Economic concerns table proposed statewide rental tax

It’s not the time.

That’s the general consensus of the Sussex County Association of Realtors regarding House Bill 188, a proposed amendment to Title 30 of the Delaware Code relating to lodging tax. And it’s a consensus with which the bill’s sponsor, Gerald Brady (D-Wilmington), generally agrees.

“We are not happy,” said Steve Alexander, a local Realtor and president of SCAoR. “The rental market it not lighting the world on fire right now. People aren’t as interested, or they can’t afford it. This is horribly timed and poorly written, at best.”

The bill has been tabled in the state legislature, and it is now up to the Brady to decide if it is to be lifted from the table for discussion at a later date – presumably when the economy is better – something Brady said he very well might do.

“More than likely, I’m not going to run this bill this year,” Brady said this week. “As much as we need to create revenue, we don’t want to create an undue burden. To create or raise a tax in desperate time is not a good thing.”

The element of the bill that Realtors are opposed to would amend Title 30 of the Delaware Code by adding a 5 percent tax on seasonal rental properties (properties with non-renewable rental agreements for less than 150 days in a year), “including but not limited to seasonal rental properties, corporate housing and condominium rentals,” less any amount of tax already imposed by a county or municipality.

“For a rental unit, the excise tax rate shall be 5 percent of the rent, except that such excise tax rate shall be reduced by the amount of any rental tax imposed by a county or municipality for occupancy of such rental unit as of the enactment of this provision.” That exemption means property owners in towns such as Bethany Beach, South Bethany and Fenwick Island who rent their properties seasonally would pay no additional tax, since Bethany Beach already assesses a 6 percent tax on rentals, South Bethany assesses an 8 percent tax and Fenwick assesses a 7.5 percent tax – a significant source of revenue for the area’s beach towns. It would also not additionally impact the year-round rentals that are more common inland.

However, property owners renting homes in unincorporated areas – particularly those just outside the beach towns’ corporate limits, where seasonal rentals are just as common as inside their neighboring town limits – or in towns without a rental tax of 5 percent or higher, would have to pay up to 5 percent of that seasonal rental income to the state. Additionally, HB 188 would mandate a state rental license fee of $50, in addition to any municipality’s fees.

The bill, which would have added money to the state’s general fund, was initiated by the Delaware Tourism Bureau as a way to create more a pool of revenue in a suffering economy. Brady said the money would go into the general fund with the idea that the tourism industry would then have the ability to argue the funds should be channeled back to the industry. He said the bill sought to create more equity between the big hotel/motel chains that pay the state’s accommodations tax on all stays and smaller mom-and-pop bed-and-breakfasts and individual landlords that lease a property for just part of the year.

Alexander noted that the resort rental community has long been excluded from specific taxation as an industry. He also said that, although the tourism industry had said the rental community would be kept “in the loop” on the proposed legislation, that did not happen.

“The biggest thing is the way they rolled it out, with not much thought: ‘We’ll just grab this money real quick,’ with no thoughts on how to collect it,” he added.

The SCAoR still has questions regarding the lack of a formula for the tax and language for enforcing the bill, and Alexander said they fear that having a tax like this in place on seasonal rentals will drive homeowners to lease their homes underground.

“Basically, the rental agents will be like the taxation department, and homeowners will say, ‘Why would I rent through a professional agency?’” said Alexander.

He also questioned “the domino effect” of such a tax and said that, with fewer people renting their homes out, gross receipts will go down as listings are lost, which will in turn affect the bottom line for businesses dependent upon the seasonal visitors.

“They are coming at this from a hotel/motel side. There is no way of identifying rentals,” said Alexander. “Any house driving down Route 26 could be a rental. The state is not in a position to enforce this.”

Ruth Briggs-King, executive vice president of the Sussex County Association of Realtors agreed that the area’s Realtors are opposed for a variety of reasons – the main ones being that homeowners will be driven to rent “underground” and that the proposed tax is a duplication or another added layer on top of what homeowners already pay in property tax.

“People are maxed out. This takes a little bit away from the local decision-making process,” she said.

“Our tourists, as well as our Delaware residents who comes for weekends, a new tax for them… I don’t feel now is the time,” said Briggs-King.

She also said the bill lacks any fiscal note describing its potential impact and, because the state and the tourism industry – by which the bill was proposed – have no real grasp on the number of rentals there actually are, the administration of the bill would be burdensome. She is tasked with trying to get a “guesstimate, at best” of the number of rentals for the state finance department.

State Rep. Gerald Hocker said he is opposed to the bill, as well, again with the comment that the timing is off.

“I cannot support it,” he said. “We’re at a time now where this area is not competitive to other areas. People are leaving. With the economic conditions as they are, we need to do all we can to promote tourism. And an added 5 percent right now is a bad mistake.”

Brady said this week that “once and if” the economy stabilizes, the bill could be introduced then. But, for now, they are in a “wait and see” mode.

“If we see anything encouraging, I might introduce it at a more favorable time, or modify the current rates, or phase them in over time. We need to study this over a long period of time to gauge the climate of recovery.”