 Welcome to Vacation Runtles Are the Future. I'm your host, Erica Muller. And this week, we're gonna be talking about everyone's favorite topic, which is regulatory and compliance with short-term rentals. I know we talk about this on every episode and we kind of ask each guest what they think, but today's guest, this is her job. This is what she does all day every day. She's head of compliance and at Avalara, excuse me, and they do tax and compliance for short-term rentals nationwide. So I'm very excited to have her on today. Welcome to the show, Pamela. Thank you for having me, Erica. Yeah, it's my pleasure. So, you know, there's a lot of things happening right now in Hawaii with short-term rental regulations and compliance issues. And before we dig into that, because I mean everybody kind of knows about the ban that happened in October and the changes to things, but how did we get here? Like that's my big question today is like everything was going great at one point. I'm not gonna say it was, you know, one point in the, you know, not too long ago, but at some point everything was going great. Everyone was minding their business and owners were allowed to use their home however they saw fit. What is going on and what happened? Because we literally went from people being able to use their property as a short-term rental to now it's almost like if you're not a big hotel chain, you're pretty much out. So how did we get to this place? You know, that's a hard question to really answer. I think it really varies by what's happened in every jurisdiction. You know, one of the things is during the pandemic, short-term rentals really saw an increase in kind of their usage and that's continued as even outside of the pandemic, people started to realize the benefits of living or of working with a short-term rental in terms of being able to work from anywhere, being able to control your environment. So there's been a real uptick and the use and the utilization of short-term rentals. If you look at some of the bigger platforms like Airbnb and Verbo, their demand far outweighs the supply. And so I think, you know, there's been a lot more of that happening. And then again, you know, people were home so they saw things a little bit more. You know, they realized more things potentially or whatever. And then, you know, and then there's just been a lot of news about short-term rentals. And I think it's caused some people to kind of think about it and they view it from the standpoint of their neighborhood and not necessarily the broader picture of the impact of short-term rentals, you know, on a positive side as well. Yeah, absolutely. And I feel like a lot of it might be monkey see, monkey do. Okay, so like one market starts getting really strict with regulatory stuff like Nashville, for example. And then everyone is paying attention to what's going on there. And then everybody's sitting back and questioning, well, maybe we need to look at things here in our market. And then that's kind of like a snowball effect. And I've seen just like, you know, every other month it's something new somewhere else. I know in Arizona right now they're working on things, changing things around. But staying on the topic of Hawaii, like can you tell me a little bit about your experience working with compliance and regulations in that market? So there's, you know, there's a lot of short-term rentals in Hawaii and compliance has been one of the big factors there. And really when, like again, some of the platforms looked at compliance as far as permitting and everything else, there was a lot of short-term rentals in Hawaii that hadn't been permitted appropriately. And so that's been a big push for compliance is to get those short-term rentals permitted so that they are, you know, good citizens. They're doing what they're supposed to be doing. They're collecting the taxes that are supposed to be collecting, et cetera. And so it's really critical that all the hosts are very compliant with not only the permitting regulations but then the reporting regulations that come after that. Because that's what makes them kind of part of the economic community and the community as a whole instead of kind of being under, you know, underground in that scenario. Gotcha. So you mentioned the tax part of it and tax compliance and I really feel like a lot of this comes down to making sure they're tracking the money that's coming in from this. So they're getting their piece of the taxes and I understand that. And that's definitely fair and needed. Okay, so we create compliance around that to make sure everything is being regulated and everyone's paying their taxes but completely like outright banning things I think is a bit extreme. But on the tax side, now tell me about how taxes are working right now with short-term rentals on, you know, all the islands in Hawaii. Is it different from island to island? You know, is it more or less like the same all across the board? What can investors that are looking at this market expect when it comes to taxes in this market versus other markets they may be looking in? Yeah, and it varies widely. So yes, it varies by, you know, can vary by state, by city, by county. It really depends on what in each individual taxing authority has decided to do. So you can see that, you know, if you're in a specific city and county and state, you might have a different tax rate, you know, so you might have a different tax rate on Maui than you do on, you know, Oahu or on Kauai or any of those types of things. You really need to make sure you know what the local taxing jurisdictions have asked to do as far as the tax rates are concerned because it can vary, again, jurisdiction by jurisdiction. What is the most like wild expensive tax you've seen in any state or county or city? Like what's the most outrageous one you've seen so far? Let's see, that's a tough one. And I can't say that any of them are necessarily outrageous. I know there's, you