Short-term rentals targeted by state, Wilmington tax proposals

New proposals could force short-term renters using popular platforms like Airbnb or VRBO to pay lodging taxes on their stays and some owner-operators to sell units in Wilmington.

More than a decade after Airbnb made renting accommodations much easier by creating a searchable database of available units, Delaware remains one of just three states that don’t tax short-term rentals like it does for hotel rooms, joining Alaska and California – where Airbnb is headquartered – as the holdouts.

That may soon change though.

House Bill 168, which is awaiting a vote on the House floor after passing a committee vote last year, would apply the state’s 8% lodging tax to short-term rentals (STRs), such as those found on Airbnb, VRBO, Vacasa or through local agencies. It would also allow New Castle and Sussex counties to extend their existing 3% lodging taxes to those rentals as well.

Another bill under consideration by the Wilmington City Council would likewise apply its 3% lodging tax within city limits to short-term rentals. It would go a step farther by enacting a restrictive set of regulations on owner-operators of such units, including that they must live on the premises or adjacent to it – effectively eliminating the ability to operate multiple units around the city.

Hotels, tourism in support

For at least five years, the hotel industry and tourism offices around the state have called for short-term rentals to be taxed, citing it both as an issue of fairness and proper funding of marketing and natural resource efforts.

“The Delaware Hotel & Lodging Association f has been the sole producer of beach replenishment and infrastructure funding, and tourism marketing for the past several decades. It’s time for change,” said Ben Gray, a past chair of the DHLA in last year’s committee hearing.

Proceeds of the state’s lodging tax, which totaled more than $28 million in 2022, are divided among four funds, with 62.5% going to the state’s general fund, 12.5% going toward the beach preservation program, 12.5% going to the local direct marketing organization (DMO) for each county, and 12.5% to the statewide Delaware Tourism Office.

“The dramatic increase in short-term rentals in Sussex County over the past decade continues to increase the lodging tax and inequity between hotels, motels and short-term rentals. Under current lodging business definitions, Delaware is doing itself a disservice by not including STRs in its tax reinvestment toward promoting and supporting its $4 billion tourism economy,” added Scott Thomas, the tourism director for Sussex County.

Among the supporters of the bill are the Delaware State Chamber of Commerce, local chambers from New Castle County and Rehoboth Beach-Dewey Beach, and all DMOs.

Realtors express concern

The lone voice of opposition to HB 168 has been the Delaware Association of Realtors, who have expressed concern that the burden of red tape could cause some homeowners to rent homes illegally or some brokerages to forgo listing the properties.

Wes Stefanick, the executive director of the DAR, noted that while Airbnb may be the biggest target of the bill, many Delaware real estate brokerages also list short-term rental opportunities. Forcing them to become a tax collector on top of managing listings may convince some that it’s not worth it, he said.

“We want to make sure people understand that it’s just more than a website that’s collecting tax revenue. It’s definitely real Delawarean small businesses that are going to be impacted by this,” he added.

Stefanick also noted that equity cuts both ways, as the state’s hotels are taxed at 11% between state and local lodging taxes. However, many beach communities have already enacted gross receipt taxes on short-term rentals, ranging from 5% in Lewes to 8% in South Bethany Beach.

As written, HB 168 has no tax cap and it appears those municipal rates could be applied atop the state and county’s lodging taxes, pushing the bills for tourists even higher.

The DAR highlighted that under the current definition of the bill, short-term rentals would include stays up to 150 days, which would impact far more than just those looking for a beach getaway but also those looking for interim housing for multiple months, traveling professionals, and more.

“We would argue that short-term rentals are not hotels. So right off the bat, they are two just simply different products on the marketplace,” Stefanick said. “[HB 168] will create this possibility that people are now going to do things that are not going to get a tax collected – a rental black market is the most appropriate word. In Delaware, we have real estate licensees doing it. So, why are we driving people away from professionals?”

Wilmington faces scrutiny

While much of the statewide debate has focused on Delaware’s beach communities where the vast majority of short-term rentals are located, it’s biggest city is also looking at taxing and regulating the units.

While short-term rentals would be subject to the city’s 3% lodging tax under Ordinance 24-018, it’s the regulatory matters that are raising most eyebrows. Most notably, the bill limits the number of rentals that any owner-operator can have to just one.

That has alarmed owner-operators like Travis Fogelman, who launched an Airbnb business with his wife and investment partners as a side hustle that has now grown to include 32 units around the city. The majority of his clients are medical students completing rotations, families moving to Delaware and seeking short-term accommodations while house hunting, lawyers or bankers coming to the city for work, or families seeking treatment at a local hospital.

“We’re not replacing long-term rentals, we are complimenting them,” he said. “This bill would effectively kill Airbnb in the city.”

For some neighbors to Airbnb units in the city, who have criticized at the constant flow of visitors, the noisy disturbance and the increase in trash, that may be a welcome turn. David and Bridget Storm told city council earlier this month that the short-term rental next door to them in Trolley Square has been a headache.

“There are currently 160 non-owner-occupied, short-term rentals on any given day in the city of Wilmington to the best of my knowledge … that’s 160 properties that are no longer homes, where there are no wage earners living and paying city wage taxes. And these homes do not strengthen communities. They weaken them,” David Storm said. “This ordinance is more than about the housing market. It is about restoring peace of mind and security of residents within their own homes.”

For owners like Fogelman, who has invested hundreds of thousands of dollars into renovating more than a dozen properties, the ordinance seems to be punishing the majority due to a minority of owners though.

“I’m a Wilmington native; I went to Brandywine High. I know this city backwards and forwards. I have guidebooks for the people who come here that never been to Wilmington. I can tell them every little restaurant to go to, every event that’s going on … I act as an ambassador to these people coming to our city, but then the government says, ‘We want to put you out of business, you’re nothing but bad news for the city,’” he said.