Proposed tax hike on Del. beach rentals causes concern

Beach municipalities, real estate agents and homeowners are curious and a little worried about a new bill under discussion in the Delaware House of Representatives.

Delaware House Bill 130, introduced to the House Revenue and Finance Committee on April 13, is designed to amend Delaware Code Title 30 by equalizing the state's 8 percent rental tax to cover all forms of vacation rental properties. In its current form, Title 30 recognizes hotels, motels and "tourist homes," which is described as sleeping accommodations without kitchen facilities.

If approved, taxes could hike up to 11 percent in areas like Rehoboth Beach and Dewey Beach, who already have 3 percent rental taxes. But those details are still being defined as the bill takes shape.

The bill's sponsors, Sen. Gary Simpson (R-Milford) and Reps. Deborah Hudson (R-Fairthorne), Helene Keeley (D-Wilmington South) and John Kowalko (D-Newark South) are seeking to add a fourth definition, "short-term rentals," defined in the bill as a room, dwelling or campground site that is not the owner's permanent residence that is rented to overnight guests for a period of 120 days or less in any calendar year.

“I am never for a tax increase,” Hudson said. “But this is one that is easier to support. It’s a tax we already have. We are just making sure it covers everyone.”

Hudson said the tax would mostly affect people from out of state, another reason it is politically appealing. The state Department of Finance estimates the state could collect between $7.7 million and $10.8 million a year.

The legislation comes as Delaware state government grapples with a budget shortfall of almost $400 million. Lawmakers are still debating how to solve that problem but they are almost certain to increase some taxes.

Gov. John Carney’s proposed budget would increase income taxes for most Delawareans, hike the corporate franchise tax for major businesses and raise taxes on cigarettes and other tobacco.

If Delaware approves the bill, Hudson said that would allow legislators to reduce how much they have to raise through other tax increases.

John Breslin thinks the new tax would keep people from renting at the beach. An Arlington, Virginia, resident who owns a rental property in Rehoboth Beach, Beslin said he's still feeling the effects of other rental restrictions since he purchased his property on Bayard Avenue about three blocks from Rehoboth Avenue.

Rehoboth Beach Code Chapter 210, passed by the city commissioners in April 2016, stipulates that homeowners have no more than two occupants per bedroom plus two additional occupants, excluding children 6 years and younger.

"I've been in a panic since I saw it," he said of Chapter 210. "Clearly, this completely changes the game for us."

The bill has caused enough concern for the Bethany Beach Town Council to discuss on April 21 whether they should have an official reaction to the bill's proposal.

Other municipalities are also wary.

Among their concerns are how the tax will stack with existing municipal room taxes and the effect that might have on rentals, problems with enforcement of current municipal taxes, and the overall effect on beach tourism.

"We're aware of the bill, but as to its impact we're waiting to hear just like everybody else," said Krys Johnson, communications specialist for the City of Rehoboth Beach. "There are a few things up in the air. There hasn't been much reaction from Realtors yet. One of our concerns — is the 120 days going to change, because this is still in discussion right now. There are key elements of the bill that just haven't been defined yet."

Johnson said commissioners were wondering if there would be an allowance for people already paying a municipal rental tax, such as the 3 percent tax imposed by Rehoboth Beach and Dewey Beach. A 5 percent tax is in effect in Henlopen Acres.

As long as the revenue distribution stays the same, the Rehoboth Beach-Dewey Beach Chamber of Commerce will not oppose the bill.

The distribution of the revenue is defined by Title 30 as 5 percent to the State General Fund, 1 percent to the DNREC Beach Preservation Program, 1 percent to be distributed to county convention and visitors bureaus proportional to the amount of lodging tax revenue coming from those counties and 1 percent to the state Delaware Tourism Office. HB 130 doesn't alter that.

"We would not carry the banner for that equalization," said Carol Everhart, president and CEO of the Rehoboth Beach-Dewey Beach Chamber of Commerce. "But if the formula of distribution remains the same – which it is in the draft that I saw – we would not oppose it."

Everhart also questioned the 120-day limitation and whether current municipal rental tax payees would be given an allowance.

Jo-Ann Bacher, a rental manager and associate broker for Jack Lingo Realtor, said the limitation is based in real estate law.

"If there's a rental that's more than 120 days, it's considered a long-term rental and it's covered by the landlord-tenant code," Bacher said. "If it's less than 120 days, it's a vacation rental and you don't have to follow that guideline. Basically year-round rentals would be excluded from (the bill)."

She said the proposed bill would adversely affect the rental business in the resorts.

"All of our business would be affected by it," Bacher said. "So many owners rent on their own now that there is no way that I am aware of that people are monitoring that. So they are probably not paying any tax. People that rent through Realtors, that have to follow the letter of the law, have to pay the maximum."

But Everhart said proposal of such a bill is nothing new.

"In the past, there was opposition from Realtors about the equalizing of this tax," she said. "Now there are short-term rentals all over the place, whether it's Airbnb, HomeAway, they're all over the place. The Realtors may now feel different than they did before."

Other resort officials are not surprised.

"The state has been rumbling about this for a number of years," said Dale Cooke, mayor of Dewey Beach. "Now they're getting serious about it."

Cooke emphasized that the Dewey Beach commissioners have not met to discuss this, and that he was unaware of any concerns they might have. Nevertheless, he had his own opinions.

"I think it's a bad idea for the local towns," he said. "If they do it outside of the towns, it won't affect (Dewey Beach). If they do it including local municipalities, which is what they're talking about now, it then adds onto it. We've got a 3 percent tax, the state adds an 8 percent tax, that's 11 percent added on (to the rental fee).

"People will start looking elsewhere for a vacation destination that doesn't have taxes."

Breslin, the Rehoboth homeowner, concurs.

He bought a million-dollar home that had a solid rental history, a good reputation and a good financial record. His property has two large living rooms with sleep sofas and four bedrooms that can comfortably hold up to four occupants each.

Eighty percent of his customers are groups of two or three families – relatives gathering for a family reunion, neighbors who routinely vacation together, or college buddies and their families – averaging about 16 individuals, he said.

"It's not sardines. We're not putting Army cots on the floor," he said. "It's always been the family beach place. (It's about) the memories that everybody has, when they're a kid with all the other kids from the other two families, all hanging out at the beach house for a week or two."

He bought the house expecting the rent to pay the mortgage and the bills.

That can't happen now.

"(HB 130) in conjunction with the Rehoboth rule is going to make it very expensive to rent," he said. " 'Hey, you can no longer share with your buddy, you've got to get your own place and by the way there's an 8 percent tax.' Yeah, I think they're going to stay home."

The News Journal's Matthew Albright contributed to this article.

dferrar@delmarvanow.com