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Tax Law

The Challenge of Taxing the Sharing Economy

by Jessica L. Kerner, J.D., LL.M. *

In 2007, a hotel room shortage in San Francisco prompted two roommates to create a website to rent out air mattresses in their apartment. Less than eight years later, the company they founded, Airbnb, has been valued at more than $25 billion. ["Value of Airbnb Hits $25.5 Billion with Latest Round," The Wall Street Journal (June 29, 2015).] The success of Airbnb is mirrored in other "peer-to-peer" startups, such as Uber, Lyft, and HomeAway, which are capitalizing on technological advances that have allowed the creation of platforms to directly connect buyers and sellers.

How the Sharing Economy Operates

The sharing economy is driven by businesses that provide internet-based platforms connecting buyers and sellers of goods and services. Two examples of the sharing economy at work are the accommodation and transportation markets. The short-term room rental market has been revolutionized by platforms like Airbnb, HomeAway, VRBO, and Flipkey that allow individuals to advertise entire homes or rooms in homes as short-term rentals. On Airbnb alone, rooms are available in 190 countries and 34,000 cities. In the transportation space, ride-sharing companies like Uber and Lyft are taking market share from traditional providers like taxi and limousine services. Uber is available in 60 countries worldwide, and Lyft operates in about 60 cities in the United States.
Taxes and the Sharing Economy 

Tax Policy

In taxing the sharing economy, it is important not to create separate laws that apply only to the sharing economy. Doing so would violate two central tenets of tax policy: that taxpayers should be treated uniformly and that similar services and goods should be taxed the same. When similarly situated companies, or similar products and services, are subject to different tax treatment and to different regulations, it can result in unfair competition, which may lead to distortions in the market and litigation. For example, traditional taxi services are often heavily regulated by cities that collect substantial fees from taxis in exchange for licenses to operate. Ride-sharing companies (and their drivers) have largely operated outside of these regulations and have not been subject to these significant fees, which some attribute to being one of the reasons for their dramatic growth. With lodging, sales and hotel taxes can be as high as 10-20% depending on the location. When short-term rentals do not include these taxes, they have an advantage over hotels and other lodging establishments that are collecting these taxes, as it reduces the cost of the room for the consumer. However, legislatures and regulators must be must be careful when attempting to tax and regulate new business models that new disparities are not created.

As the sharing economy continues to grow and evolve, tax laws and policies will need to be continuously monitored, updated, and reformed. In attempting to modernize laws and level the playing field between existing and new business models, lawmakers should apply the usual principals guiding tax policy. Although governments have historically struggled to update tax laws and policy in response to technological changes, it is clear that technology will continue to advance and that governments need to be similarly forward-thinking in their tax policies with the goal of addressing new tax issues without stifling innovation.
Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.
* Jessica L. Kerner, J.D., LL.M., is a Content Manager for Lexis Practice Advisor.

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