Okay, this is going to be a story of a poor little well-off guy being abused by the big bad government. You know, like the way hedge fund billionaires may one day be asked to pay their fair share of taxes. So fair warning. But it is also a story for everyman. It is Frederich Hayek's warning to fear unaccountable totalitarianism. Not quite scary enough to make you want to stock up on canned goods and retreat to a bunker in the mountains, but nevertheless a cautionary tale.
Five years ago, we got a letter from the city of Santa Barbara saying we had to pay "transient occupancy taxes." I told them we had no homeless tenants. Seriously, that's what it sounded like to me. They said it's a tax hotels pay for guests who stay for less than thirty days. So we were a hotel? Who knew?
I had a law partner who was a famous tax lawyer. He hated the IRS. He said, "They can do anything they want to, and you can't fight them because they have the full resources of the federal government at their disposal." He was a man of exuberant intellect and passion, so you had to take what he said the way you might one of Macbeth's or Hamlet's soliloquies, but his point stuck with me. We didn't fight the city of Santa Barbara about whether we were a hotel, and for the last five years we have been paying city taxes of 12% of our rental income. We even have a nicely printed business license from the city to operate a vacation rental business at our home.
A few days ago, Catch 22 came knocking. A letter arrived from the city zoning department that said, Sorry, pal, no hotels allowed in residential neighborhoods. But...but... What about the spiffy business license you gave us? What about all those taxes. Does our financial love for you all those years mean nothing now?
We did a little research and here's what we found: The city wants it's hotel taxes; it avidly scours VRBO listings and notifies homeowners that they are hotels and must pay the occupancy taxes. The city doesn't know what to do about the pesky language of its zoning regulations that say hotels can't be located in residential neighborhoods. “It is awkward,” said a zoning department employee in 2012. “We in zoning know it is not allowed, but the Council has decided to charge TOT [transient occupancy tax]. The Finance Dept. is responsible for collecting the tax and it is included in the budget General Fund. Finance does not share their information with us.” *
So, for its own financial benefit the city ignores its zoning regulation until someone complains about a specific home and then it closes the unfortunate rental that was ratted out by who knows whom for who knows what reason. As far was we can tell from its dealings with us, the city isn’t concerned about whether our guests have been too noisy or otherwise comported themselves in an undignified manner. We weren't told who complained or why, nor were we invited to present the case that we are good neighbors. The city’s notice to us said nothing about noise or other complaints (of which I am aware of none) only that we were in violation of the zoning restriction. That would be the same zoning restriction the city ignored when it granted us and many, many others like us vacation rental licenses and began collecting hefty hotel occupancy taxes from us.
You're shocked, shocked, you say, to learn that there is government hypocrisy here? Well, me too. It would be funny if it weren't so serious, and consequential. In reliance on our city business license, we spent a lot of money making our house attractive for guests. Now the city wants to take away our ability to recover that investment. It wants to put us out of business. What about the other approximately 500 vacation rental listings in Santa Barbara? Is the city shutting them down? No. It doesn't even want to. It wants their tax revenue.
In 2000, the United States Supreme Court said in Village of Willowbrook vs. Olech that a city may not discriminatorily enforce its zoning regulations. To do so is a violation of the equal protection clause of the 14th Amendment. I think there's a good chance that if we took the city all the way to the Supreme Court, we would win. Can we afford to do that? We haven’t decided. But I’ll bet the city is betting we can’t. This was my tax partner's view of the IRS. This was Hayek's view of totalitarian governments. Maybe they were right.
VRBO, Airbnb, Uber and Lyft are at the vanguard of the sharing economy. They are liberating dead capital, and at the same time disrupting the status quo. They both give us exciting new opportunities and force us to think about what interests to protect. There are legitimate questions here, being debated in cities all over the country now. Communities are adopting regulations to let Uber operate side by side with taxis and to let homeowners to rent out their spare bedrooms and homes to help cover the rising costs of home ownership. In Ventura, applicants for a vacation rental permit must show that their home is properly sized for the number of guests permitted and that the owner has a nuisance response plan in place for dealing with noise and similar complaints. Those are thoughtful requirements for dealing evenhandedly and fairly with legitimate concerns.
Whatever a community decides, however it balances competing interests, the one thing it must do is treat everyone equally. If it wants to ban all vacation rentals, fine. If it wants to let neighborhoods become Las Vegas, fine. Or anything in between, as long as whatever it decides applies equally to all residents. The one thing a local government in America may not do under our constitution is apply it's laws in an unreasonably discriminatory fashion. Say, for instance, something like having the city finance department aggressively collect hotel taxes while at the same time telling the zoning department to look the other way until someone (maybe a competing renter) bitches and only then to engage in an ad hoc, ex parte enforcement of a law that it is not in its financial interest to enforce evenhandedly.
Note: As does the municipal code, I use the term "hotel" as shorthand. For my lawyer friends, the applicable definitions are:
Occupancy tax law: "Hotel: Any structure, any portion of any structure, or any property or portion thereof which is occupied or intended or designed for occupancy by transients for dwelling, lodging or sleeping purposes, and includes any hotel, inn, tourist home or house, motel, studio hotel, bachelor hotel, lodging house, rooming house, apartment house, dormitory, public or private club, mobile home or recreational vehicle park (as defined in Title 28 of this Code), or other similar structure or portion thereof."
Zoning law: “Hotel. A building, group of buildings or a portion of a building which is designed for or occupied as the temporary abiding place of individuals for less than thirty (30) consecutive days including, but not limited to establishments held out to the public as auto courts, bed and breakfast inns, hostels, inns, motels, motor lodges, time share projects, tourist courts, and other similar uses.