This article in my local newspaper highlights an important issue with landlords: many are not aware they are supposed to be collecting city sales tax on their rental income. In addition to the sales tax, I discovered you also need to register the property as a rental property with the county. What happens if you don't do this? Penalties vary by city, but you could face fines of up to 25% of the value of back taxes owed, plus a fine of $1,000 for not registering the property as a rental property. Lack of manpower meant that, in the past, you could fail to do these things and manage to escape detection fairly easily. However, with the real estate boom and the large increase in the number of rental properties, cities have realized this is now a huge source of revenue they are missing out on and are starting to throw resources at it. Chandler, Arizona hired an ASU grad student to search through real estate and utility records looking for mismatches, which may indicate rental units. So far, they've collected $33,000.
When I first got my rental property, I didn't know I needed to collect tax until my CPA mentioned it. It wasn't a big deal, but it did mean I had to pay $20 a month in sales tax, plus about $50 a year for a sales tax collection license. Had I known I needed to collect tax, I would have included it in the rent I charged my tenant. Instead, I had to take a drop in my cashflow of $20 a month.