A year after she listed her Sea Pines home on the website Airbnb, Tuzy Wall was ordered to stop renting to guests.
Sea Pines Community Services Associates, which runs the neighborhood, said she could not live in her home and rent it at the same time.
“They sent a cease-and-desist letter,” Wall said. “It surprised us. We didn’t think we were doing anything wrong.”
Two years later, Wall and the Sea Pines group are engaged in a legal battle to decide Airbnb’s fate in one of Hilton Head Island’s largest private communities. A final decision on the case is expected in the next few weeks.
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The lawsuit foreshadows a power struggle between the established tourism powers that operate by long-standing rules and Airbnb, a new website that exists in a regulatory gray zone.
On the website, people rent lodging in South Carolina or anywhere else in the world – be it a spare bed, a couch, a house boat or an entire home. It’s increasingly popular with vacationers interested in less-expensive lodging options and with South Carolina property owners looking to make extra cash.
But some private communities and local governments aren’t thrilled with the website’s growing presence in the South Carolina market.
In the Lowcountry, for example, the website has effectively bypassed Beaufort County’s rental management companies that tack on a surcharge of up to 30 percent for helping to rent homes. In some cases, the website also is sidestepping local and state governments that charge thousands of dollars in fees and taxes to those who rent their properties.
Some hospitality leaders say it is unfair that the startup is competing for customers without being subject to the same regulations or paying the same taxes.
“Sometimes they have advantages that other properties don’t have,” said Robb Wells, vice president of the Beaufort Chamber of Commerce’s tourism division. “As far as paying certain taxes, like hotels do, Airbnb can kind of sidestep that by offering a couch (for rent).”
Airbnb owners, known as hosts, argue the service attracts different travelers than those who visit hotels or rent vacation houses through the area’s management companies. Most hosts say they would gladly pay taxes if charged.
Despite unprecedented global growth, the company’s presence is still relatively small around South Carolina.
Yet some observers say Airbnb and the so-called “sharing economy” will transform the vacation industry, the lifeblood of places like South Carolina’s Lowcountry.
They warn traditional powers must keep up or be left behind.
Most people don’t have a week. From a time and money standpoint, this is the only way a lot of people can come here.
Tuzy Wall, Airbnb host
“Companies like Airbnb are revolutionizing the way people do business,” said Scott Smith, a University of South Carolina hospitality-management professor who studies the sharing economy. “Everyone else better figure it out pretty quick. If they don’t, they won’t know what hit them.”
Battle behind the gates
Starting at $114 a night during the peak season, Tuzy and Steve Wall give strangers access to nearly all of their spacious Sea Pines home. The couple sleeps in a tiny bedroom on the second floor, accessible by a separate entrance.
Inside, custom artwork dots the brightly colored walls. A massive fireplace built by Czech craftsmen dominates the living room, which is filled with Oriental furniture that belonged to her father, an American attache in South Korea after the war.
“We definitely attract people who want a unique experience,” said Wall, who bills her house as “organic” on Airbnb.
She first read about the website in a national newspaper three years ago.
The former hotel-marketing professional recognized the potential.
“I thought it would be a platform that would take off,” she said. “It made so much sense.”
Her rental, one of the first Airbnb listings on Hilton Head Island, was an immediate success.
It soared up peer-reviewed charts after receiving positive ratings from guests. That rise probably caught the attention of Sea Pines leaders, she said.
In 2013, a Community Services Associates official called her husband, Steve, and told the couple to stop renting. Letters followed.
Eventually, the group hit them with a lawsuit.
It alleged, among other claims, the Walls were operating a bed and breakfast, which violated the development’s covenants, according to the complaint filed in Beaufort County Circuit Court.
The Walls stopped serving breakfast. Guests now cook their own meals, Tuzy Wall said.
Community Services Associates also said Sea Pines rules prohibit a resident from living in a single-family home and renting it at the same time, according to the complaint.
“We have nothing against Airbnb,” said Community Services president Bret Martin. “We’re simply enforcing our covenants. It’s a single-family unit. The covenants don’t allow multiple unrelated entities into a single-family unit.”
The Community Services complaint warns the spread of such rentals would disrupt life in Hilton Head’s oldest gated community, court documents show.
In May, Master in Equity Marvin Dukes ruled the Walls’ arrangement did not violate the community’s bylaws.
We believe that those offering rentals on the Airbnb platform should adhere to the same rules set forth for others in the accommodation rental business by following the law on paying accommodations taxes and having a business license with the town (when necessary).
Charlie Clark, vice president of communications at the Hilton Head Island-Bluffton Chamber of Commerce
He called the group’s warnings of unregulated rentals a “legitimate concern” but wrote, in this case, “It appears to me that (an owner on-site) actually minimizes the possibility of loud or destructive tenants in what all agree is an area with numerous resort rentals.”
Community Services has asked Dukes to reconsider. A hearing is scheduled for July 28. Afterwards, Dukes will issue his final ruling, which Sea Pines could appeal.
Meanwhile, the Walls continue to rent.
Tuzy Wall said she’s normally booked from March through August and rarely has an open day during winter months. She declined to say how much money she earns through Airbnb.
“Most people don’t have a week,” she said, referring to the island’s typical week-long vacation-rental cycle. “From a time and money standpoint, this is the only way a lot of people can come here.”
