South Bethany looks at rental tax compliance

South Bethany may be looking to get a little tougher on rental taxation and licensing. At the town council’s May 19 workshop, Mayor Jay Headman reviewed the town’s existing policies and his concerns about irregularities in the number of licenses and amount of revenue coming into the town from its rental taxes.

“I’m going to ask you at the end to support formation of a committee to review the current penalties and ordinances, so it falls in line with what we’d like to see. I think it’s out of date, and some of you have made comments to me to that effect,” he told fellow council members.

The town sends out a rental declaration form to owners of all developed properties in the town each February. Those forms ask the property owners to declare whether they will rent their property in the coming year. Those who do plan to rent – or who later decide to rent – are required to apply for and pay for a rental license from the town, and to pay rental taxes on the income those rentals generate, no matter how little or how much rental income they make.

“Rental tax is and has been one of our top three sources of revenue over the years,” Headman noted.

Data from 2005-2006 shows that rental tax supplied 27 percent of the town’s revenue that year, while transfer tax brought in 37 percent of the town’s revenue, with 13 percent coming from property tax revenue.

Transfer tax revenue, though, has dropped with the price of housing and the slow real estate market of the last few years.

In the 2011 budget, transfer tax revenues make up only 18 percent of the total town revenue, while property taxes – increased a year ago to adapt to the changes in the real estate market – are now 31 percent of the revenue budget. Rental taxes come in at 28 percent of the town’s revenue for the current year’s budget.

Headman said the town’s collection of rental tax peaked in the 2006 fiscal year, declining from 2007 to 2010 but then bumping up again in 2011. He noted that the number of licenses also peaked in 2006, with 294 checks coming in for rental taxes. There were 195 licenses issued in 2009, 280 in 2010.

“We know we lost some revenue,” he said. “With the down economy, maybe people didn’t rent as much. But that can’t be the reason for these numbers totally.”

Councilman Tim Saxton and Finance Administrator Renee McDorman noted that there wasn’t necessarily a strict correlation between the number of licenses and the amount of revenue brought in by the tax. McDorman said some may have simply rented their properties at higher rates in some years than in others.

“I don’t object to what we’re doing here,” Saxton said, “but we’ve got to be doing it for a rational reason. People have got to file for a rental license – no question about that – but there’s no correlation between these two charts.”

Councilman Bob Cestone said he would guess the reason there were so many rentals in 2007 through 2009 was that, at the start of the recession, people were staying closer to home for their vacations and not traveling so far – benefitting the area’s rental market.

“There may be some who rented for three weeks and couldn’t rent more,” he said, “and they said, ‘I’m not going to file for a license.’ And you could have an increase in revenue for other homes because some were not rented.”

“The question I have is around rental licenses,” Headman said, “because my feeling is we should have a good handle on rental licenses. If you’re going to rent – in 2006, there were 294 people; in 2007 there were 219 – where did they all go? Did they stop renting? It drops all the way down in 2009 to 195 rentals. What happened to 100 people who used to rent in our town?”

“It means they weren’t buying the licenses,” said Councilman John Fields.

“But we didn’t see rental revenue go down,” Cestone countered.

Saxton pointed out that there was another X-factor in the equation of rental tax and licensing. “While we were taking in all that property tax, properties were changing hands. New people may not be renting,” he theorized.

Regardless of the reasons, Headman said he felt the town should get to the bottom of the issue.

“Are these things we don’t have a good sense of and yet it’s one of our major sources of revenue in this town? I think we all would agree that revenue was going to decline,” Headman said of the recession. “I have a rental home in North Carolina. … I had to cut some deals. What surprised me was the amount of variance in the number of rental licenses that were being sold; and, again, I don’t have an explanation for it.”

McDorman said she had some notion of what might be happening. “A lot of people, when they were buying these properties, said, ‘I’m not going to rent this house, I’m going to use it myself. And people, when they pay the mortgage off, they stop renting.”

