Guest: Kim Stephens
Tax rates and filing processes
Filing tax returns
Non-compliance and penalties
More about HotSpot
Host, Christine Karpinski: Today we're going to speak with Kim Stephens. She is a Certified Public Accountant with over 17 years of experience in accounting and finance. She is also the co‑founder of HotSpot Tax Services, a company solely dedicated to helping vacation property owners with sales and lodging tax compliances. Kim can be reached at 1‑800‑589‑0207, or on the Internet at www.HotSpotTax.com.
Kim, thank you so much for joining us today. Can you tell us a little bit about how and why you started HotSpot?
Kim Stephens: Sure. Well, thank you for having me. Well, when we purchased our vacation home in Vail, Colorado a few years ago, we started looking into what the requirements were for forming this business, and short‑term renting, and one of the things we realized was that you couldn't just go to one place and find all the answers. I'm a CPA, and I was actually a little surprised to find out that this little venture was actually subject to all these taxes. So we figured that if I was surprised, that people who are not CPAs would probably also be equally surprised, and thus the idea was born.
Christine: Well, I always love it when the ideas come from true experience, because obviously it is going to make a big difference in how you are able to help others in having that practical experience as well. Now, who is required to collect and pay sales taxes?
Kim: Pretty much anyone who rents their property on a short‑term basis. Short‑term basis varies by jurisdiction; it varies by where your property is. Some places, if you rent it for 30 days or more you're not subject to the taxes. Other places, you have to rent it for 180 days before you are exempt from the tax.
Christine: Yeah, I own in Florida, and at one of my places I once had a long‑term renter, and I was surprised to find out that it actually had to be six months plus a day. There were kind of crazy rules around it, like they had to have stayed the first of the month, six months consecutively. It was really kind of crazy.
Kim: Right and it can't be an extension on an existing lease. Like, if you have someone in there for four months and then they extend for an additional two months, the clock starts over with the two months. It has to be the additional lease. Also, in Maine, actually, no vacation rentals are exempt from the taxes. They say a rental for 30 days or more, to someone who that is their primary residence, or someone who is there for employment or for school, that is exempt, but if it is a vacation rental at all, if it is not someone's primary residence, it is subject to it no matter what the length of stay it is.
Christine: Wow, that's pretty interesting. Are there any states that are not required to collect and pay sales tax?
Kim: Well, so far we have found, pretty much, in Massachusetts you are exempt from collecting and remitting the taxes. It is based upon what the township or the village, how they view you. If they view your property as a hotel or a motel, and you are subject to their local taxes, then the state also says you pay the state sales taxes; but so far we haven't found any villages or towns that do consider single family homes or the vacation homes or beach houses subject to the taxes. And we are waiting on a ruling from Rhode Island as to whether or not single family homes are subject to those taxes.
Christine: Interesting. Now, what if, I have heard a lot of owners say this: "Well, my CPA or my tax accountant says that I don't have to collect and pay sales taxes because I am a single property owner." Can you explain how this is a little different?
Kim: You know, we hear that probably at least once a week. Someone calls and says, "Oh, my tax accountant says that I don't need to pay these taxes," or, "My tax attorney says I'm not subject to these." But we can guarantee that they are wrong. Tax laws are very complicated and very extensive, and I'm sure that their tax attorneys are very well equipped to handle their income tax returns, but no one CPA can know every single tax law. They are, like I said, very extensive.
Christine: You know, it's really funny, when I was writing my book, I was trying to get CPAs and tax accountants to give some quotes, and it's amazing, I couldn't get anybody to do it, because they said the laws are too complex, they are too local, they are too... I mean, there are too many variables. So it is really interesting that you get this question so often, because the ones that I have contacted were readily admitting that they didn't know how to be able to quote this.
Kim: Right, right. That is exactly right. We had decided to specialize in sales and lodging taxes for second‑home owners who rent their properties. That is what we do, and that's what we specialize in, so we understand all the different markets; and it does vary by city, county, and by state, and your CPA may not be familiar with the tax law requirements of the city in which your rental home resides.
Christine: It's funny, because with taxes, we all sort of assume that you are talking about income taxes, the taxes that I have to file every April 15th, whether it be federal or state. I think the people are confused, with this being a sales tax as opposed to your income tax. People say stuff like, "Well I already report my rental income on my income taxes." Can you explain that a little better, and how this differs?
