The Tax Crackdown Coming for Short-Term Rentals

This sponsored content was created in collaboration with a Skift partner.

The U.S. short-term rental market experienced a dramatic post-pandemic boom in the number of listings and owners, followed by a considerable slowdown as economic, regulatory, and supply factors converged, resulting in a more mature market by 2025. 

Market stabilization and professionalization have been overall beneficial for short-term rental owners, making their investments and opportunities for growth more predictable. However, tax and regulatory issues continue to be a moving target.  

A new report from Avalara, “Checked In, Taxed Out: Benchmarking Tax Compliance in the U.S. Lodging Industry,” is based on a survey of 500 short-term rental hosts who handle their own financial operations and tax strategies, as well as senior-level hotel executives and hotel management leaders. According to the report, “constantly changing rules at both the state and local level, tricky legal wording, and complex tax calculations make keeping up with the system a near-permanent battle.”

The Importance of STR Tax System Integration

For STR operators, tax compliance represents a substantial time burden. According to the Avalara report, 42% of STR respondents spend between 51 and 100 hours annually on lodging tax compliance, while nearly one-quarter (23%) devote 101 to 200 hours per year — the equivalent of several full workweeks lost to administrative effort.

The most time-consuming challenges include understanding local tax codes, filing monthly or quarterly returns, managing different rates across jurisdictions, and registering properties across cities and states. These hurdles are particularly acute for STR operators with listings in multiple markets, where rules can change frequently and without warning.

As a result, nearly half (45%) of STR respondents feel only “somewhat prepared” to adapt to new or updated tax requirements, signaling growing vulnerability as enforcement accelerates.

A New Phase of STR Tax Scrutiny

In recent years, the STR sector has benefited from less tax scrutiny than the well-established hotel industry. Indeed, only about one-third (34%) of STR sector respondents said they had received an audit notice in the last five years, compared to 60% of hotel operators. Furthermore, while 64% of hotel respondents reported receiving a penalty notice or fine for non-compliance over the same period, just 19% of STR respondents said the same.

This may be due in part to the fact that hotels are purpose-built, so their taxable activity is immediately visible. By contrast, many STR properties were originally constructed as residential housing, historically making it far more difficult for tax authorities to identify when a home is being used for a different, taxable purpose.

That visibility gap is narrowing. Jurisdictions have increased regulatory and licensing rules, and improved technology can identify properties listed on platforms, monitor complaint data, and more effectively detect non-compliant units.

The Opportunity Cost of Manual Compliance Processes

Technology adoption in the STR sector remains uneven. Research shows that 65% of STR respondents still rely on manual or partially automated processes for tax compliance, far more than the 44% of hotel owners who gave the same response. While many STR operators have modernized their core systems more recently than hotels, fewer than half currently use AI-powered compliance tools, which offer major efficiency upgrades.

In one area, both sectors are aligned. STR and hotel operators acknowledged the role that other technology innovations will play in helping them to save time and ensure compliance in the future. Across both groups, the areas of greatest interest were “better integration between booking, property management and tax systems” (50%), “AI-powered alerts for tax changes” (47%), and “access to up-to-date tax rates by location” (46%).

As regulation intensifies, the cost of inaction is rising. STR operators who continue to rely on manual processes risk falling behind — not just on compliance, but on operational efficiency and scalability.

“The days of flying under the radar are over,” the report noted. For STR operators, investing in modern, automated compliance tools is a prerequisite for sustainable growth.

Download “Checked In, Taxed Out” here.

This content was created collaboratively by Avalara and Skift’s branded content studio, SkiftX.