Councilwoman Sue Callaway pointed to another unknown.

“We don’t know what this number would be if we knew who was renting on their own,” without a license, she said. She also said she felt the penalties for failure to obtain a license or to pay the tax due “are nothing to be feared,” leading, perhaps, to scofflaws.

McDorman said town staff had made some effort to make sure licenses were being obtained. She said the database of the rental declaration forms doubles as a parking permit log, so if the form has not been returned, property owners are asked to complete one when they pick up their parking permits.

After the summer is over, she said, every person who indicated that they rent, including those who obtained a rental license, is sent a tax form. And, in addition to the home owners, forms are mailed to local Realtors – who McDorman said pay most of the rental tax directly, rather than relying on the home owner to do it.

Headman said the first change he would like to see is to the declaration form, by adding a due date. “And if you want a parking permit, you’ve got to turn one in,” he suggested. “But not everybody uses a parking permit,” he allowed. “We need to make sure they understand they are subject to an 8 percent gross rental tax.”

He further suggested that the town ask in which periods of the year (summer, spring or fall shoulder seasons, year-round) the property owner plans to rent the home and which online rental service they use if renting the home online, so the town can track compliance even if the property owner is not using a local Realtor. Finally, he said, he would like an ordinance adopted to require all property owners to return the declaration form each year.

Council members had concerns about having property owners declare when they would be renting, as some felt it could be misleading to property owners, who might even conclude that renting outside the traditional summer season or one of the listed periods meant they didn’t have to pay taxes on the income.

Headman said the intent was to have them declare what they do.

“We have 200-some people who haven’t declared anything for this year,” he said. “Let’s just see what happens.”

In fact, McDorman said, there were 231 forms that were never returned for the 2010 rental year.

“My feeling is that we not go there yet,” Headman said of a possible fine for not returning the form.

“We need to recognize that changing these few things may not do anything,” Saxton added.

Headman said he would take the council’s input and work with McDorman to revise the declaration form and would again ask them for feedback at a future meeting.

On the subject of possible enhanced penalties for failing to pay the rental tax, Headman said he would return to that issue at a later time. Current penalties can be as high as $100 per day for each day of violation in not paying the taxes due. Headman said he would like to get the town solicitor involved and work on the issue with Cestone and Saxton.

Improvements to beach access considered

Headman on Nov. 19 also asked the council to consider whether they would support efforts by the town to improve beach access. The issue turned out to be sticker than expected because council members said they didn’t feel everyone’s idea of improved beach access was the same.

Headman said he planned to ask Town Manager Mel Cusick to begin looking into costs for a project ahead of the start of the budget process.

“It could be Mobi Mats. It could be other things. It doesn’t mean we’re going to spend the money. We’re just getting numbers for the budget process,” he emphasized.

Callaway asked exactly what kinds of costs were being considered.

“Based on the use of the Mobi Mats and the ability to move them during storms and so forth,” Headman said, he was primarily thinking of Mobi Mat – which were tried as a demonstration project at one beach crossover this summer and were implemented across all of Bethany Beach’s dune crossings.

“We looked at having structures, such as the boardwalk we have for the handicapped, and adding at least two more, but that would cost at least $200,000 and mean having to replace or repair them after every major storm. I was told we should look at devices that can give our residents an easier way to get to the beach.”

Cestone said he had recommended two more handicapped ramps when the new dune was first put in and would now like to see railings on the east side of the dune crossings. “That was before the Mobi Mats,” he noted, suggesting that railings might still be useful at some crossings.

“I had not thought we wanted to look at ramps,” Headman said of the east side of the dune. “They’re expensive and difficult to maintain.”

“I agree. They’re subject to storm damage,” Cestone said of the east-side issue. “But I think we need two more handicapped ramps.” Headman said such ramps cost about $108,000 to build.

Fields said he felt there weren’t enough handicapped people going down onto the beach to need more ramps. “But if you want it for the citizens…” he began.

