Over the last year, I have received an influx of calls from clients who are being audited by the City for failure to pay their transient occupancy taxes for short term rentals conducted in their property. Many of these clients are being audited for non-payment of taxes going back to 2007 which can amount to tens of thousands of dollars plus penalties.
In the City of San Diego, all homeowners conducting short term rentals for periods of less than 30 days are responsible for paying the transient occupancy tax, and tourism marketing district assessment tax for their rental business. (SDMC 35.0101 et seq) This transient occupancy tax is currently assessed at 10.5 % and the rental business tax is .55% of the total rental income collected. (SDMC 35.0103-35.0108) The property owner is responsible for paying these taxes regardless of whether they remember to pass that tax on to their guest in the total rental fees being charged. (SDMC 35.0112) Unfortunately, claiming you did not know you had to pay these taxes is not a valid defense to nonpayment of taxes. Owners bear the responsibility for maintaining records to show accurate numbers for the rental amounts collected on a monthly basis, and remitting the tax to the City monthly. Failure to pay these taxes will result in the homeowner being faced with an audit by the City.
If the homeowner fails to keep accurate records, the City auditor is entitled to estimate the amount of taxes owed based on the current rental income being received, even if the current rental income may be higher than prior years. (SDMC 35.0117) Obviously having the auditor estimate the taxes you owe is not the most ideal situation, however many owners don’t have records going back to 2007 and most hosting platform sites like Airbnb and VRBO didn’t keep good records prior to 2014. Additionally many hosts did not report their rental income on their federal tax returns, or did not keep their tax records going back to 2007. My advice to clients is that they try to be as forthcoming with the auditor as possible, and to produce whatever records they have to try to get an accurate number for the taxes owed. Failure to comply with the auditor’s request to produce records, and failure to pay the taxes is deemed to be a criminal misdemeanor. (35.0121)
If the auditor discovers that the owner failed to pay these transient occupancy taxes, the penalties can be hefty because this is deemed to be tax fraud. A penalty is imposed for an owner’s failure to pay the taxes which could be as much as 25% of the total tax amount owed, plus a 25% penalty for fraud on the total amount of the tax owed, plus an additional 10% audit deficiency penalty if the owner was not remitting the correct amounts based on the income received from the short term rentals. (SDMC 35.0116) The owner has 14 days to pay to total amount of the taxes due as shown by the audit. For many homeowners, the tax amount assessed can be anywhere from $5,000-50,000 depending on the number of years the owner conducted rentals and failed to pay the tax. An owner has a right to appeal this audit number and can request a hearing in front of a hearing officer. The hearing officer is a licensed attorney and not a City employee. At this hearing the owner can present evidence to try to refute the numbers the auditor is claiming is owed, and an attorney can represent you. However, if the owner does not have records, requesting a hearing would likely be a waste of time and money since the owner does not have any new evidence to present that would result in the auditor’s numbers being revised.
If the owner cannot pay the delinquent taxes within 14 days, the City has a right to file a lawsuit against the owner, or record a tax lien against the owner’s property. (35.0123) If the owner tries to sell the property before the tax lien can be imposed, this also rises to the level of a misdemeanor criminal act. (35.0115) Under the California Revenue and Tax Code Section 7283.51 there is a four year statute of limitations for the City to file an action to collect the unpaid taxes from when the taxes were required to be paid, however it is important to point out that this 4 year limitation does NOT apply in the cases of fraud or failure of a property owner to file the transient occupancy tax return. Thus, the City can go back as far as necessary to collect unpaid taxes from the homeowner.
If you rent out your property for short term rentals and collected the rent, you are ultimately responsible for the payment of these taxes. Fortunately Airbnb now collects these taxes in the booking fee and remits them to the City on behalf of the homeowner in select cities, but VRBO and Home Away do not. Homeowners are now having to face the bitter truth that they received rental income for many years without paying the City taxes, and cannot claim that they do not owe these taxes now when faced with an audit.
If you are facing an audit by the city, and have questions, we encourage you to contact our office for a free consultation. This article is intended for informational purposes only and does not constitute legal advice. This article discusses issues applicable under California laws and the San Diego Municipal Code only and is not intended to apply to laws in other states.