Is new vacation home tax worth it?

So far, Rhode Island’s plan to collect an extra $7.1 million in annual revenue through new vacation-home rental taxes is falling short of expectations.

In the first eight months since collections began, from last July 1 to the end of February 2016, the state has received just $1,563,565 in new rental taxes, according to Neil Downing, chief revenue agent for the state’s Division of Taxation.

However, because bookings made before the law went into effect last July 1 were allowed to escape taxation, the full potential of the new revenue stream has yet to be realized, and the real impact won’t be known until the coming summer rental season is over.

State Sen. Frank S. Lombardi, D-Cranston, is the prime sponsor of a new bill, S. 2813, that would eliminate the tax on whole-house or apartment rentals. Lombardi explained that many of his Cranston constituents own second homes in Narragansett, and “they have complained rather vociferously” about the new tax.

In addition, “the numbers seem to suggest” that the actual tax collections “are significantly less than anticipated,” he said.

Rentals of entire homes, condos or apartments, for less than 30 days, previously untaxed, are now charged 8 percent: the 7-percent state sales tax and 1-percent local lodging tax. This change alone was expected to generate $5.4 million a year.

The rest of the $7.1 million was expected to come from taxing sales by room resellers and short-term rentals of individual rooms in private homes, whether conducted independently or through sites such as Airbnb. The individual room rentals are now subject to a 13-percent tax: the 7-percent state sales tax, 1-percent local lodging tax and the 5-percent state hotel tax. Room resellers, such as Priceline or Expedia, are taxed on the full rate paid by end users.

Each property owner who rents out space for short periods much register with the state, pay a $10 annual sales tax permit fee, and remit the taxes on a monthly basis.

Tyler Doran, an agent with Keller Williams Realty, rents out his house in Wakefield through Airbnb for most of the summer, while he and his spouse move temporarily into an 800-square-foot cottage on their property. He said the Airbnb site automatically collects state taxes on rentals.

Other online rental portals, such as Homeaway, leave it up to owners to collect taxes. Is everyone complying? Some Realtors don’t think so.

Jim Durkin, owner of Durkin Cottage Realty, in Point Judith, and Cecile Cohen, of the Charlestown office of Randall Realtors, believe the new tax has caused some rentals to “go underground.”

“What bothers me the most is there’s people out there who just don’t collect the tax,” Durkin said. “It’s kind of creating a black market economy … and we’ve got enough of that in Rhode Island.”

“I absolutely think that is probably happening,” said Liz Brazil, who manages rentals for Lila Delman Real Estate International.

“The idea behind it was to collect the money and then spend it on tourism to make more money, and we all know what happened there,” Durkin added. “I’d rather spend the money myself” to promote his business, he said. “There’s going to be a lot of waste when the state administers a lot of that stuff.”

Cynthia Pappas, a broker at Sullivan Sotheby’s international Realty on Block Island, said the new tax has cost her about $3,000. She had to change her rental contracts and website, and there are additional staff costs.

Pappas said most of her clients will forego rent increases this year because of the new tax. As for her renters, no one has yet canceled a booking because of the tax.

In Jamestown, rental prices can climb as high as $7,000 per week, according to Brazil. “That’s a lot of darned money, but people pay it,” Brazil said. She thinks the new tax probably “hurts the lower-priced budget people more.”

In addition to the new state taxes, homeowners in Newport, the state’s top tourist destination, face a “multileveled” city ordinance regulating short-term rentals, according to zoning official Guy Weston.

In Newport, renting not more than two rooms in one’s home, to not more than four people total, is allowed on a nightly or weekly basis as long as the owner is in the home, Weston said.

But the city limits short-term rentals in which owners vacate their homes. While this is allowed in business districts, it is allowed only by special permit in most residential areas, and it is banned entirely in the city’s “estate” neighborhoods.

Weston acknowledged it is impossible to track all of the city’s rental transactions, and violators are typically caught only if their guests throw a loud party and neighbors call the police.

Even though the city will charge violators up to $500 per day, that doesn’t deter some owners, he said.

“These people are getting such a large amount of money for these rentals, they just chalk it up as the cost of doing business,” Weston said. Some houses in Newport rent for as much as “$4,000 or $5,000 for a weekend,” he added. “It’s a huge market out there.”

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