Governments are searching for how best to zone, tax and oversee Airbnb and other short-term rental websites, such as Vacation Rental By Owner, or VRBO.
At stake could be hundreds of thousands of dollars in tax revenue, officials say, money that pays for schools, roads and law enforcement.
In Beaufort County, much of the problem is the county lacks the resources to police homeowners.
Some owners don’t tell the county they are renting out their second homes. Instead of paying the state-mandated 6 percent property tax rate that owners of vacation homes are required to pay, they are charged at the 4 percent rate that’s reserved for owner-occupied homes.
Beaufort County assessor Ed Hughes said his staff investigates hundreds of complaints of owners skirting the law each year.
Many complaints derive from properties listed online for rent that are classified as being owner-occupied home. Recently, Hughes collected back taxes on a home of more than $70,000, he said.
In the case of Airbnb, properties listed for rent do not show addresses, limiting Hughes and his staff in their investigative ability.
“We’ll take a look at the map and see what we can find out,” he said. “But it’s a moving target. New rentals pop up all the time.”
And it does no good to simply prove that a homeowner is renting out part of a home on Airbnb. State law says that hosts who live in their homes are not subject to higher property tax rates.
But if Airbnb hosts are renting out their entire homes and are not living on-site, they are required to pay the 6 percent property tax rate. And in Beaufort County’s towns and cities, Airbnb hosts who rent out more than one property must get a business license, which usually costs about $50 for the first year.
In some cases, they also must pay local and state accommodations taxes – a tax on overnight lodging – but the rules are murky.
“The downside is (Airbnb) is not completely trackable for local governments who depend so heavily upon tourism revenue,” said Wells, the Beaufort chamber vice president.
On Hilton Head, for example, the town doesn’t charge hosts who rent their primary home and have fewer than 6 bedrooms.
But if the host rents a guesthouse next to their primary home, it’s unclear whether they would be charged lodging taxes, according to Bruce Seeley, the town’s inspections, collection and audits manager.
Government officials previously have regrouped to deal with a newcomer to the tourism market.
At the behest of rental companies, the town cracked down on VRBO rentals in 2012, collecting more than $150,000 from property owners who didn’t pay lodging taxes. VRBO almost exclusively advertises second-home rentals.
Airbnb is a different animal, said town finance director Susan Simmons.
One primary difference is that owners typically live in the homes while they rent them, creating situations that aren’t spelled out in state law.
“It’s a very new and untapped issue,” Simmons said. “A few years ago we didn’t have it. Nobody was renting only part of their house.”
Local business leaders say they respect the company’s innovative approach as long as it plays fairly.
“Tourism is a constantly evolving industry, largely driven by the consumer and technology,” Charlie Clark, vice president of communications at the Hilton Head Island-Bluffton Chamber of Commerce, said in an email. “We believe that those offering rentals on the Airbnb platform should adhere to the same rules set forth for others in the accommodation rental business by following the law on paying accommodations taxes and having a business license with the town (when necessary).”
It’s not just a Beaufort County issue.
Nationwide, regulators are struggling to define and oversee this new player in the “sharing economy,” a collection of Silicon Valley start-ups with business models that are said to disrupt existing industries. The ride-sharing service Uber is among them.
In North Carolina, Airbnb agreed this spring to pay sales and hotel occupancy taxes for every booking. In the past year, it also began paying taxes in San Francisco, Portland, Chicago, Malibu, San Jose, Washington, D.C., and Amsterdam.
Wall, the Sea Pines owner, currently pays local lodging taxes. She and several other Airbnb hosts said they would pay state taxes if charged.
“I think it’s a no-brainer,” Wall said. “It’s completely fair.”
Most hospitality leaders suspect there aren’t enough Airbnb rentals to take a meaningful slice out of their business.
Some see Airbnb as an urban phenomenon. In bigger cities such as Austin and San Francisco, where there are more opportunities for hosts, Airbnb will dig into hotel revenue by roughly 10 percent by 2016, according to a Boston University study released last year.
It’s different in vacation areas, where hotels and rental companies own the prime real estate. There isn’t enough inventory to challenge the established market, some analysts say.
Plus hotels will always draw business travelers, who prefer the consistency of Marriott or Westin to a stranger’s couch.
But that doesn’t mean local management companies aren’t keeping an eye on the upstart clawing at their target market.
Bob Hawkins, owner of The Vacation Company on Hilton Head, said Airbnb reminds him of when VRBO came to the Lowcountry last decade.
Many thought VRBO would undercut rental companies and upend the established market, he said.
Instead, rental companies started advertising on VRBO. Eventually, the companies won over guests because they were more reliable, with maintenance staff on call to repair broken air conditioners or unclog toilets.
“I think VRBO renters thought they wanted owner-operated (rentals) because they were going to get a deal,” Hawkins said. “But there were so many horror stories, so many scams.”
Hawkins said there could be a similar outcome with Airbnb. He’s considered advertising a few properties on the website.
“My philosophy is, ‘If you can’t beat them, join them,’” he said.
Smith, the USC professor, said it’s important for established players to pay attention. Whether it means advertising on Airbnb or completely re-branding to appeal to younger audience, hoteliers and rental companies must keep pace with the start-up to attract the modern consumer.
“My advice to a rental company is to use every avenue possible to market property,” he said. “If you embrace it you’ll do fine. Otherwise someone else will be eating your lunch.”