know, there's one right now that's got a 15% rate, which is a pretty high rate. There's another jurisdiction within that they are charging a flat fee of $1,000 a year from a permitting standpoint. But on the flip side, they've earmarked that $1,000 specifically to address a problem that they thought short-term rentals were contributing to that being affordable housing. So they've earmarked that $1,000 to go to solve the affordable housing crisis in their community. So it's a balanced approach actually to say, hey, we're gonna charge this flat rate, but we're gonna earmark it to try and solve the problem that we think we have. I actually, I love that. That's the first I've heard of anyone actually doing something about the problem that they claim short-term rentals are causing is, you know, the more short-term rentals you have, the less affordable housing, the less people will rent out for long-term stuff. Okay, fair point. But like, what are you doing about it, right? Instead of just complaining about it, it sounds like they're actually doing something. So can we dig into that a little bit? Cause I really like that. And I kind of feel like if, you know, if there's a local ordinance or, you know, municipalities are serious about solving this problem that taking an action like that might be a better option than just outright banning short-term rentals because now you're generating cashflow and revenue into solving something that, you know, it would have been a problem regardless, right? So how are they, when they're earmarking that money, like what are they doing with it? How are they solving the problem with it? Then they're starting to look at where they can either build or invest in kind of some, some more affordable housing for the workers that need to come in. It's a resort community, just like a lot of short-term rentals. And so they need to figure out how they can house the people who the grocery clerks that are working there or the retail clerks. And so they're taking that money and really kind of developing some more affordable housing or setting aside some apartment complexes or whatever to say, hey, this is affordable housing. And it's actually working quite well for them cause they're still getting all the tourist dollars that come in. So, you know, these people who work at the grocery stores, they're depending upon the tourists coming in and buying groceries or that they work at the local salon or any of those, they're depending on the tourist dollars coming in. And so now they've balanced both. They still have the tourist dollars coming in from the short-term rentals, but they've now actually developed a plan to provide affordable housing to the workers that have to come in to do this. That's amazing. And do you think this is a model that people are watching right now that might be implemented in other markets as well? Or is this something that you feel like is maybe just unique to this market? And it's not something that people are gonna jump on. Well, I think all the communities watch all the communities to see what's happening and to see what's gonna work and what's not gonna work. So, you know, I think there are watching it, you know, whether or not they'll jump on it, I think is really gonna depend on how they look at their own community. But I do think, you know, they are looking at it, they're watching it and seeing what really works. And, you know, and that's really the key to this whole thing is communities really need to take a balanced approach and say, what is the problem we're trying to solve and does the solution that we're thinking about actually solve that problem? You know, affordable housing is a great one from the standpoint of, you know, if you take some of these short-term rentals off the short-term rental market, are they really eligible for a long-term rental? Are they within the financial capability of somebody who's working at the local grocery store or the local salon or the local retail outlet? A lot of them are not because they're bigger, more expensive houses sometimes to accommodate the families that are coming in. So they really aren't, even as a long-term rental, they're not affordable for those same people. So, you know, it's really making sure that they're taking a balanced approach and looking at what are the problems that we need to solve and what's the best way to go about solving them? Yeah, I absolutely agree. I mean, there's a lot of people that, you know, their mortgage is too high anyway to even do a long-term rental. So even the rent they could bring in, they might break even and that's not why they bought the house. They bought the house to generate cash flow. So what'll happen is you're just gonna get a flood of houses being put on the market and dumped and sold. And that's not good for the real estate market either. And coming back to the thing you said too about how the local community depends on those tourists coming into the market, that's a really important point that I think people forget when they're trying to just shut down short-term rentals is they bring a lot of money back into the community. And that money is what keeps people employed. It keeps jobs in the tourism industry and the surrounding industry. So like I just don't understand who's sitting back thinking that this is a great idea to just ban short-term rentals and shut it down. To me that just sounds like an outrageous concept because if you have a good model in your market and something's working and there's a small problem, address the problem but don't throw the baby out with the bathwater, right? And it sounds like that's exactly what you're talking about right now. So what are some other like unique ideas or concepts that you've heard of that people are using to approach this whole short-term rental compliance standpoint to where they're not just banning them but there's other ideas on the table? Like what are some of those things looking like? Yeah, so some of the other things