New York’s small business lodging crackdown – another ripple from a big wave

By Pam Knudsen, Lodging Executive at Avalara

While the dust has scarcely settled from the landmark ruling in New York City resulting in a massive crackdown on short-term rentals, the full extent of the fallout from the decision has yet to be fully grasped by many – perhaps even by the city itself. The effective ban on short-term rentals will have considerable consequences on local economies, and more than anyone, it’s small lodging businesses that stand to be impacted by the resulting wave.

To fully understand the major impact this ban has on small businesses, we must first acknowledge that short-term rentals should rightly be considered small businesses themselves. Much like any other small business, STRs are required by most communities to be licensed, registered and compliant with tax collection and remittance. Furthermore, the hosts and managers behind these STRs operate in much the same way as any other local business owners, focusing on marketing, ongoing maintenance, customer communication/satisfaction, risk management, networking and continuous improvements.

It’s important to acknowledge that the recent action in NYC has been playing out in cities across the country. And in fact, NYC could well have borrowed their crackdown strategy from Santa Monica or other cities that chose to dial back short-term lodging. It’s essential to note that a crackdown on STRs should be considered a crackdown on small businesses. And the impact on small businesses extends well beyond the hosts and managers who are primarily targeted by these rules.

The collateral damage of this approach extends into the surrounding community and its myriad retail and service businesses frequented by travelers and utilized by STR operators. A report from Oxford Economics found that tourism had a total impact of $85.5 billion in New York in 2021, supporting more than 33,630 jobs and generating $7.5 billion in state and local tax revenues. As tourism is hamstrung, so too are the economic boons for the restaurants, bars, grocery stores, coffee shops and other businesses that rely on their patronage.

Just as hotels provide travelers with an increasing variety of choices to suit nearly any demographic through newly launched brands and options, the proliferation of STRs comes in all stripes. Listings can range from a single room in a home to whole-home rentals that span every type of architecture from a yurt to a castle, historic mid-century, sleek and modern to rustic. In curbing STRs in NYC, a measure of choice has been wrestled away from travelers, an untold percentage of whom have had their preferred lodging option cleared from the board. The result? Some will opt for hotels or seek STR accommodations in a nearby “second choice” city…or take to local underground listings.

It’s still early, but initial reports indicate that former Airbnb users are indeed flooding to these below-board listings, which unfortunately have a host of unique problems, such as being prone to scams or outright fake listings while also creating a municipal revenue gap. When so much of the potential lodging tax is swallowed up by underground listings, cities are typically forced to make up the difference through increased sales taxes, property taxes or costs of city services – ultimately passing the economic burdens of their STR restrictions onto full-time residents and business owners.

The perceived negative impacts of STRs have been largely misunderstood, with blanket arguments such as “STRs limit available affordable housing for local workers” being largely unproven and untested from city to city. But what is quickly becoming undeniable is the impact of heavy-handed legislation on vulnerable small businesses in any given community.

With the possibility of a recession still looming on the horizon, on top of the past year’s inflation challenges and enduring economic uncertainty, cities curbing STRs means rolling the dice heading into 2024. How many cities can truly afford to shortstop their otherwise guaranteed tax, license and registration revenue, and cripple the profitability of their community’s small businesses – including STR hosts and managers, and the plethora of retail and services providers directly serving the short-term lodging economy – in the process? Whether they realize it or not, the answer is “not many.” It doesn’t have to be this way, however – there are notably more promising options that could bring about a much more beneficial outcome for all parties involved.

In the midst of so many municipalities across the country taking direct action to curb, limit, curtail, over-regulate or outright ban STRs, there are also cities proactively implementing compliance and regulatory measures to allow STRs to thrive alongside other lodging types and the small business ecosystem connected to them. This provides a chance to reap all of the associated municipal revenue – if they take a measured, carefully considered approach to lodging. A great place to start is taxing and enforcing compliance on all lodging types, from hotels to STRs, in equal fashion. This system would ideally be centralized and remove as much of the burden from compliance as possible, while also working with local hosts to establish a streamlined process to address the concerns of residents. Model ordinances that manage to gracefully walk this line are currently rare, but have been seen in places such as Alexandria, Tulsa and Raleigh. Furthermore, there are reported instances of jurisdictions stepping up their approach to compliance by requiring back filing and payment of tax liability for periods of any reviews discovered for STRs that predate their registration’s start date. This shows that jurisdictions are already starting to lean into compliance for STRs as a way of making up some of the tax revenue they’ve lost in over-regulating.

Clearly, threading this needle isn’t easy, and that’s why we’ve seen the situation in New York unfold as it has – and just as NYC borrowed from established tactics undertaken by other cities, the spotlight that the Big Apple brings along with its actions will doubtless get the attention of yet other cities readying measures resulting from yielding to pressure from various civic and interest groups. With an eye to an uncertain 2024 economy, municipalities can choose to take an approach to STRs that’s grounded in compliance from top to bottom, while maintaining a commitment to allowing vacationers a full spectrum of lodging choices, rather than taking the easier road of passing the cost of their decisions on to local residents and businesses.

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