Earlier this year, the city of Los Angeles stopped letting illegal medical marijuana dispensaries sign up to pay businesses taxes because, well, they're unlawful and, as City Councilwoman Nury Martinez explained, "We shouldn't be making money off of illegal businesses."
This week, however, the city announced a deal with Airbnb in which the company will collect and turn over hotel taxes from short-term rentals booked through its website, even though the vast majority are illegal.
So why is tax revenue from illegal short-term rentals OK, but not tax revenue from illegal pot shops? One possible answer is politics. Another is pragmatism.
Pot shops are very unpopular in some neighborhoods, and the city has been criticized for failing to stop the proliferation of illegal dispensaries. When City Council members learned that the city was registering and issuing business tax certificates to illegal dispensaries, which made it appear that the operations were legal, they decided to halt the practice. Council members said the city shouldn't register or collect taxes from illegal businesses – even if it means losing money. Councilman Mike Bonin compared it to registering businesses that sold heroin or shark fins.
The act of renting out a room for a few nights on Airbnb isn't as bad as peddling heroin or killing sharks for their fins. But, it is illegal in Los Angeles. Critics worry that the agreement with Airbnb legitimizes the practice and sends a message to hosts and travelers that short-term rentals are legal in the city. Airbnb wants legitimacy and that's why the company has pushed city leaders to make a tax-remittance agreement.
Mayor Eric Garcetti seemed to be on board with the tech company's plan. He announced in his 2015 State of the City address that L.A. would start collecting hotel taxes from Airbnb, and use $5 million of the tax revenue for affordable housing. But City Council members refused to negotiate the tax agreement; Councilman Paul Koretz said he didn't want to legitimize illegal short-term rentals before regulations were in place. So, Garcetti's promised $5 million for low-income housing never materialized. This year, Garcetti again banked on the Airbnb deal in his budget for homeless spending.
But short-term rentals are still illegal because the city still doesn't have regulations in place. Yet, City Administrative Officer Miguel Santana and the Department of Finance went ahead and negotiated an agreement in which Airbnb would levy the city's 14% Transient Occupancy Tax on rentals booked through its site and remit the money to the city. Officials estimate the tax will bring in nearly $6 million this year, although Airbnb has suggested it will be much more.
Why not wait for short-term rental rules? Well, the city could be waiting a long time. Last month, the Planning Commission backed a proposal that would legalize short-term rentals in peoples' primary residences for no more than 180 days a year. In an attempt to put some teeth in the rules, the proposal would also penalize Airbnb and other websites for advertising rentals that fail to register with the city, or which refuse to turn over the addresses of hosts who fail to register. Airbnb filed a lawsuit against San Francisco last month after the city passed rules seeking to hold Airbnb responsible for advertising unlawful rentals. The company is seeking an injunction to block that city from enforcing its regulations. If Airbnb is successful in San Francisco, the city of Los Angeles may need to go back to the drawing board, which could further delay regulations.
So, even though city leaders aren't consistent on collecting taxes from illegal businesses, they're at least practical. If L.A. can't properly regulate short-term rentals, the city might as well start making money off the roughly 12,000 Airbnb hosts renting out their homes illegally.