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Upcoming Changes Concerning Occupancy Taxes on Short-Term Rentals

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Public Chapter 787 was signed into law by Governor Bill Lee on July 15, 2020. This new law requires short-term rental marketplaces to collect and remit local occupancy taxes for short-term rentals beginning January 1, 2021. The law also enacts provisions governing certain residential property used as a short-term rental and revises and enacts other related provisions.  These changes will affect county officials involved in the assessment and collection of the taxes.

The new law defines a short-term rental marketplace (“marketplace(s)”) as any person or entity that provides a platform for compensation through which a third party offers to rent a short-term rental unit to an occupant.  Airbnb, HomeAway, and VRBO are examples of short-term rental marketplaces.  Taxes collected by the marketplace must be remitted to the Tennessee Department of Revenue (“department”) for distribution to local governing bodies levying the tax. Taxes collected by the marketplace must be collected at the same rate adopted by the city, county, or metropolitan government.  This law does not apply to local governing bodies that do not have a hotel/motel tax.

Marketplaces must collect and remit taxes even if the transaction is occasional or isolated and must report and remit taxes to the department each month.  Taxes paid under this law are subject to audit only by the department at the commissioner’s sole discretion.  If the marketplace is required to disclose personal information related to the short-term rental provider or occupant, such information is confidential pursuant to Tenn. Code Ann. § 67-1-1702.  Marketplaces may not advertise or state that any occupancy tax will be absorbed by the short-term rental provider, not be added to the occupancy, or be refunded. 

The department will distribute occupancy taxes collected to the local jurisdiction in which the short-term rental is located and may deduct an administrative fee of 1.125% of the collected tax to cover expenses for collecting and distributing the tax.  Additionally, the department may promulgate rules under the Uniform Administrative Procedures Act to aid in the enforcement and collection of the taxes.

This law will not apply in a local jurisdiction in which the governing body is a party to a valid contract with a marketplace that includes terms related to the collection and remittance of the tax set out in Tenn. Code Ann. § 67-4-3302(a). 

Local governing bodies must certify the occupancy tax rate imposed on an annual basis and report any tax rate change to the department.  The department will create and provide a form to local governments for reporting purposes. 

Public Chapter 787 makes other changes related to short-term rentals. Section 5, for example, amends the Short-Term Rental Unit Act to define the term “transferred” relative to short-term rentals that are “grandfathered” under local ordinances. The new law also enacts provisions governing the classification of residential property used as a short-term rental.  When a parcel of real property is the principal residence of its owner, contains not more than one rental unit, and is used as a short-term rental unit, the property assessor should presume that the real property classification is residential.  Additionally, when a parcel is classified residential, the property owner may request a residential classification for one additional parcel in the state, and the property assessor should presume residential classification for the parcel when certain other conditions are met. 

Section 5 of the act became effective upon becoming a law and applies to any local government action, including assessing a property for taxation purposes, on or after August 1, 2020.  All other sections of the act take effect on January 1, 2021.