Closing the Summer Tourism Tax Gap: Four Ways to Improve Compliance in the Short-Term Rentals Market

Summer travel season delivers an important economic boost for vacation destinations across the globe. The World Travel & Tourism Council estimates that international visitor spending will generate an unprecedented $2.1 trillion in 2025 and support 371 million jobs worldwide, more than the entire population of the U.S.

Short-term rentals (STR) have surged in popularity over the last decade and reshaped the way we travel, thanks to the convenience and affordability they offer as well as increased accessibility through platforms such as Airbnb and VRBO. In 2024, Airbnb reported it had more than 5 million hosts and over 8 million active listings around the world, generating over $11.1 billion in global revenue through an estimated 491 million nights and experiences booked through the platform. For comparison, Airbnb generated just $9.9 billion in 2023. This explosive growth in the short-term rental market can be a missed opportunity for tax authorities.  Let’s take a look at the state of the problem in the U.S., for example. 

The Scale of the Challenge

In 2024, domestic and international travelers to the United States generated $190 billion in tax revenue, with state and local governments directly benefiting from $89 billion to help fund essential services like education, infrastructure and public safety. Short-term rentals contribute a significant portion of these tax revenues, estimated by IVIX to be a $28.8 billion domestic market in 2022. However, IVIX also found that the negative value of unreported revenue in the domestic STR market averaged $8.6 billion, representing lost tax income of $2.6-3.1 billion. This tax gap exists because many transactions occur in regulatory gray areas with inconsistent enforcement, and hosts often don't understand their tax obligations in the complex digital economy. Notably, many STRs are operated under semi-anonymous profiles, presenting additional challenges for tax authorities. In addition, large portions of revenue generated by STRs is frequently generated across state borders and with multiple co-hosts, increasing the complexity of tracking, reporting and taxing this income. 

Take a traditional hotel, for example. After check-out, guests are presented with an itemized receipt that details the various occupancy and tourism taxes automatically collected by state and local tax authorities on their stay. Meanwhile, popular STRs like Airbnb and VRBO collect only some local taxes, and hosts must conduct their own research into complex local regulations -- which can be a patchwork of city, county and state rules -- to fully understand their tax obligations.

Recent reports also suggest that larger STR hosts, especially those with multiple properties or an established brand, are actively encouraging and facilitating direct bookings outside of platforms like Airbnb and VRBO in an effort to boost their profit margins and avoid the commissions charged by these platforms. Without the platforms acting as a "paper trail," this trend can make it significantly harder for local, state, and federal tax authorities to track the income generated by individual hosts. This puts a greater imperative for tax authorities to develop more sophisticated methods for identifying non-compliance among STR hosts.

Where Tax Authorities Can Take Action Now

1. Taxpayer Education

‍Taxpayers can’t comply with rules they don’t understand, and clear, accessible guidance can dramatically improve voluntary compliance rates. Many tax agencies are developing easy-to-understand guidance that specifically addresses tax obligations for digital economy activities, what records taxpayers need to maintain, and how to properly report assets like vehicles or homes that are used for both personal and business purposes. Some localities and governments  are also investing in taxpayer education campaigns specifically targeting STR hosts, gig workers and other digital economy participants. 

2. Comprehensive Platform Reporting

Currently, most STR platforms provide limited transaction data to tax authorities, if any. It’s critical that governments require comprehensive reporting from platforms above certain revenue thresholds, similar to how financial institutions report interest income. It must be noted, however, that STR operators with  operations across more than one platform or local jurisdictions can still slip through thresholds if total revenue is not considered.

3. Legislation

Governments can also consider legislation that requires major platforms to provide annual statements to all users and tax agencies, regardless of the amount of revenue earned. For example, IRS 1099-K forms have been required for hosts that exceed $20,000 or have more than 200 transactions per listing. The forms are issued by the hosting platforms and are used to report payments received through reportable payment card transactions (such as debit, credit or stored-value cards) and/or settlement of third-party payment network transactions. However, the average host does not meet this requirement, particularly on any one platform, and platforms do not share or aggregate data. Requiring the issuance of annual statements to all users would create transparency and give taxpayers the information they need for accurate filing.

4. Enforcement Modernization

Tax authorities today are resource-strapped and often hamstrung by legacy technology, making it nearly impossible to efficiently identify and address tax noncompliance in new digital markets such as short-term rentals. That’s where IVIX comes in. 

IVIX’s innovative technology uses publicly available data and has a 97% accuracy rate in helping tax authorities around the world pinpoint hidden business activity, across platforms and jurisdictions, and connect it to the real people behind it. To date, the IVIX platform has helped authorities identify billions of dollars in offshore assets and hundreds of millions of dollars in unreported business income.

Recently, a tax authority sought to gage potential noncompliance among its largest STR operators. IVIX quickly identified 200 prolific operations with high business activity and strong revenue. These 200 leads represented more than $18.6 million USD in unreported revenue. IVIX enhanced transparency by providing the tax authority with precise insights into unreported revenue and identifying the people behind it – even when profiles were semi-anonymous. IVIX was also able to match STR operator identities to the authority’s internal tax return data, automatically calculating any revenue deficiencies. By deploying IVIX’s short-term rentals solution, the tax authority was able to quickly pinpoint noncompliance among its largest operators, with access to all the underlying data needed to work and close the cases.

Conclusion

The digital economy is here to stay, and it will only continue growing and innovating. Tax authorities that move quickly to address the challenges presented by the digital economy will not only improve their revenue collection, but also create more business-friendly environments where entrepreneurs can thrive without fear of inadvertent noncompliance. In addition to short-term rentals, this is true of all emerging markets made possible through the digital economy: eCommerce and online sellers, Crypto traders, social media influencers, and the list goes on. The digital economy rewards innovation and adaptation—qualities that state tax agencies must embrace to remain effective, now and in the future. 

Learn more at: https://www.ivix.ai.

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