Resort communities: Rental tax extension threatens tourism

Delaware beach towns are actively protesting a proposal that would extend taxes on house and room rentals because they fear it threatens tourism.

A bill currently in committee in the Delaware House of Representatives proposes extending the current state rental tax to all vacation rentals, not just hotels and homes designed to be rented.

The bill is intended to help offset the state's $400 million budget shortfall.

Delaware has an 8 percent tax on hotels, motels and tourist homes already, but House Bill 130, introduced April 13, would extend that 8 percent tax to short-term rentals as well. That would be in addition to the taxes on that communities already have on those short-term rentals, ranging from 3 to 8 percent.

"There is a large group that fully rents, part time, or a couple weeks or days out of the year," said Kathy McGuiness, a Rehoboth Beach City Commissioner. "With the 8 percent coming into play, you now have a 3 percent plus the 8 percent. I don’t think people will stop renting in Rehoboth, but it will cause pause."'

Short-term rentals, as defined by the proposed bill, are "any person renting a room or dwelling unit to overnight guests for a period of 120 days or less for any calendar year and the room or dwelling unit is not the owner's permanent residence."

When the bill was introduced in April, Rehoboth Beach, Dewey Beach, Bethany Beach, South Bethany and Fenwick Island took a wait-and-see attitude. Now many are writing formal letters of protest.

READ MORE: Proposed tax hike on Del. beach rentals causes concern

Part of the towns' previous uncertainty was that the language wasn't clear whether an allowance would be made for existing municipal accommodation taxes – which all of these towns already levy on short-term rentals. As stated, it looks like the state's 8 percent would be applied in addition to any existing municipal tax.

Since then, the only change in language was an amendment introduced by Rep. Ruth Briggs-King to remove "campsites" from the definition of short-term rental. The issue of allowances for municipal taxes is still up in the air.

This comes at a time where real estate agents say the market for beach rentals is evolving, according to The News Journal. 

"It's not that there are fewer rentals overall," said Brigit Taylor, president of the Sussex County Association of Realtors. "It's just that the rental market is shifting out of the towns and into the county as more of the prime properties are becoming year-round residences for retirees or second homes for people who simply have no interest in renting."

Two of the bill's sponsors, Sen. Gary Simpson (R-Milford) and Rep. Deborah Hudson (R-Fairthorne) have said they see this as an easy tax to accept, claiming that it is targeted to seasonal visitors and won't affect Delawareans.

It just extends existing code to include all rentals, they said.

But not everyone agrees with that assessment.

Bethany Beach Vice Mayor Lew Killmer said in a special meeting convened to discuss the bill on April 28 that the effects of the bill would be devastating to the tourism industry.

He said it would directly affect roughly 55,000 Delawareans employed by the industry, endanger nearly $3 million dollars in annual state revenues and force the average Delawarean to pay an additional $1,450 in taxes to make up for it.

In Rehoboth, the feelings were mutual. 

Rehoboth, which already has a 3 percent tax on rentals, decided to send a letter to the General Assembly to voice their displeasure. It was an overwhelming support to send the letter from the commissioners. 

"I cannot support it whatsoever if it is going to impact our ability to maintain or increase or change residential rental tax," said Rehoboth Beach Commissioner Stan Mills. "And the same thing with the hotel accommodations tax."

The city is concerned about what the tax would mean for their ability to collect taxes — in the case of Mills — as well as the impact the new law would potentially have on tourism.

Lisa Schlosser, who just announced her candidacy for city commissioner in the August election, already shares the city's concerns.

"Bottom line, it's a significant tax on short-term rentals that will impact our city's ability to draw tourism," she said. "I believe we need to be intimately engaged with state legislators and be clear and firm in our objections. But I also think that we need to be part of the solution to inform a better bill."

She said a better understanding of where the proceeds are spent might enable the commissioners to ensure that some of that funding comes back to support the city.

But Rehoboth isn't the only beach community concerned about this tax and its impact on the town.

Travel south on Route 1 to South Bethany and the town faces a similar situation.

South Bethany Mayor Pat Voveris said her town already has an 8 percent rental tax which goes towards maintaining town services.

"Charging additional may mean people choose not to rent here anymore and head to a cheaper resort community," she said. "It may also mean that owners stop being as honest and do not tell us they rent and not pay the tax that we depend upon so much."

She added the state's budget deficit should not be erased on the back of coastal towns, rather, it should be a statewide effort.

The South Bethany town council voted unanimously on April 27 to send letters of protest to Sen. Gerald Hocker and Rep. Ron Gray.

That was matched by Bethany Beach's town council a day later.

At that meeting, Mayor Jack Gordon said the bill takes aim at beach communities that already contribute substantially to state coffers. Property owners in Bethany Beach would be negatively affected, he said. Bethany Beach already has a 7 percent tax.

Dewey Beach Mayor Dale Cooke emphasizes that the issue of an allowance for existing taxes is unclear, but Dewey Beach is still concerned. They have a 3 percent tax.

The town is in a tight spot. Their municipal code forbids them from assessing a municipal accommodation tax against properties already subject to a state lodging tax. That means they cannot tax hotels, motels and tourist homes.

"That was done to get (our ordinance) passed initially," he said. "We had a referendum, we wanted the support of everybody and the businesses in town."

If HB 130 becomes law, they will not be able to tax short-term rentals either.

"It would destroy our budget," he said.

Cooke has been in regular contact with Rep. Pete Schwartzkopf and Sen. Ernie Lopez. He believes that they could add language to the bill to create allowances in which the state tax is reduced by the amount of the municipal tax, but it might require finding a way to change the ordinance without another referendum.

"I believe we have the support of our local representatives after talking with them, and I don't believe the lodging tax will make it through without taking into account the problems it would cause for municipalities," Cooke said.