Texas Adds State Sales Tax to OTA Fees

2 hours ago
5 min read

Texas short-term rental operators may be seeing a new tax-related cost associated with the online platforms they use to market and book their properties: Texas state and local sales tax on certain services provided by online travel agencies (OTAs) and other marketplace platforms.

This is not a new hotel occupancy tax, nor is it a tax on the nightly rental rate. It is sales tax on taxable services that platforms provide to hosts and other users of their marketplaces.

Thanks to one of STRASA’s very astute business members, Jeremy Rosen of Five Star Vacation Home Rentals, this issue came to our attention after he noticed the tax appearing on his platform transactions and began asking questions about how it was being calculated.

Why Texas is taxing marketplace services

Texas has long classified data processing as a taxable service, but changes to the Texas Comptroller’s Rule 3.330 provide more detailed guidance about what constitutes data processing and how the rules apply to marketplace providers.

For online marketplaces, data processing can include computerized activities used to facilitate transactions, such as maintaining and storing listings, photographs and transaction records; manipulating or retrieving information; and compiling information and analytics.

That has implications for OTAs and other digital platforms serving the short-term rental industry. Platforms such as Airbnb and Vrbo provide hosts with a combination of marketplace, technology, payment, marketing, customer support and other services, and charge service fees, commissions or processing fees for those services.

Exactly how the Texas sales-tax rules apply depends on the services provided and how a platform structures and allocates its fees. Hosts should review the taxes appearing on statements and invoices from each platform they use rather than assume every OTA will calculate the tax in the same way.

The Texas 80/20 rule

Texas provides a statutory exemption for 20% of the charge for a taxable data processing service. When a charge qualifies as data processing, sales tax is therefore imposed on 80% of the applicable amount rather than 100%.

Texas imposes a 6.25% state sales tax, with local jurisdictions able to impose additional sales taxes up to a maximum combined rate of 8.25%.

The amount of tax charged on a platform fee will depend on what services are being taxed, the amount subject to the data processing rules and the applicable state and local sales-tax rate.

Airbnb provides a useful example

Airbnb specifically states that Texas state and local sales tax applies to its service fees, with a portion of those fees treated as taxable data processing.

Airbnb is applying sales tax to 64% of its service fee. An Airbnb market manager confirmed that percentage to Jeremy, and the same calculation is reflected in actual Airbnb host transactions reviewed locally.

In Airbnb’s case, the 64% taxable base results from two 80% calculations. Airbnb treats 80% of its service fee as attributable to data processing. Texas then applies its statutory 80/20 rule, under which 20% of the data processing charge is exempt and the remaining 80% is taxable.

The Airbnb calculation is:

80% × 80% = 64%

For a $100 Airbnb service fee, $80 is treated as the data processing portion. Texas’s statutory exemption then applies to that $80, leaving $64 subject to state and applicable local sales tax.

At the maximum combined Texas sales-tax rate of 8.25%, the sales tax on that $100 Airbnb service fee would be $5.28:

$100 × 80% × 80% × 8.25% = $5.28

What does this mean under Airbnb’s new 15.5% host fee?

The impact is particularly relevant as Airbnb moves hosts to its single-fee structure, under which the service fee is charged entirely to the host. Under the new structure, the standard host service fee will be 15.5% for most hosts.

Consider a reservation with a $1,000 booking subtotal. Airbnb’s 15.5% service fee would be $155. Based on Airbnb’s calculation, $99.20 of that fee would be subject to Texas sales tax.

At the maximum combined state and local sales-tax rate of 8.25%, the sales tax would be approximately $8.18. The total cost to the host would therefore be $163.18: the $155 Airbnb service fee plus $8.18 in sales tax.

For a host subject to the maximum 8.25% rate, that increases the effective cost of Airbnb’s 15.5% service fee to approximately 16.32% of the booking subtotal.

What about Vrbo and other platforms?

The Texas data processing rules are not limited to Airbnb. They can apply to taxable services provided by other marketplace platforms operating in Texas.

That does not mean every OTA will necessarily tax the same portion of its fees. Platforms provide different combinations of services and structure their host fees, commissions and payment-processing charges differently. The taxable amount may therefore vary by platform.

Hosts who use Vrbo, property management systems, direct-booking software and other technology providers should review their invoices and transaction statements for Texas sales tax and look closely at the amount on which the tax is being calculated.

Where does the tax go in your accounting?

Sales tax charged on an OTA’s service to the host is different from hotel occupancy tax and from a tax the host collects from a guest. In this transaction, the host is purchasing a service from the platform and paying applicable sales tax on that service.

For bookkeeping purposes, the sales tax paid on the platform service would generally be treated as part of the cost of that service. In the Airbnb $1,000 booking example, the total platform expense would be $163.18 — the $155 Airbnb service fee plus $8.18 in sales tax.

Depending on the host’s bookkeeping system and accountant’s preferred chart of accounts, the total might be recorded under Platform Fees, Booking Fees, OTA Commissions, Airbnb Service Fees, Commissions and Fees, or a similar business-expense category. Hosts should retain platform statements and invoices showing both the service fee and associated sales tax and follow the expense classifications recommended by their accountant or tax professional.

This is separate from hotel occupancy tax

The distinction between sales tax and hotel occupancy tax is important. HOT applies to the rental of the accommodation. The sales tax discussed here applies to taxable services purchased from an OTA or other platform.

The two taxes may be associated with the same reservation, but they are imposed on different transactions and have different taxable bases.

For hosts, the practical takeaway is to look beyond an OTA’s advertised commission or service-fee percentage when calculating the cost of using the platform. Texas sales tax on taxable platform services is another expense that may need to be included in that calculation.