are not being permitted through the city. 

A recent report from Realtor.com lists Austin as the ninth city in the country where Airbnb rentals make the most money, with an average daily rate of $245, an occupancy rate of 71 percent and 10,825 active rentals. Commissioners wondered, how could Austin make sure the city gets their share? 

Commission Chair Whitington clarified the recommendation is a call to council to get more information, “so we can better consult in relation to tourism.” 

“Until the legislature decides what their stance is on it, it’s a little premature to make any recommendations,” he said.

“Currently Austin is the largest short-term rental market in Texas,” Whitington said, adding that many of the properties that make up that number are operating largely without compliance to city code. 

Under current policy, properties in Austin charge customers 15 percent the cost of a room in hotel occupancy taxes. Nine percent of that is collected and paid to the City of Austin and six percent is collected and paid to the state of Texas 

The Commission wants the city to reap the benefit of Hotel Occupancy Taxes, but they don’t know exactly how many properties are operating without a permit. Whitington says that ultimately puts the good actors that are getting permitted by the city at a disadvantage. 

Austin passed rules for STRs in 2016. 

By 2022 the ordinance will eliminate Type 2 STRs in residential areas, though they can continue to be built in commercial areas. These Type 2 STRs are dwellings where the owner doesn’t live on site or isn’t associated with the site. Under these rules, homeowners who live on their property and want to rent it out for a short time can still do so.  

The commission has not taken a position on whether to end the phasing out of Type 2 rentals in residential areas. But short-term rental companies have been vocally opposed to this phasing out. 

“My personal opinion is that for the sake of affordability and integrity we need to look at the policy as it exists,” Whitington said. But he also noted that the market for short-term rentals has changed a lot since 2016, and that the city leaders should take a look at the current policy with that in mind. 

City taxation and short-term rentals

Whitington hopes Council will assess the numbers related to short-term rental taxes and bring those back to the Tourism Commission who would then talk about the next policy steps, “to make sure the city of Austin is getting the best deal out of all this.”

Commissioner Scott Joslove, also president of the Texas Hotel & Lodging Association, added: “Our hope is that Austin will both be able to retain its power of local control with regard to the regulation of short-term rentals and that it will be able to collect taxes from any short-term rental activity that transpires.”

When talking about getting more dollars from non-compliant properties, Joslove and his fellow commissioners noted the city will be faced with the question of whether to collect taxes from properties that may be listed online but are operating illegally under Austin’s current rules. 

Multiple times, Joslove described this situation as “awkward.”

“It’s an awkward scenario because Austin has chosen to do a moratorium against all new and existing short-term rental permits for non-owner occupied [dwellings] within residential areas, that’s where a lot of the money is,” Joslove said. 

Austin City Council Member Kathie Tovo said she appreciates the Tourism Commission taking on this issue.

But she has some questions about the recommendations. What would it take for city staff to figure out how much money they are not being paid by unlicensed STRs? And what will the city do with that information once they have it? 

She imagines that city staff might have to compare advertisements from short-term rentals to the actual number permitted with the city in order to accomplish this.

“I wonder whether that’s the right use of staff time,” she said. “Should we be analyzing them for taxes they are not paying or actually enforcing [city rules]?” 

Tovo’s focus is on enforcing the rules for short-term rentals, she’s already been involved with local policy to try and track down the few “bad actor” properties that are making more work for the city’s Code Department. 

Tovo believes the city’s current policy is necessary to avoid giving  “an incentive to have people want to convert short-term rentals in the middle of our neighborhoods.”

“Here in Austin, it’s a concern because we have a need for more housing, and you see an increasing number of properties being converted into short-term rental properties,” she said. 

Tovo hopes that short-term rental companies look to partner more closely with the city of Austin in the future and share their information and data. 

Airbnb (since 2017) and HomeAway (since February of 2019) have an agreement with the Texas Comptroller’s Office to provide anonymized, aggregated data to the state of Texas about their rentals. These numbers show the state what profits they’ve made and how much they’ve paid in taxes. But the numbers do not show locations of properties or any identifying information about these properties or property owners.  

Tovo said while anonymous information would be helpful to Austin, “from the city’s perspective we need disaggregated data.”

She said up to this point, short-term rental properties have been unwilling to provide the city data without disaggregating it.

How companies are proceeding 

Airbnb made an offer to the city of Austin that’s been on the table since 2016. An Austin American-Statesman editorial notes that in 2016 Airbnb “estimated it could collect $7 million a year in such taxes if Austin enlisted the website’s help.”

HomeAway said it has, in the past, talked to the city about voluntarily sharing data, but said the city wanted HomeAway to provide information that it was not legally able to do so. 

HomeAway and Expedia had a representative present on their behalf at the Commission meeting who explained that providing data which identified individual properties is “federally protected and is not releasable.”

“We made clear our willingness to support responsible limits on the number of short-term rentals allowed in the city; similar to limitations imposed in San Antonio’s new short-term rental law,” said Philip Minardi, Head of Public Affairs For HomeAway.com.

HomeAway added that they hope the city will come back to talk with them about making an agreement to voluntarily share their data. They also remain optimistic the city will find a way to extend its upcoming sunset on Type 2 Short-term rentals.