that I've seen is again really looking at, okay so neighbors are concerned about party houses or those types of things. So they've put in some really clear regulations around noise levels, around trash, around parking around the number of occupants and they're requiring that that be monitored. And the thing is with technology these days you can monitor that, you know you can use Google Home for example to keep an eye on what's happening outside your house so that the property owner can look and say oh there's too many cars parked out there I need to get a hold of whoever's renting this for this week and tell them they've got to get rid of some of the cars or you know, hey the trash is piling up I need to get somebody to go deal with this or Google if you have it in the house we'll even monitor the noise level and we'll alert you to say hey the noise level is getting out of hand or whatever. So there's a lot of regulations that are happening around that to imply for the good neighbor standpoint so that it's like these short-term renters do remain good neighbors with the local community and they're not disruptive, et cetera. So I've seen some of those regulations coming into play too that say, okay you're permitting it but there's some very clear regulations as to what you can and cannot do. You have a three bedroom house the maximum number of people you can have in that house is six so you can't have somebody who's coming in and throwing people on the couches and the floors and everything else and so now you have 10 people in a small house. So it's a lot of things like that that we're seeing is some of those regulations. So who's tracking all that, right? Like, because there's a lot of cheaters out there, right? There's a lot of people that are gonna try to press the boundary and like, you know get around the rules and that's just, that's in every industry everything that people do. I'm not a proponent of that. I'm one of those buy the books, just follow the rules and do what you're supposed to do and generate your income and mind your business, right? And just follow the rules but there's a lot of people who are like, oh, you know, I can just, you know sneak somebody in the back door or whatever like how are they keeping track if people are really following that or not? And is it part of the problem that like when they do roll out these kind of compliance rules that people try not to follow them? Is that an issue? Well, you know, I think most people are good players and they are trying to follow just like you. They're good players. They wanna follow the regulations, et cetera. You know, from an enforcement standpoint it's really dependent upon the neighborhood to say, hey, if you see something that's not happening, you know, report it but that's why it's also critical for the property owners of the short-term rentals to really connect with their neighbors to give their neighbors potentially an avenue to contact them directly if they think something's going wrong rather than always going to the local agencies to say, hey, something's happening here. So it's, you know, it's a combination of things getting to know your neighbors even if you're not a full-time resident there giving them an avenue to reach out to you if they see a problem and then building that relationship to help maintain that good neighbor status. Nice, yeah, I agree with all that. So let's talk a little bit about the nuts and bolts of how taxes and work on this because a lot of people don't understand how it breaks down. And you know, in every market it's different but you generally have like your, some markets you have like a resort tax, a hospitality tax, you know, income tax there's a whole bunch of taxes that are like they all equal out your one fee but like they're split up into different buckets really. How do you kind of explain to people about the way short-term rental taxes work because it's different than people that don't own long-term rentals? It's a very different concept. Yes, and again, that also varies basically from jurisdiction to jurisdiction in some cases anything over 30 days is classified as a long-term rental. So there's not a tax implication in terms of a transactional tax. And in some cases that's a 90-day window that anything that's rented less than 90 days is still responsible for that nightly tax. So it's really critical that people know what the rules and regulations are within their specific jurisdiction. And that's where we come into play if you, we provide the information that says here's what the rates are, it's 15% for this, it's 3% for this, 2% for this types of things. We provide that information. And our system will help calculate what those taxes are based on the number of nights of the stay, et cetera. So that's a critical factor is to understand what that is and also know when that tax is due to the jurisdiction. Because if you file late or you don't file on time, not only is there penalties and interest to get assessed, but you can put your permit at risk. Yeah, absolutely. And I'm really glad that you guys are out there. I've followed your company for a long time. And you are one of the most helpful companies out there when it comes to people just like needing direction on this because it's like easy to buy the house, right? Well, it's not easy, but it's easier to find a good real estate agent to help you get the house, understand the numbers, find the property manager, but really there's nobody out there that I know of except for you guys really, that really will sit down and explain this all to you and break it down. And you guys have been doing this for 10 years or longer, right? Yes, we've been doing this for a long time. Yeah. Over 10 years, yeah. Yeah, so you remember kind of like, I don't know if you guys started before Airbnb was in the scene, but I got into short-term rentals in 2008 and it was like the wild west. And nobody knew anything about who to pay taxes to, what taxes were due, what