Undercurrents: How Much Tax Burden Should ‘Sharing Economy’ Shoulder?

A regular Source column, Undercurrents explores issues, ideas and events developing beneath the surface in the Virgin Islands community.

While the Legislature has been mulling over the wisdom of imposing hefty fees on the timeshare industry – it is set to vote Tuesday on a new $25-per-day user fee – it’s barely glanced at the exploding private-owner short-term rental market.

There have long been vacation villas available for rent in the territory and throughout the region, but in the past five years the market has gotten a tremendous boost from such internet platforms as Airbnb, the industry leader, and such competitors as VRBO, HomeAway and Flipkey.

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“These websites changed the game on it,” said Lisa Hamilton, president of the USVI Hotel and Tourism Association.

Just as eBay facilitates peer-to-peer sales of goods, the sites connect homeowners with customers looking for a short-term residential property rental, particularly in popular vacation areas. Without the overhead costs associated with a hotel, the property owner can rent his space at half or less the cost of a hotel room.

A recent report by the Caribbean Hotel and Tourism Association titled “The Caribbean Sharing Economy Resource Guide” chronicles the rise in the market and raises concerns about how private rentals should be regulated and taxed and how they are cutting into traditional hotel business.

In late 2015 and early 2016, more than 2,000 properties in the territory were listed on internet sites as available for short-term rentals, according to the report. Airbnb alone listed 1,144 U.S. V.I. properties and more than 25,000 throughout the Caribbean.

The numbers reflect a global trend. When the guide was drafted, Airbnb had two million listings worldwide, with properties in 34,000 cities in 191 countries. By comparison, the Marriott International hotel chain had 1.1 million rooms, Hilton Worldwide had 745,074 and the Intercontinental chain had 726,876.

The types of space offered as shared economy rentals ranges widely. It may be just the spare bedroom in someone’s home; a condominium unit that is used by its owner in the winter months and offered for weekly rentals the rest of the year; or a lavish 5-or 6- bedroom villa designed and built to accommodate guests for corporate retreats or family gatherings.

The average size, according to the resource guide, is 2.1 bedrooms. That means that 25,000 listings could be roughly equal to 52,500 hotel rooms – although many are not available year round.

Even ignoring the multiplier effect suggested by the report, short-term private owner rentals make up a significant part of the U.S. V.I. tourism market.

Hamilton said there are approximately 4,700 traditional hotel rooms in the territory. Add to that 1,500 timeshare units that are a recognized segment of the visitors’ market, and there is a total of 6,200 commercial rental offerings. That means the 2,000 shared-economy rentals (a conservative estimate and a number that fluctuates) represents almost one-fourth of the accommodations on offer to U.S. V.I. visitors.

“And they’re taking our air seats,” she said.

This is hardly the first time a tourism leader has complained of scanty airlift. But Hamilton said the situation is exacerbated by the number of private owner offerings. The major carriers are still basing their estimates of the number of seats they can fill on a maximum of 5,000 hotel rooms likely to be filled at a given time. At the least, Hamilton would like to see the airlines revise their estimates.

There have been court challenges to the shared-economy market in other U.S. jurisdictions, Hamilton said, but laws involving property rights and fair trade have protected the fast-emerging market.

“It’s not going to go away,” she said.

Instead of fighting the trend, the Resource Guide suggests that local governments find the best way to integrate the market into existing tourism frameworks – and to cultivate it as a new revenue source.

Typically, hotels must pay an occupancy tax of some sort. In the territory, that’s a 12.5 percent hotel room tax. The report notes that taxes vary from place to place and lists numerous other common taxes and fees, including commercial (as opposed to lower, residential) real estate taxes, corporate income tax and gross receipts taxes.

Then there are the safety and other requirements. A hotel needs a license, proof of property liability insurance, pest control certification, clearly marked exit signs … and a host of other things, all of which cost money and drive up the cost of doing business.

Clearly, shared-economy rentals should not be held to the same standard as hotels, the report states, nor should they pay comparable taxes. But the guide does suggest that government set some sort of minimum safety and aesthetic standards in order to protect the visitor and to protect the destination’s reputation, as well as impose some sort of revenue measures.

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