VROA COMPLIMENTARY NEWSLETTER - November 03, 2003
SUBJECT: Are You Paying Enough Tax?

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If you think the law is supposed to be based on logic and reason you may be sadly mistaken. In many jurisdictions the rules, regulations and laws affecting your right to rent out your abode are illogical, unreasonable and sometimes downright stupid. And if you don't know the ropes you could get hung. Over time we'll be digesting the various kinds of laws that affect vacation rentals. Let's start with sales tax.

SALES TAXES:
Last summer a prospective guest told us he had chosen to rent from one of our competitors because they didn't charge sales tax on the rent. This is in a resort area where summer weeks go for $3,000 and up and many owners do their own renting. The tax is Eight percent. That particular owner has rented their home out for about ten years and for only about 10 weeks per year. If you do the math you can see that they have failed to pay taxes approaching $24,000.

Certain regulations governing vacation rentals are ambiguous and unclear in many countries, states, counties and cities. But there is one thing government bureaucrats are very sure about - - they want your money and they want it now. The interest and penalties on the owner's failure to file returns or pay taxes could cost him upwards of $50,000.

IGNORANCE OR STUPIDITY:
Maybe this owner is just ignorant of the taxing authority. Or maybe he is trying to beat the system. But in either cases he is digging a hole that may be difficult to escape. His home is worth a good half million dollars. That means the liability is a ful 10% of the value of his home and probably 20% or more of his equity.

Maybe he is thinking he'll sell one day, not tell anyone, and just sneak away into the night. That's a bad idea too. His obligation to pay the debt will stay with him until paid. And no statue of limitations will protect him when the government proves he knew he should pay, or more importantly, that he should have known. Both make him culpable for paying the debt.

And if he doesn't get caught? During the closing process, the buyer or buyer's agent or the escrow agent should be smart enough to ask whether the rental taxes have been paid. If not, closing could get delayed for a good long time or, worse yet, the deal killed. The buyer too could be held liable for the sales taxes incurred by a prior owner. When you buy a home be sure to get an affidavit from the state indicating taxes have been paid.

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TAX BLINDNESS:
Not collecting and remitting sales tax to your taxing authorities is just plain stupid.

First, because you can't beat the government's system. My father used to have a saying (which he illustrated by point one arm left and the other one right) "The government goes their way," (he then pointed his right arm to the left side and said) "And I go their way." This kind of ambivalence may not be assertive if you want to speak up at public hearings or voice your dissent over, let's say, the war in Iraq. But when it comes to dollars, pesos, lyre, euros or yen there is simply no sense in fighting the current tax rate. Pay it and pay it on time. Anything else is financial suicide.

There is another reason why paying the tax is really not a big problem. Citizens the world over are desensitized to paying taxes. They are so used to being fleeced for 20% on phone services and large sums on vehicle purchases and huge taxes on real estate that they no longer believe that they have any ability to cut or eliminate taxes. In fact, people believe that taxes will rise relentlessly. I used to joke that once that taxes won't stop rising until government takes 100% of your income. But a friend reminded me that after taking all the income they can still come after your assets. Let's hope they don't.

With guests already expecting to pay taxes on everything else they certainly expect to pay them on vacation rentals as well. The story I told of the guest who went elsewhere due to the tax is our first such encounter. Smart owners pay the tax and pass it on to the guests. Collusion about rates and policies is illegal according to the US government. But there is nothing illegal about requiring every owner and property manager to collect and charge the tax. And that's another reason why guests pay it - to stay in a given resort area the tax is mandatory and there is no way to escape it - so why try. They don't.

HOW TO CHARGE TAX:
When you buy a car, or clothes or jewelry and ask the price - the sales person never mentions the tax until they ring up the purchase. They presume any intelligent person knows there will be a tax on almost everything. But in vacation rentals we have to be more prudent. The same goes for deposits, cleaning fees, resort fees and the entire cost of renting.

