Charging separate tax rates based on length of stay?
I own a vacation rental property management company in Arizona and nearly all municipalities throughout the state require rental taxes be collected, reported and paid to the AZ Dept. of Revenue monthly. The problem is, the amount we have to collect and pay on our owners' behalf varies depending on the length of stay (whether it's short term, > 30 days, or long term, 30 < days), we have a significant amount of both.
I can manually break down the difference in city, transient, hotel/motel, etc. but I have searched everywhere within MyVR and the MyVR community to find a viable option for this problem without success.
This is an absolute logistical nightmare when it comes to a tax audit so it's imperative that we are somehow able to alter these rates. MyVR tech support has stated that this isn't something they have the ability to do but referred me to the community for suggestions. Has anyone else run into this issue and/or have any suggestions on how we could handle these differences?
@rance-fladeland how significant is the tax difference? Just thinking out loud here, but could you charge the higher rate, and then add a promo code for shorter stays that discounted the additional amount?
Thanks Jenny, that's an idea I hadn't thought of. I'll have to look at logistically how that might work. The difference can be significant. Each municipality has its own tax (hotel/motel, transient lodging, etc.) and some cities have no tax on rentals (which is easy of course).
Here's one example taken directly from the Dept. of Revenue for a property we manage in Scottsdale.
Taxes required on bookings less than 30 days.
SC - SCOTTSDALE: 044 - HOTELS: 1.75 %
SC - SCOTTSDALE: 144 - HOTEL/MOTEL (ADDITIONAL TAX): 5 %
MAR - MARICOPA (MAR): 025 - TRANSIENT LODGING: 7.27 %
Taxes required on booking 30 days or greater.
SC - SCOTTSDALE: 045 - RESIDENTIAL RENTAL, LEASING AND LICENSING FOR USE: 1.75 %
All of these rates vary depending on the property address.
@rance-fladeland - it sounds similar to my debacle with our city business tax on some items, county on other items, and then state tax on everything. But most systems only allow for one tax rate on all taxable items. It makes for an accounting headache.
I'm not an accountant, but I have had an accountant review what I'm doing, so I'll share it here.
To solve that, I charge an amount that is equal to the maximum tax rate for everything, but I call it "Taxes AND FEES" because that's what it is. It consists of all of the required taxes, and whatever is not a tax becomes a transaction fee. Another option I used previously is to charge a rate "including taxes" and then back into the base number within your accounting system. the down side to that though, is that if you use services that charge a % of revenue, you're inflating it.
This might be clearer: I would recommend charging a 14.25% (example) Taxes and Fees. When bookings are <=30 nights, you'll have a .23% transaction fee (and if that's a taxable fee in your area, you'll need to adjust it). When bookings are > 30 nights, you'll have a much larger fee, so you can afford to give a little discount?
NOTE: It's VERY important that you clearly label this line item as Taxes AND FEES. If you label it as only taxes, then that means you are collecting all of it on behalf of a taxing authority, and must pay it as such.
Does that help?
@Jenny-Oest - It's certainly not ideal but it makes sense. I'm meeting with our accountant next week so I'll see what he recommends. Hopefully, we'll be able to establish a process to adequately, and accurately, assess this. I think we've just been a little spoiled by the previous platform we used which was able to sense the length of stay and access the correct amount of taxes we inputted. Thanks for your thoughts and suggestions.