Are short-term rental hosts ready for a technologically powered compliance crackdown in 2023?

Technological development has been rippling through the short-term rental (STR) space in recent years, with hosts embracing new developments to help monitor noise, check occupancy and otherwise streamline operations—but they’re not the only ones looking at new tech. A tidal wave of change is coming soon for non-compliant hosts, and they’d do well to prepare before it hits.

Based on recent trends, 2023 is likely to be the year that government adoption of technology to automate auditing short-term rental compliance in their jurisdictions hits its stride. Spurred on by regional controversies over short-term rentals, cities such as Forth Worth and Galveston, Texas; and more than 20 others have already started looking into contracting data-mining solutions powered by artificial intelligence to identify and monitor non-compliant properties. Hosts that have been operating underground for years, comfortable and complacent from an absence of frequent inspections, may soon find their operations crashing down under an artificial intelligence (AI)-driven compliance sweep.

Automated audits
Here’s how it works: the AI-solutions begin by using data-mining techniques to scrape information from AirBnB, Vrbo and other publicly available booking services for short-term rentals to create a unified list of active properties in a given jurisdiction. Then, this list is compared against information held by the tax authorities, the jurisdiction’s website and others to make sure everything is in order. Are the addresses properly labeled as STRs? Do taxes show as being rightfully remitted? Are all the permits and licenses in order? If not, the property can be automatically flagged for further investigation.

These data-mining methods stand to be a complete game changer for compliance enforcement. Assessments that would have taken a full team of inspectors weeks of grueling tedium can now be done passively with little to no involvement from any humans—allowing even smaller municipalities to skip right to the economically stimulating step of enforcement.

Exponential evolution
The general expectation is that this approach is going to scale rapidly in 2023—quite simply because the economic impact of such streamlined compliance crackdowns will likely prove irresistible to most municipalities. A recent study of Airbnb and Vrbo listings in Los Angeles by McGill University urban planning professor David Wachsmuth found noncompliance to be at a worrying 45 percent in the city. This amounts to roughly $300 million in fines that the city could have collected throughout 2022 due to violations, but it brought in less than $40,000 in fines over a similar period.

Considering the current state of the economy hampering many trusted sources of income, jurisdictions are bound to be open to considering any solution that provides such a considerable revenue stream. Those that are successful with it—whether from a financial or compliance standpoint—will likely create a ripple effect out to others facing similar problems.

Take Indio, Calif., for example, home to the massive annual Coachella Valley Music and Arts Festival. Coachella draws so many people to Indio that it not only fills up the city’s own STRs, but also spills out to the surrounding areas such as Palm Springs and Indian Wells. If Indio were to successfully adopt a compliance solution, these other cities would likely follow suit—even more so if Indio were to bring in considerable revenue in addition to getting their STRs under control.

These new technologies and methodologies may also compound into an evolution in short-term rental regulation, with more complete oversight and increased revenue allowing for a paradigm shift in how local regulations are meted out.

Consider San Diego, where a short-term rental cap was recently put in place with middling success. Based on the lack of sign-ups for the city’s proposed lottery system, it may well be the case that the introduction of a cap has only resulted in further willing noncompliance—after all, the city has created a situation where, past a certain number of units, compliance for any additional would-be hosts becomes impossible. Rather than introduce a new compliance pitfall, the city may be better served by instead using these new tools to secure more money and keep property owners in compliance at the same time. Having the additional revenue could also open up further options for handling local STR controversies with more elegant solutions than simple bans or caps, as well.

The tipping point
With all of these benefits on the table for local governments, there’s no longer any time left for STR hosts to get their compliance in a row. A tipping point is quickly approaching in terms of how closely the government is able to look at and enforce STR compliance.

Of course, owners who have flown under the radar for years may not have the best understanding of what their local rules and regulations are, nor does operating underground provide much of a chance to voice their point of view on what’s happening in their communities. For these property owners who have been operating in the shadows, the sudden blinding light of a compliance audit may be difficult—or outright impossible—to deal with.

Depending on how long an owner has been operating in noncompliance, local governments could, as one example, bring the hammer down on owed transient occupancy tax. If the owners haven’t been properly collecting, this turns into an out-of-pocket expense, which could be catastrophic if the government ends up demanding missing taxes for previous years as well.

Hosts need to be cognizant of these developments and plan accordingly. Governments in 2023 will be holding the magnifying glass of compliance closer than many ever thought possible. If property owners expect to still be able to get away with noncompliance by later this year, they very likely have another thing coming.

Pam Knudsen is an executive at Avalara, leading multi-tax teams including lodging, beverage alcohol, communications and sales & use tax. She is a leading voice in vacation rental tax compliance and regulation, in addition to bringing in-depth experience across software/SaaS technology and ERP systems. Knudsen joined Avalara in 2012.