Here is how we do it. Early in most inquiries the caller wants to know "What's the rate." It tempting to just blurt out the answer, but you may be doing a disservice to the guest. And if you don't remind them of tax they can later accuse you of misleading them. Instead, we answer the question this way,

"Well, there are several costs in renting. There is a refundable damage deposit, a one-time cleaning fee, a resort fee (if applicable) the rent and, OF COURSE, taxes. The rate varies by home you choose, the season and how long you stay. When do you want to come?"

Later in the conversation when the guest has chosen the unit, the dates and other details we then repeat the order in detail itemizing each item specifically including the tax. Sometimes the total is simply more than the guest can afford but this process minimize the tax objection (we can't waive it anyway) and actually makes most visitors comfortable that they know the whole price before making their purchase. And it even makes the calls go quicker. Try it.

WHAT ARE YOUR RATES:
Sales taxes come in many forms. In Washington State, where we live, the rates vary by county and city. We start with the basic amount to the state. Then we add county or city taxes and in Seattle (King County) we pay a regional transit tax. In certain tourist oriented areas visitors are slammed with an accommodation tax that fuels the local coffers. In Hawaii we pay General Excise Tax (GET) and a Transient Accommodation Tax (TAT) that add up to 11.419%. I have never asked but the TAT alone has to be a huge money maker for the state of Hawaii. They get a disproportionate number of guests to citizens in Hawaii but the state still cries budgeting woes while taxing its citizens at one of the highest rates in the nation.

KEEP A LOW PROFILE:
If have not been paying sales taxes you are in trouble. And even if you are new to renting I recommend keeping a low profile when determining what your tax rates might be. Virtually all governments have websites that spell out what is and what is not taxable. Believe it or not, we just discovered that the cleaning fees (janitorial services in the eyes of the state of Washington) are not sales taxable. We're trying to get a definitive answer in Hawaii. Yes, we've made good assumptions in the past but now its time to get it documented. We didn't expect to save some tax but that could a pleasant surprise in your case too.

So you need to be explicit and clear in finding your tax rates. The best way is to get your Accountant to answer the question. Or, in the alternate, call your taxing authorities and asking specifically what rate each item on your invoice or lease is taxed at.

No matter who you rely on for your answer be sure to get it in writing. Your accountant can write you a letter of opinion or you can write the authorities. Again, don't simply ask if rentals are taxed - ask about each type of charge specifically. And make sure you keep the answering letter in a safe place. Should you have a tax dispute later no phone call memory or email will protect you. All that counts is what you get in writing.

Please see the website section for other ideas:
- Forms & Contracts (Download free Guest Booking Confirmation)


INPUT:
As always I seek your input. Please share you tips, techniques compliments and complaints on this or any other subject by writing me at Director@VROA.org.

HOME OF THE WEEK:
Emily & Alfred Glossbrenner have written a great "how-to" book about owning and operating their vacation rental. Check out their Bucks County Cottage http://www.vrbo.com/7951. Read excerpts from their book at www.FireCrystal.com. It has lots of good info.

*** If you want your place added to the list of weekly contenders just drop me an email.

FEEDBACK:
Greetings from Las Vegas~
I must say that I believe the membership fee investment that i've made in VROA is one of the best values I've received - the information you provide is excellent! I do have a suggestion for your suggestion box - it has to do with the rating system for properties. Everyone knows the difference between a 3, 4 & 5 star hotel - why not use the same rating system so as not to confuse prospective renters? I would be much more interested in participating in the rating system if you did. Thank you for taking the time to read this and keep up the good work!
- Cynthia, Las Vegas NV

Thanks Cynthia, please reread the inspection & ratings info on the webpage. Each inspected property receives the Blue Ribbon Award AND between 1 and 5 stars.
- Wm. May

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VROA OWNER NEWSLETTER
Published weekly for all Members
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Director & Editor - Wm. May Director@VROA.org
Membership - Penny Taylor Membership@VROA.org
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Seattle, WA 98111-3305
Voice: 206-343-7777
Fax: 206-628-0839
Email: Info@VROA.org
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Web: www.VROA.com (for Guests - coming soon)
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