“I think that’s what people mean when they say they want better beach access,” Callaway said of the ramps, “not just the handicapped, but the elderly – people with bad knees and backs.”

Headman said he would ask Cusick to also get cost estimates for new ramps – but only as part of the budgetary process. He said he had been thinking of “Mobi Mats or sand or something else. Hopefully, by that time we will have known what kind of replenishment we’ve had.”

“I’m not saying that’s what I want,” Callaway added, “but that’s what I’m hearing people talk about.”

Saxton said he supported work to “put something out there that’s sensible, that storms don’t have the potential to wash it out. If we build it, we own it. We’ve got to fix it. And once it’s there, you’ve got to fix it.”

“That’s the argument for not building it,” Headman said. “We want to get the cost.”

“Maybe no one knows what [access] means,” Callaway suggested. “They just want to get to the beach.”

Saxton further suggested that those wanting easier access to the beach should head to the south end of the beach, where the dune was washed out by the “Nor’Ida” storm. “You go down there and it’s flat, but do we label it as handicapped-accessible? We didn’t promote that you could go down there and get on easier.

“I’m not saying we shouldn’t be doing some of these things, but there are different things we’re not taking advantage of, either,” he added. “I suspect because it’s because they don’t want to sit there,” he theorized of the lack of people on that area of the beach.

“There’s limited parking there also,” Headman put in, leading Saxton to suggest the town could mark of last two blocks as handicapped parking.

Headman said he would have research done into the costs of all the suggested improvements. “We’re going to be in the budgetary process, and I would think this council will want to look at the cost of beach access before next year,” he said.

Also at the Nov. 19 workshop:

• The town’s code enforcement officer reviewed town records regarding the implementation of the town’s floor-area-ratio limitation. He said he believed FAR cases had been “reviewed consistently since the 2004 ordinance was passed,” contrary to the assertion of a property owner who recently successfully appealed a finding against her over the rule. A 2006 case was initially denied, he said, but was later approved after the plan was revised. The same happened with three other cases that had come up. One, he said, was actually determined to already be under the limit.

Cestone said his discussions with the home owner had revealed that she simply felt the town should not count in FAR the enclosed areas underneath house if they were used just for storage.

“The point of the whole ordinance was to limit the physical size of the house,” Cestone asserted. “It adds more bulk to the house, and you get into McMansions, which was the buzzword when this ordinance happened. She felt we should change it to allow that.”

Cestone noted that the ordinance had passed with a majority vote of the council and had gone to a binding referendum in which the majority of voters agreed with what the council had approved.

“I have no plans to change what was the intent of the code,” he said, saying that he would pursue proposed revisions to the code that would clarify what the intent was and how it would be implemented, to avoid future confusion and appeals.

The proposed ordinance also clarifies that the town requires applicants to first obtain and submit a building permit from the Sussex County building department, as well as any other approvals required by FEMA, DNREC or any other state or federal agency.

“That’s usually a communication part of the process,” said the code enforcement officer. “Usually they know that they need a Sussex or DNREC permit, but if they come in without it, I usually just pick up the phone and make a few calls.”

A third reading of the ordinance is set for Dec. 10.

• The council voted 4-1 in favor of approving an increase in the ambulance fees paid by property owners for the Bethany Beach Volunteer Fire Company’s ambulance service. The increase is being recommended as the service implements a long-term capital replacement schedule and would increase the fee per property from $35 to $42 per year. Instead of planning for increases to pay for future capital costs, such as new ambulances, the increase in the annual fee will build a fund for such costs.

Fields noted that the town had seen a $3-per-year decrease previously, which McDorman attributed to a temporary surplus in both the ambulance service and town budgets, due in part to South Bethany being one of the first towns to have budgeted for the service. The fee could drop in future years, after the initial loan taken out to establish the service is paid off. Saxton opposed the increase, citing the finite figure of $7 per developed property, which he said he felt should have been included as a single cost for all of the town and not per property.