On Airbnb Rentals, Some California Cities Tax First and Regulate Later

Despite the defeat of Proposition F and its stricter rules on short-term rentals, San Francisco is still legislative light-years ahead of other California cities in regulating rental platforms like Airbnb.

San Francisco passed its initial law regulating Airbnb-type rentals more than a year ago. It now has a city office -- a small one, so far -- dedicated to administering and enforcing the law.

The precursor to San Francisco's legislative action was an agreement with Airbnb in which the company would collect a hotel tax from guests.

Though few cities in California have attempted to pass and enforce restrictions on short-term rentals, eight cities in the state have reached an agreement with Airbnb to remit the taxes.

Tax First, Ask Questions Later?

A tax collection agreement has benefits for both cities and operators like Airbnb. Cities get a new stream of revenue, and platforms gain legitimacy by coming to terms with the city.

"Cities should go ahead and make their units subject to the transit occupancy tax right away," says Karen Chapple, a professor of urban planning at UC Berkeley. "Why not take that first move, while we're still figuring out that regulation."

The agreements are not always a precursor to more expansive regulation, however.

The city of Santa Clara is the most recent California city to begin collecting taxes from Airbnb, and officials there say they have no intention of taking on legislation to regulate short-term rentals. When the City Council passed a tax agreement in September, the chief concern of many members seemed to be whether the deal would go into effect fast enough to collect taxes from renters during the Super Bowl, which the city hosts in February.

"We want to be proactive in capturing revenue for the Super Bowl," City Attorney Richard Nosky told the council in September. "Our code does not have any use restrictions on rentals ... so we didn't see a need to regulate short-term rentals and kick that rock."

In San Francisco, short-term rentals have been seen as a direct threat to permanent rental units.

"In Santa Clara, that's not the case. Many of our homes are occupied by one or two people," says Mayor Jamie Matthews. "This will give people an opportunity to try out what it's like to be able to have part of their home or accessory unit rented. That might lead to additional affordable housing."

One ready use for that new stream of tax revenue would be to offset the loss of affordable housing units.

"We shouldn't set up a regulatory system that is going to cost us a lot of money to implement," Chapple says. "Ideally, what we want to do with this hotel tax revenue coming in is put it into an affordable housing trust fund."

High Cost of Enforcement

Earlier this year, the beachside city of Santa Monica made headlines by enacting a ban on the short-term rental of a full unit.

The regulation was more straightforward than the rules in San Francisco. By banning all rentals of a full unit and placing no restrictions on hosts renting out a spare bedroom, the city doesn't need to keep track of the number of nights a unit was rented. Under San Francisco's ordinance, full unit rentals are capped at 90 nights a year.

Still, as Santa Monica begins its enforcement effort in earnest, it's finding it needs to devote every penny of the hotel tax in that direction.

"The money that we are going to collect on the now-legal short-term vacation rentals is only enough to pay for the two code people and staff analyst to do effective enforcement against the illegal ones that were doing us so much damage," says Santa Monica Mayor Kevin McKeown. "So it's probably going to be revenue-neutral for the city."

Airbnb has been loath to give cities like San Francisco and Santa Monica specific data on rentals that might aid enforcement. A state bill to require the release of that information stalled earlier this year in the state Senate.  

Los Angeles Holding Off on Tax Agreement 

The state's largest city is taking a different approach: holding off on a tax agreement while legislation plods through the City Council.

Mayor Eric Garcetti has urged the city to move ahead on a tax agreement, but some council members have expressed concern that taking the money now would muddy the waters if the city imposes regulations on short-term rentals later.

"I think this would actually put the cart before the horse," said City Councilman Mitch Englander at a Budget and Finance Committee meeting over the summer. "To go forth and say, 'Let's go ahead and look at this revenue' before we've set off a path of having the policy in place."

So the city will instead move ahead with committee hearings, public meetings and staff studies before an ordinance moves to the full council.

Airbnb Stays on Message 

Chris Lehane, head of global policy for Airbnb, says the leading short-term rental platform is comfortable reaching agreements with cities, like San Diego, in which short-term rentals are not fully legalized.

"We want to pay taxes, we're happy to pay taxes, we want to contribute," he says. "When we can collect and remit, it's a great thing for a city."

Airbnb may have gotten a bit too excited about its willingness to fill city coffers with a series of billboards in San Francisco last month.

The ads notified city and county agencies of the things they could be doing with the $12 million in tax money that Airbnb remitted on the behalf of hosts. Not mentioned was the possibility some of the money could be used to fund the Office of Short-Term Rentals, which currently is budgeted for just $475,000 in the current fiscal year and $464,630 for next fiscal year.

But the ads that threatened to become a snatching-defeat-from-the-jaws-of-victory marketing blunder didn't move the needle enough for voters to approve Prop. F and its increased restrictions on short-term rentals.

Airbnb has apologized for the ads, but Lehane says the company will continue to emphasize the message that it is willing to pay its fair share of taxes.

"We have historically been very consistent about talking about our commitment to paying taxes," he said. "We'll talk about it in the future, and I think we'll certainly talk about it in a smart way that's consistent with how cities want that to be discussed."