Two people operating short-term rentals legally under nonconforming use certificates they received from the city decades ago told the City Council Budget Committee Wednesday that the new vacation rentals law unfairly punishes them by placing their properties into the hotel tax class where they would have to pay much more annually.

Jill Paulin owns one of about 800 NCU certificates and therefore can legally operate a North Shore transient vacation unit. She estimated that her taxes could climb to more than $7,000 if taxed at a hotel rate from the $1,800 she pays now, a jump that could make her business unsustainable.

“It makes no sense,” Paulin said. “It really would put almost everybody with a TVU in these types of environments out of business and maybe that’s the intention. We pay our taxes, we pay our certification fees every year two years in advance.”

Despite the objections, the committee moved out Bill 55, positioning the measure for a final vote of the full Council at its Dec. 4 meeting. Budget Chairman Joey Manahan and Councilman Ron Menor, who tried unsuccessfully Wednesday to add language exempting NCU-allowed vacation rentals from moving into the hotel class, promised to address the issue in a new draft before the final vote.

The bill creates a new tax category for bed-and-breakfast establishments. Council members, who set tax rates annually each June, are widely expected to set the B&B rate somewhere between the hotel rate of $13.90 per $1,000 of assessed value and the residential rate of $3.50 for every $1,000 of value.

Additionally, the bill places all non-hosted transient vacation units, or TVUs, in the hotel tax category, making it a certainty they would be paying more since they now are in the single-family tax class.

Currently, the city makes it illegal to rent a residential property for less than 30 days unless specifically allowed to do so as is the case with about 838 NCU permits issued prior to 1989. A B&B is a “hosted” short-term rental where the property owner continues to reside even when paid guests are there. A TVU is considered a “whole home” short-term rental where there is no host.

City officials want the new tax category in place for the 2020 tax year because up to 1,700 new permits for “hosted” bed-and-breakfast operations will begin being issued by the Department of Planning and Permitting in October under the wide-ranging vacation rental ordinance approved by the Council and signed by Mayor Kirk Caldwell in June. No new TVUs will be allowed under the new bill.

The Council will need to pass Bill 55 at its December meeting for the new category to be in place for next year because the Real Property Assessment Division sends out assessed values annually in mid-December.

SharLyn Foo, who operates a NCU out of a single-family residence, said the cost of renewing her certificate annually went to $200 from $10, and now will cost $2,000 under the new vacation rental ordinance.

Foo said the new ordinance, coupled with the proposal to place TVUs in the hotel class, will only drive illegal operators further underground, leaving legal operators such as herself the only ones punished.

“You’re allowing thousands to run illegally because you know where we are, you don’t know where they are,” Foo said. “If you’re going to call me a hotel, it’s illogical and a Catch-22. Since there aren’t going to be any new TVUs allowed, who is this law targeting? Just us.”

Steve Takara, administrator of the Real Property Assessment Division, said removing NCU-allowed TVUs from being the hotel tax class “may cause an inequity to the tax base.”

Takara said the administration is OK with the NCUs that operate as B&Bs being allowed to remain in the residential class but is firm that NCUs operating as TVUs should be placed in the hotel class. Of the 808 operators with NCUs, 770 operate as TVUs while only 38 are B&Bs, he said. Having the TVUs switched into the hotel category would net the city about $5 million annually in revenue, he said.

Menor said he has a hard time equating TVU operators with hotel and resort companies. While TVUs may be considered investment properties, many of the NCU operators are local residents who have been running legally for decades.