Santa Monica, California has had a law on the books for years making Vacation Rentals illegal. However, it was common knowledge that they never enforced this law. In fact, until a year ago, only one Vacation Rental had ever been shut down since the ordinance was enacted.
Last summer that all changed and the city started to shut all VRs down. I've started a petition that goes to all of the City Councilmembers to let them know that there are many people, both locals and visitors, who want VRs to be legal.
Our small beach town also faced this problem years ago. The solution was to limit the # of vacation rentals to 17% of the total # of homes, and to implement a rental permit process along with lodging tax, etc. If you are not already involved, go to the city council to get a public meeting for a revision to the ordinance on their agenda, and come prepared and with as many other home owners who agree with you.