are these even for? It was a total nightmare. And so I'm really glad you guys came and cleaned it up. What is the customer journey like for somebody that they acquired a short-term rental and they own it now, they just closed on it? Like what does that journey look like from how they find you and then how you guys help them? It's really quite simple. They can just find us if they go out to Avalara.com, they can just find us. And then they can sign up online. They will ask for some information in terms of property address, those types of things they sign up online. And then just every month, they all they have to do is report their revenue to us in terms of what their revenue was the last month. We'll calculate out what portion of that was tax and then we'll prepare the return. We'll tell them the liability that they're due and we can pull the funds from their account and submit that all to the jurisdiction. It's all happens timely. And they don't have to worry about it. That's amazing. Yeah, that's a really great service to people can leverage. So what is the wildest thing that you know? And I know I asked you before about a different question that was wild but I love this word wild because there's just so much stuff happening every day out there. But what's the wildest thing you're seeing right now anywhere in the US that with regulations, like in terms of coming out of nowhere, trying to ban things, like when I say wild, I'm talking about like Nashville level wild or Honolulu level wild where things just get like shut down. Right? Are we seeing that anywhere else right now? Or was Honolulu kind of the last one to do that? No, we're seeing it in other places and there's everything from the increased regulations regarding permit. So there's a community in California that now to get a short-term license permit, you have to actually have a home inspection. And then from the home inspection, if there's anything not up to code, you have to bring your house up to current code before you can do it as a short-term rental. Not anything you'd have to do if you were selling it or just living there but you have to do it for a short-term rental. That's pretty extreme because some of these houses could have been built 30 years ago and things are not going to be up to code. So that's one extreme. On the flip side, we've seen like San Diego just recently put a cap on the short-term rental permits that they're going to have and they decreased it by almost 60% from the number that they already have. Oh wow. So all of a sudden you're going to have somewhere around 12,000 short-term rental owners that are no longer going to be able to use a house as a short-term rental. Period. That's crazy. That is definitely wild. So what is their contingency plan to handle? Like what do they expect is going to happen to all these people? This is a lot of people, this is how they make their living, right? This is their full-time job is to rent out properties on Airbnb and they actually have a whole revenue stream from that. It is like their single revenue stream. And when you do something like that, you're putting all these people out of business. This is how they feed their family. So is there any kind of a contingency plan as like what happens to these people? Do they have a timeline that they can phase out or they just like, boom, you're done? No, it's pretty much a boom, you're done. They're going to have, there's a date when this is going into effect and basically who's going to get this permit is going to be a bit of a lottery system. They are going to basically, prefer people who have been in compliance and who don't have complaints against them, those types of things. But again, other than that, it's really going to be a lottery system. So you won't know if you get it or not. And then from that point on, somebody's going to have to drop off for somebody else to come on. Wow. So it's going to be an interesting piece. And to your point earlier, does this mean that there's houses going for sale on the market because they can't afford to keep this house anymore? That's still to be seen, but that is definitely a potential outcome of this is that people who love visiting San Diego, for example, and that's why they bought the short-term rental there is because they want to go down there for three months out of the year, whatever, now can't. So they're going to sell their house. It's going to put a lot of houses on the market. And then the money that they bring in when they do come stay for the three months is now not going to be there anymore because they're not going to come in anymore. So, yeah, it's a really interesting, it's a really interesting dynamic. And that's where I really encourage people to take a holistic view of what is happening because banning things or shortening them has some economic impacts that most people don't really think through a review to determine what's just going to happen because even if they are compliant and they're paying taxes, now your tax revenue that's going into your city is less, but the city still has to pay for the roads. They still have to pay for the police force and the fire department and all of those things. So now somebody's got to make up that shortfall in revenue that the city is going to have, which means it's going to turn around and fall on the long-term residents to make up that shortfall. So yes, they may have decreased the number of short-term rentals, but they may also end up increasing their own tax base. Wow, that blows my mind that somebody actually thought that was a good idea, that I'm not trying to be mean, well, maybe I am, but like that was a terrible decision. I mean, terrible on so many levels. And so this was in San Diego. Is that where Oceanside is in that whole area? I believe so, yes. Okay, yeah, cause that's a really hot short-term rental market right now that a lot of people are investing in. So there's a lottery system. People are going to find out, like, if they're