HomeAway took a minority stake in its tax-compliance partner, HotSpot Tax, in a move that seeks to bolster the vacation rental site’s reputation as a law-abiding corporate citizen and potentially enables it to grab new business as the alternative lodging sector expands in the U.S.

HotSpot Tax, which has been the exclusive tax-compliance partner of several HomeAway brands and partners with other rental sites, too, maintains a database of the varied short-term rental and occupancy taxes across the U.S., and offers a Web-based solution for vacation rental owners and property management companies to comply with local and state tax law.

Carl Shepherd, HomeAway co-founder and chief strategy officer, declined to disclose the amount of the company’s investment in HotSpot Tax, but said HomeAway is not a majority owner, and HotSpot Tax remains independent of HomeAway.

Hotspot Tax released a redesigned website last night in advance of the August 26 announcement.

In addition to HomeAway brands, HotSpot Tax partners with companies such as iStopOver, LeisureLink’s ABetterStay.com, and several other sites, and hopes to forge new relationships across the short-term rental sector.

“The deal in no way inhibits HotSpot Tax from working with other companies,” Shepherd said. “In fact, this investment enables HotSpot to move beyond its existing standalone tax-compliance product to offer an integrated solution across many short-term rental platforms, and helps the company achieve its goal of making it easy and cost-effective for individual owners (and property management companies) to comply with increasingly complex tax rules in thousands of jurisdictions.”

Taxing Criticisms

Short-term rental sites from HomeAway to Airbnb and TripAdvisor have come under fire at times from failing to collect or remit local taxes.

Shepherd argues that lack of compliance by owners tends to be due to the complexity of figuring out widely divergent local and state rental-tax laws.

“Tax compliance is an important issue in our growing industry, and we believe most municipalities see it as the emblem of a level playing field among local lodging providers,” Shepherd said. “Generally, if people are not compliant, it’s because it’s not easy to figure out and comply with local requirements, not because they’re avoiding taxes.”

Giving vacation rental owners the tools to more easily comply with local rental taxes will enhance the industry’s image, Shepherd said.

“HotSpot makes it easy for owners to know they have properly remitted these highly specific taxes, which in turn increases local compliance and helps municipalities benefit from the vacation rental industry,” he said.

The Honor System?

Airbnb, which has faced criticism for not stepping up to ensure hosts comply with tax laws, advises hosts to take steps such as including various rental taxes in the nightly rate or to urge “guests to pay it in person.”

In at least two jurisdictions, San Francisco and Portland, Oregon, Airbnb has agreements to collect local rental tax on behalf of hosts.

HotSpot Tax was founded in Denver in 2002 by Rob Stephens and Kim Stephens.

Rob Stephens, who is co-founder and CEO of HotSpot Tax, says the HomeAway investment is HotSpot Tax’s first financing, and that the company has been profitable in recent years.

“The need and demand for tax compliance is such that we felt compelled to bring on capital partners and accelerate our growth plans,” Rob Stephens said.

Rob Stephens said the company plans on using the capital injection for product development; to integrate with listings’ sites, property management systems and various booking sites, and perhaps to expand its services outside the U.S.

Photo Credit: HomeAway invested in HotSpot Tax, which provides solutions enabling vacation rental owners and management companies to more easily comply with rental taxes. Pictured, a VRBO vacation rental in Napa Valley. VRBO