Explainer: How Short-Term Rental Tax Was Revised to Give Homeowners Relief

John Reitmeyer | August 13, 2019 | Explainer
New Jersey’s year-old tax on short-term property rentals has been revamped, mostly to assuage concerns about its negative effects of summer rentals at the Shore

explainer button shadow
A little over a year after it was signed into law, New Jersey’s new tax on short-term property rentals has been modified in response to concerns that it was taking too big a bite out of the Jersey Shore’s summer rental market.

A state tax-code revision that went into effect late last week now protects certain property rentals from being hit with the state’s tax on so-called “transient accommodations.” Specifically, the revision exempts rentals that are arranged directly between homeowners and renters without the help of an online marketplace, a change that should benefit rental transactions at the Jersey Shore where direct rental agreements are popular.

Gov. Phil Murphy and lawmakers placed a new levy on such accommodations last year because of the growing popularity of online marketplaces like Airbnb and Vrbo. Such websites have become key rivals to New Jersey’s hotels and motels, yet their rental agreements were previously not subject to the same taxes paid by those staying in hotel and motel rooms due to an outdated tax code that didn’t apply to online transactions.

The original version of the tax, which first went into effect last October, also applied to short-term property rentals arranged using more traditional methods like word of mouth, including those at the Jersey Shore. On Friday, Murphy enacted a policy fix that lawmakers took several months to come up with, suggesting it will help the state live up to the intent of the original short-term rental tax.

Why the state began taxing “transient accommodations”: The new state tax on short-term rentals was enacted as part of a broader modernization of the tax code that included new levies on so-called ridesharing services like Uber and Lyft, among other changes. Murphy and lawmakers approved those tax-policy changes at the same time they agreed a new state budget in July 2018 and as they also increased overall state spending. (The tax policy changes helped bring in new revenue to support the increased spending.)

The goal of the new tax on transient accommodations was to put the short-term rentals arranged through the increasingly popular online marketplaces on par with hotels and motels by charging marketplace renters the same 11.6 percent tax rate paid by those staying in hotels and motels. It also allowed the same transactions to be subject to any local room taxes and occupancy fees that are charged by municipalities in New Jersey.

Why the policy was revised this summer: The original tax on transient accommodations was written with broad language that generally only excluded rentals arranged by realtors. That meant arrangements made directly between property owners and renters in response to things like newspaper ads, Facebook posts, word of mouth and signs were still subject to the tax. But lawmakers soon heard complaints about how the new tax could impact the tourism industry, including rentals at the Shore and at northern New Jersey ski resorts, and they began to work on a policy revision.
and they began to work on a policy revision. After some last-minute amendments, lawmakers sent the final version of the proposed tax-policy fix to Murphy at the end of June. The governor’s staff then had to conduct what his office called a “thorough legal and technical review” before he could sign it into law.

Exemptions to the tax: The new policy limits the scope of the transient-accommodations tax with language that says it only applies to “rentals of professionally managed units and rentals obtained through a transient space marketplace or travel agency, as long as the transient space marketplace or travel agency does not exclusively offer transient accommodations owned by the marketplace or travel agency.”

Impact of the policy change on the state budget: There’s no precise estimate, but analysts from the nonpartisan Office of Legislative Services are predicting the latest policy change will result in at least some reduction in state tax collections. After going into effect in October, the short-term rental tax originally was projected to generate about $8 million during the remainder of the 2019 fiscal year, which ended on June 30. In addition to a loss in state revenue, the OLS analysts said the latest change in the tax policy could also reduce some local tax collections in municipalities that levy local room taxes and other occupancy fees.

Murphy’s view of the change: ““Our shore economy adds tremendous vitality and dynamism to New Jersey (and) access to affordable rental properties for visitors and income on rentals for homeowners are the backbone of that economy,” Murphy said. “Our public policies must be well-calibrated to allow this economy to thrive and grow.”

Reaction from Jersey Shore homeowners: “By signing this bill into law, the Governor is both proving New Jersey is a tourism friendly state and protecting the integrity of the business economy along the shore,” said Denise Payne, president of NJ Shore Rentals Coalition, one of the leading groups that lobbied for the tax revision. “The Coalition applauds the efforts of lawmakers throughout the state who recognized that this tax law needed to be corrected and worked together to make it happen.”