Kim: Right, we hear that a lot also, and it is especially with people who come to us wanting help with some back taxes. They thought that they could file this with their federal and state income taxes, and they hand it over to their accountant at year end, and the accountant says, "Whoa, I have nothing to do with this." Putting it on your income tax return is a very good first step, but that is not the whole picture. Sales and lodging taxes are filed monthly or quarterly, they are not just filed at the end of the year. They are also filed with the city, the county, and the state. And actually, there is no federal sales tax at this point, or lodging tax, so it is more at a local level.
Christine: Very interesting. Now, what is that sales tax rate?
Kim: Now that is a difficult question to answer, and the reason why is because it varies by location. It depends on if your property is within any city limits, if it is within any special taxing districts, and it really does vary by city, county and state.
Christine: I mean, I own in Florida and in Tennessee, and I get so confused all the time, because they are all different tax rates. I've got one that's nine‑and‑a‑half, one that's eleven, one that's twelve. Sometimes it's really hard to keep them all straight. So I can see where it is very difficult. It has got to be really difficult for you guys, because you obviously represent a whole bunch of property owners. Can you kind of tell me a little bit about the steps that you take on your end with the filing process?
Kim: Sure, and yeah, I could not keep it all straight in my head, that's for sure. We have a very extensive database, and in our database we keep track of not only the rates but the filing frequencies and what tax returns are filed, and our database also helps us generate all those tax returns. So no, we couldn't keep it straight without the database. But basically, the steps that we take when someone signs up with us, first thing we do is we determine if someone is within city limits, or town limits, or a special taxing district, or an extra‑territorial jurisdiction, all these crazy things that you find out with experience, and determine what county they're in, and then determine which taxes they are responsible for collecting and remitting. In some places you may be subject to the state tax, but not subject to the local tax because you only have one property.
After we have sorted out which taxes they are required to collect and remit, then we need to find out how often we need to file the tax return, when those tax returns are due, and what tax returns actually need to be filed. One of the other things that we need to determine is how does that jurisdiction defines short‑term rentals, what is subject to the tax. If someone is renting their property for a year to someone who's living there for a full year, their most likely not going to be subject to those taxes. So each jurisdiction defines what is short‑term and therefore subject to the tax.
Then after that we need to register the property with the city, county, and/or state, and at the time that we're doing that we usually try to check into zoning issues, try to determine what types of licenses they need: if it's a business license, a sales tax license, an occupational license, a nightly rental license.
Christine: You know, I think that was actually one of the things that sort of stumbled me when I first got started. I was like, "I have to have a business license? Why?" You know?
Kim: Right, right. And we get that a lot too. People will say, "No, no, no, I don't want a business license, I'm not a business." But the fact of the matter is, is that when you put your property out there for short‑term rental, you have in fact turned your property into a business, and you need to get a business license. And in most situations, really what that means is that the state needs to assign a number for you, or open an account for you, so that they have a place to apply your tax returns, and a place to apply your payments. If you don't have that account open, then your payment will not get applied to your account, and you won't get credit for it, and so effectively you want that account open.
Christine: There are the positive aspects of your property being a business. You know, all the tax write‑offs and things that you can get when your property is actually a business, but I guess that's topic for another show.
Christine: So what are some...? OK, after you get the business license, then what do you have to do?
Kim: After that, you file the tax returns. You may... you pay the tax. You may file monthly, or you may file quarterly.
Christine: And how is that determined?
Kim: That's determined by the jurisdiction. They set their own rules, ordinances, laws. It's based on the level of your revenue, or the amount of tax that you collect. Either annually, or quarterly, or monthly; they all do it differently. So, and I know that all of this sounds overwhelming, but it's something that we do day in, day out, so if you don't want to deal with it you can just call Hot Spot, and we'll take care of it for you.
Christine: That, I mean, it's definitely a nice thing, because I know every 20th of the month, we always go, "Oh gosh, we've got to hurry up and make sure to get to the post office to make sure our taxes are post‑marked," because ours are due every 20th and I know some of the states allow us to file online, but unfortunately not all of them do.
Kim: Right. There are a lot of states that do that, but not very many local cities or counties do that.
Christine: That's what we found, is on the county and city level.
Christine: Now, OK, let's go to the flip side, and this is the part that nobody likes to think about. But what about non‑compliance?
Kim: Well, if you are not paying your taxes you most likely will get caught sooner or later. The jurisdictions are very creative in the ways that they catch people.
Christine: How would they even know I'm renting?
Kim: I mean one of the big ways that they catch people is by reviewing the vacation rental listing websites, like HomeAway.com or VRBO.com, they go down those for their jurisdiction, and they look for properties that don't have a license.
Christine: And just to clarify, I know from working here at HomeAway, sometimes property owners get upset and they say, "Oh you gave our name to the state." Actually we don't, we don't give them out, it's just a matter of they go on the Internet just like our renters do.