“We can find an innovative solution that can help the city benefit from responsible and fair vacation rental regulations,” said Minardi. 

“We’re ready to help shape that future together,” he continued.

While Tovo worried about the impact of short-term rentals on housing affordability in the city of Austin, HomeAway expressed worry about Austin’s ability to house the many people who come to visit each year.  

“Unfortunately, the 2016 ordinance not only jeopardizes responsible vacation rental homeowners, but will impact our city’s ability to welcome traveling families and groups looking to experience all Austin has to offer,” Minardi said. 

TurnKey Vacation Rentals, a full-service vacation rental property management company based in Austin, also disagrees with Austin’s phasing out of Type 2 rentals but is not holding out hope that the rules will change. 

“I don’t expect that they will take another look at that, not the existing council,” said John Banczak,  Co-Founder and Executive Chairman at TurnKey Vacation Rentals. 

TurnKey manages around 250 short-term rental properties in Austin. As the policies around short-term rentals have been in flux the last five or six years, Banczak has had to stray up to speed. He said that Austin’s rules can be difficult to navigate for the property owners TurnKey works with. 

“It’s really changed, it’s one of the more restrictive areas now, where it used to be one of the more lenient areas,” Banczak said of Austin’s policy. 

While he feels the sunset portion of Austin’s rules infringes on property owners’ rights, he said he supports the taxation portion of the 2016 ordinance. 

“We believe that all short-term rentals should follow all the tax code, and by signing up with us, you have no choice, you can’t be an owner and come on with TurnKey and not have your taxes paid,” he said, explaining that TurnKey takes care of all the Hotel Occupancy Taxes on behalf of their property owners. 

He explained that if all property owners were compliant, short-term rentals could be a pretty big revenue generator for the city and the state. 

“We encourage all owners, whether they use TurnKey or they manage on their own, to do their own tax filings and make sure they’re accurate,” Banczak said. “But is there a chance that that’s not happening? Yeah, there’s definitely a chance and I can see why the city wants to make sure they close those holes.”

But he sees the issue not as a problem with the city’s taxation rules, but with the lack of enforcement. 

An image of the TurnKey Vacation Rental website, an Austin-based short term rental company. 

“The city knows that there’s a group of properties that are 100 percent tax compliant and we’ve gone through state audits and checked all the boxes, what happens though is you get an owner that does a partial rental, they do it on their own — maybe they list on Airbnb or HomeAway for a couple of days,” he said. “There is the chance that they decide not to file their taxes, and yes it can be hard to track that down.”

 According to the Texas Comptroller’s office, the owner of the short-term rental property is the one who is ultimately liable for collecting, reporting, and remitting state and local occupancy taxes. But the company which hosts that property as a short-term rental may contractually take over some or all of those tax responsibilities. 

Statewide implications for short-term rentals.

Short-term rentals generate a significant amount of money in Texas. According to 2018 report compiled by TXP, a public policy consulting firm, state’s vacation rental system supports $3.5 billion in economic activity and 35,000 permanent jobs each year. But many municipalities have different rules for these properties. 

Currently, Texas House Bill 3778 and Senate Bill 1888 would curb local restrictions when it comes to short-term rental properties. HB3778 has been left pending in the Urban Affairs committee. SB 1888 has been referred to the Business & Commerce Committee. 

While the Tourism Commission was informed that the likelihood of those bills actually passing was slim, others who’ve been following the bills told KXAN they haven’t counted them out yet. 

Tovo said she is opposed to both these bills.

A City of Austin Spokesperson said in a statement to KXAN:

“Should these bills pass, one of the major impacts would be to negate the City’s decision to phase out investor-owned short-term rentals from single-family residential zones. This would leave Austin residents subject to the disruption and chaos caused by homes operating as hotels and party houses in their neighborhoods.”  

But HomeAway and TurnKey say they support both these bills.  

“They really allow clarification across the state,” said Banczak of TurnKey Vacation Rentals.  “Right now you’ve got a hodgepodge of local laws, you’ve got some really well-written laws in San Antonio, some really poorly written ones in Austin.”

“As a Texas born and bred company, we support policies that address the concerns of community members while protecting the long-standing practice of vacation renting,” said Minardi of HomeAway.com, noting that the policies would set up a statewide framework for vacation rentals. 

A challenge to the City of Austin’s Short-term Rental policy is still pending in an Austin appellate court. That challenge was launched by plaintiffs from Austin represented by the Center for American Future at the Texas Public Policy Foundation. This suit alleges that the city’s policy is unconstitutional. The Texas Tribune describes this case as a “likely candidate for review at the state’s highest civil court” and one that has been supported by Texas Attorney General Ken Paxton. 

A state supreme court decision in 2018 ruled that a property owner in a homeowners association near San Antonio was allowed to rent his residency for a “residential purpose” and was not in violation of the homeowners’ association”‘s rules. 

That “residential purpose ruling” makes some like Banczak more optimistic about court challenges to come.

“We think they will find the Austin short-term rental statutes to be unconstitutional, we don’t think it will hold up,” Banczak said. 

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