lucky or not, like Willy Wonka and the chocolate factory basically, I got the golden ticket and if you don't have the golden ticket, you're gone. And that's going to have terrible economic impact, an impact, like you said. But like, what do we, let's talk about the real estate market, what that is going to do to the real estate market. When you have a flood of houses hitting the market all around the same time, I mean, that's how prices just tank. You know, in the current economic environment that we're in, that's like the last thing you want to be doing is like pushing the boundaries on that any more than we're currently at. And so like adding fuel to the fire, we're going to be watching San Diego now that you told me this to see kind of how this plays out because I hope, and I hope other people are watching if this does not play out well and I don't think it will. I hope they kind of see that and don't replicate that in their market. And this hopefully will encourage people to find a better solution than to just like shut things down. Because I just don't, like you said, I don't think that's the answer. So are there any other markets that are doing anything that crazy or is that kind of the most insane one of the week? I would say that's probably one of the crazier ones. I've seen, you know, the more extreme ones that I've seen lately. You know, there are some that are putting in like percentage caps that says within this particular set of blocks or this particular square mile, there can only be, you know, 10 or 20% of the houses can be short term rentals, those types of things. You know, that's a little tougher as well, but you know, that is one of the things that we're seeing that's happening across some of the jurisdictions that still allows people to kind of have short term rentals in the area is just, they're trying to not have them all concentrated in one spot and they change it because they may want some of them concentrated in one spot. So then they'll increase the percentage in that area, but decrease it in other areas to encourage kind of the short term rentals to be more consolidated. So it really varies based on the jurisdiction, how they want to approach this. Interesting. And one thing from an investment standpoint, because you know that's that earlier, that's what we do is the investment side of it is we have to look for markets where, you know, investors wanting to get into this market, we have to look for markets where if there is a situation where these permits are very coveted and you know, you happen to have one that it can be transferred to the new owner because a lot of times when they go to sell that permit is done, like the new owner cannot renew it and they won't give it to them. And this person has years of value put into this home. They built an actual business, right? And what happens is they can't sell it for what it's worth. And when you're selling a business that has a higher profit and a higher margin and you know, price tag, then when you're just selling a regular house because we look at these as commercial investments to sell, not just residential. And so, you know, part of the business model that a lot of people are looking at with short-term rentals is I'm going to come in, I'm going to get it profitable, I'm going to make this a great short-term rental and then I'm going to sell it at a cap rate valuation. And you can't do that unless there's a good cash flow number. And that all goes out the door completely if you can't sell the short-term rental permit with it. So they're also indirectly kind of, you know, screwing over the owners that currently have one and are putting all this time and energy into building it up into a really great income-producing business from ever being able to sell it to an investor, they're basically just stuck with whatever the residential market looks like at that point, right? So I feel like that's also something that people need to be aware of when they're investing in a certain market. We only have about a minute and a half left. So I just wanted to give you like a minute to talk about, you know, how people can, I know that the link is on here, you know, people can find you, go to the website. But like, who do you serve best? Who's your ideal client? And what do you want them to know about you in your company? We do everything from single short-term rental owners where they just own a property at, you know, a house in some place that they love to go. So I love to go skiing in Breckenridge. I own a short-term rental in Breckenridge so I can go there for a couple of months during the sea season, but the rest of the time it's a short-term rental to property managers who have thousands of houses. So, you know, the short-term rental market is really what we know. We do that sort of thing. We help out with the licensing and the permitting piece of it all the way through again to the tax collection compliance. So it's, and it is critical for people to stay in compliance because, you know, that really is what sets them up for success long-term. Absolutely, I couldn't agree more. Well, Pamela, I want to thank you so much for coming on the show today and you were in a wealth of knowledge. I learned a lot from you and I love learning. So thank you so much for that and for everybody listening. If you want to reach out to Pamela, just go to Avalara.com, A-V-A-L-A-R-A for those of you that are listening and not watching, A-V-A-L-A-R-A.com. And you guys can get set up with them over there, awesome team. I love what they do for you guys and then you'll make sure you stay in compliance the whole time. Thank you so much, Pamela, and I hope to have you back in the future on the show. Thank you so much for watching Think Tech Hawaii. If you like what we do, please like us and click the subscribe button on YouTube and the follow button on Vimeo. You can also follow us on Facebook, Instagram, and LinkedIn, and donate to us at thinktechhawaii.com. Mahalo.