Kim: Well, they'll pose as a renter, and call and find out ... they'll get you that way. Also, you know, that's one of the ways that they'll do it. They will also cross‑reference their information. Like, say you're filing at the state level, but you're not filing at the local level, or vice versa, they do cross‑reference them, so, you know, sending it back and forth between the city and the state and the county. They'll review income tax returns in some places. I know of some people who have gotten caught that way, because the state was reviewing income tax returns for rental revenue that was reported but they weren't filing sales tax returns. And then another way that we hear most often is that a neighbor turned them in.
Christine: No way.
Kim: Yes. And the neighbor doesn't like that they're short term renting, and they can't do anything about it because they're zoned properly, but then they find out if they're not collecting the taxes and they'll turn them in that way.
Christine: Or maybe there's someone who is paying the taxes and they're saying, "This isn't fair, they have an unfair advantage. I'm charging this additional 10% and they're charging 10% less, I'm going to turn them in so they have to charge it as well."
Kim: I can see that side, because I'll tell you, there are people in my own complex that even boast about it, there like, "Ha‑ha, you know I don't collect and pay sales tax..." But, you know, I always say they'll get caught.
Christine: They are going to get caught.
Kim: They are going to get caught, and when they put that on their website, when they boast about it, I just had one today, and when they boast about it, the tax authority, they're not very lenient when someone puts that on their website that they don't collect the taxes.
Christine: Interesting that somebody would even put that in writing.
Kim: Right. She contacted us after she was contacted by the local taxing authorities and she said, "What do I do now?"
Christine: What is the worst penalty you've ever seen?
Kim: Just recently, we had a client that came to us and wanted to do voluntary disclosure, so we went...
Christine: Wait, what is voluntary disclosure? Define it.
Kim: Voluntary disclosure is when you go forward, you voluntarily report your revenue to the city, the state, or the county, and say, you know, "Please, I'm coming forward, you haven't contacted me first, I want to pay the taxes, I want to come clean, can you please wave the penalties."
Christine: So that's kind of like an amnesty program, huh?
Kim: Well, it's not an amnesty in the sense that with a tax amnesty you... they can't ever wave any of the taxes, you have to pay the taxes, but it is amnesty from the penalties, but they can never wave the taxes unfortunately. So they had come to us and we voluntarily went forward, and she basically owed about $350 in tax, and she had started renting about a year before we filed the tax return, so I mean, this is not a huge amount of money that she owed, and it really wasn't hanging out there for that long...
Christine: OK, now wait a minute, I have to stop you there, sorry, I'm going, "OK now, if I've not been in compliance, I've not been reporting it, I go and hire you to do it, are you giving out my name so they'll come after me?"
Kim: No, we actually we go on an anonymous basis. And that's why you want to go through a CPA or someone, so that you can, if they decide not to wave the penalties, you come back, and you're like, "Well, I'm not going to tell you who I am then, because if you're not going to wave these, I'm not going to pay them."
Kim: So, what happened in this situation: she owed about $350 in tax and was only about a year late in paying the tax and the penalty, which was waived, by the way, came back at $22,000?
Christine: Wait a minute. $350 worth of back taxes and the penalties were $22,000. Kim, was there a mistake there? There had to have been a mistake.
Kim: That's exactly what I said. I called the tax jurisdiction and I'm like "Thank you so much for waiving the penalties but I think maybe there was a mistake," and they reassured me that there wasn't. I actually even called back again and was like "Well wait a minute, are you sure?"
Christine: Oh, gosh.
Kim: And that was what the penalty was. They said "We want to make sure that people don't think that they can collect this tax money and sit on it and make more money in interest, and pay it late."
Christine: Wow. You know, I was doing a seminar one time and a woman came clean in the seminar. She had said that she had gotten a bill for $65,000 worth of back sales taxes because the tax department found out that she was renting and they could find some back history records or...
I don't know how they came up with that figure but I guess the moral of the story is you really, really should be collecting and paying these sales taxes. I mean, $350, that's not going to make you or break you. And the bottom line is, you're not really paying it‑ the renters are paying it. You're just collecting it and submitting it.
Kim: Right. Exactly. And if someone does get contacted the number one piece of advice I could give them is to call them back. Do not ignore it, don't think that it's going to go away, address it. Call them back and work with it. Because they can, and they will put a lien on your property in order to settle that back tax bill, and if they have to, they'll take the property to auction in order to settle the back tax bill. They have the authority to do it, and they will do it, if you run away and ignore them. The best thing to do is to pick up the phone and call them and talk with them about it. Because normally, you know, they're human beings and they will work with you on it.
Christine: Right. So your company basically, what you guys do, is you will get all these wheels in motion. You will assist people in filing their taxes and getting set up properly and even if they hadn't done it properly to begin with you'll assist them.
My next question is, I've always been taught, and especially now I'm a lot more wary about it just because it seems to be more prevalent than it was in the past, but my father always told me "You can hire tons of people to do everything for you, you can hire an accountant to do your taxes, but you better mail in that check yourself, you better sign that yourself, because your accountant is not going to be the one who goes to jail if the thing isn't filed properly or whatnot." How can we trust your company that‑ how do I know that you're indeed doing it and I'm not going to go to jail or end up with one of these $22,000 bills?
Kim: Right. Well, that's a very valid question and some people do ask us that all the time. And my response is, first of all, you were probably referred to us by someone who is either an existing customer or your vacation rental listing website. We do the tax returns for the vacation rental listing website owners, most of them that refer us, and we consistently get referrals from existing customers. But you're right. I mean, you are the one who is ultimately responsible for that. So we would encourage our customers to call the tax authority and check up on us.
Say we'll get your license for you. After we get the license we mail you the original license, you'll have your original license in hand. After a month or two, call the tax jurisdiction and say "This is my license number; I just want to make sure that HotSpot is paying for me. Are my tax returns and my accounts current, my tax returns are being filed accurately in a timely basis?"
Christine: I guess this is no different from anything else. I mean, we have to check up on our housekeepers, we've got to check up on our maintenance people, we have to double check on you. But I will say that it's probably easier to double check on you occasionally than having to run to the post office every 20th of the month.
Kim: Right. And then also, you'll develop a sense of trust, and when you call the tax office and they say "Oh yeah, we know HotSpot, we know them by first name basis, " then that will also make you a little bit more comfortable, knowing that they're getting filed on time. And also, say you have properties in Florida, we were recently invited to speak at the Florida Tourist Development Tax Association, and so we actually spoke at a conference of all of Florida's tax collectors. They know us and we know them, and they can also reassure you. If you don't want to take that chance and wait you can call them up and say "Are these guys legitimate?" and they'll be honest with you if we do a good job or not. And I can guarantee they'll say we do.
Christine: Well that's good. Now, is there anything in closing that you'd like to add?
Kim: Well, we've realized that homeowners can file their tax returns on their own, but what HotSpot gives is peace of mind. You basically sign up for our services on the website and once you've supplied us with that information you're done. We research your tax rates, we get your licenses, and we file your tax returns, if you just provide us with your revenue at the end of the filing period. We guarantee our service. I think that's the one big thing that people don't really understand. If we fail to inform our clients of a tax rate increase, we'll pay the tax difference, we'll pay the difference, until we've informed them of that increase.
If we fail to file a tax return for any reason or file it late for any reason that wasn't our client's fault, if a client reports late to us, we will file the tax return late and that's not our responsibility. But if we file late for some reason, we pay the penalties and the interest related to that late filing. Keep in mind that we do this, and that this is our business, we do it day in and day out, so we wouldn't be in business if we were paying a lot of late penalties and late fines. So it doesn't happen very often, but it is a guarantee just out there to make you feel a little bit better about it.
Christine: Well very good. You know, one thing that I guess I forgot to ask you is how much does your service cost?
Kim: That's a good point.
Basically, it varies based upon where your property is, once again. We try to set up our fees such that they mirror the amount of work that is done, or how many returns that are filed, but on average you can expect to pay about $120 per year for us to file your tax return for you. We never have a contract; you can cancel at any time. We collect the filing fees as we go, so that $120 is more an idea of what it would cost on an annual basis. We don't charge that upfront normally, unless it's a special offer. And taking care of your vacation home and renting out your vacation home, there are so many things to worry about that, speaking from experience, and there's this one aspect you can outsource for very little money and not have to worry about. Something that is incredibly important and something where mistakes can be incredibly costly, so I think it's a very good service.
Christine: Well Kim, thank you so much for joining. We've really appreciated it. This was extremely helpful. I guess the bottom line is yes, we can report and pay our own taxes, but definitely HotSpot does make things easier. I've heard from a lot of owners who do utilize your services, have been very happy with it, and if you have any more information that you would like to learn from Kim, she can be reached by calling her at 1‑877‑589‑0207 and her website is HotSpotTax.com. Thanks again Kim.
Kim: Thank you Christine.
Christine: Have a great day.
Kim: You too.
Happy renting by owner! And don't forget to take some time to enjoy your vacation home yourself.
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