Tax Analysts Blog

Tax Challenges for the Uber Economy

Posted on Jul 13, 2015

The sharing economy. The collaborative economy. The Uber economy. It goes by many names. Whatever you call it, the phenomenon of specialized on-line marketplaces connecting small businesses with customers is growing by leaps and bounds. The primary builders of these marketplaces are tech-savvy, venture-capital-fed firms like Uber and Lyft (taxilike transportation services), Airbnb and Homeaway (short-term residential rentals), Instacart (grocery delivery), Lending Club (small-scale finance), and TaskRabbit (household errands).

In theory, a reliable and comprehensive tax system should be readily able to adapt to a changing economy. But our tax system is held together with duct tape and clings to 20th-century business models. So the disruption to markets caused by the rise of the sharing businesses is poking holes in the existing tax apparatus.

To date, the most conspicuous tax issue raised by the sharing economy is the applicability of local hotel taxes to rentals of rooms and residences through Airbnb. Over the last year, Airbnb has agreed to collect the tax in several jurisdictions, including San Francisco, where it is based. But the hotel tax problem is only the tip of the iceberg. As the sharing economy grows in both size and scope, it will encounter many taxes (income, employment, and excise) in many jurisdictions (local, state, federal, and foreign). The following is a list of tax-related issues we are likely to hear more about in the upcoming months and years.

1. Unfair competition. Business taxes should create a level playing field for competitors. If new services from the sharing economy go untaxed, government inaction will result in market distortions that reduce economic growth.

2. Revenue loss and possible gains. If services from a sharing company substitute for existing services and new sharing services go untaxed, governments will face revenue losses. But it is also possible that new services could generate additional revenue if, for example, Uber increases overall demand for taxi-like services. It is also possible that new sharing services may stimulate the overall economy if, for example, residential rentals through Airbnb encourage longer tourist stays.

3. Excise tax reevaluation. Excise taxes are economically justified if they allow application of the benefit principle (for example, where hotel taxes are used to fund a convention center) or when they are used to reduce negative market externalities (like congestion). Governments should reevaluate the reasons for imposing excise taxes and see if they apply to new sharing services. It might make sense, for example, to exempt rentals in residential areas from the hotel tax if that tax is used to support a downtown convention center. On the other hand, residential rentals may create new negative externalities -- like increasing traffic in a residential community -- that provide new justifications for excise taxes.

4. New tax expenditures. Sharing businesses may also generate positive externalities. For example, ride-sharing services could reduce parking congestion. More subtle but perhaps even more important, the widespread availability of sharing services can signal that a local economy is friendly to the high-tech industry and so can be a draw for new residents and businesses. Governments may want to consider promoting development of the sharing economy by providing targeted tax relief.

5. Employee versus independent contractor. Last month California regulators ruled that a driver for Uber should be classified as an employee, not an independent contractor. If Uber drivers are classified as employees for tax purposes, the company would be required to withhold income taxes, pay unemployment taxes, and pay and withhold Social Security and Medicare taxes. Uber is appealing. Whatever the ultimate outcome, there will likely be a protracted and spirited debate about whether service providers guided to customers by web-based marketplaces are employees or independent contractors.

6. Compliance by providers. Most of the new service providers do not have any experience with the requisite tax record-keeping and business filing obligations. To comply with tax laws these microentrepreneurs will be spending relatively large amounts on return preparation assistance and devoting a lot of hours to recordkeeping. Because it entails a large influx of new very small businesses, the sharing economy will be bearing significantly larger-than-average tax compliance costs.

7. Compliance by sharing companies. A lot of the new compliance burden can be alleviated if tax is collected by sharing companies (in the case of excise taxes) and if recordkeeping for income tax is assisted by information reporting from sharing companies. As noted, in San Francisco and other cities, Airbnb is paying hotel taxes directly to the city government. But those are the exceptions. In most cities, Airbnb hosts are required to pay local taxes on their own. Uber and Airbnb alleviate some of the record-keeping burden on service providers by sending them Forms 1099.

8. Tax administration. Small businesses have low compliance rates. This is a big headache for tax administrators because small business audits and enforcement actions are costly and yield relatively small amounts of revenue. Now more than ever, lawmakers should consider simplification measures for truly small businesses.

9. Intangibles and base erosion. Sharing companies, like most IP-intensive tech companies, will have lots of opportunity for international tax planning. And like Apple and Amazon, they will likely face lots of scrutiny from tax authorities and from the public if they pay what are perceived to be inordinately low taxes in countries where they operate.

10. Tax politics. In this era of legislative gridlock, there is a strong bias against action and in favor of retaining the status quo. If it is unclear whether sharing businesses are subject to existing tax and reporting requirements, inaction will work in favor of sharing businesses. Anti-tax conservatives who oppose all tax increases are likely to become natural allies of sharing firms’ efforts to avoid or delay tax burdens. Keeping tax low is admirable, but allowing any business a tax advantage over competitors is indefensible.

The economy is evolving, but the principles of good tax policy remain the same. For income and sales taxes, level the playing field. For excise taxes, address negative externalities. For subsidies, target positive externalities. Above all, simplify. As usual, political considerations will muddy the waters. And as usual, failure to implement rational tax policy can have serious consequences for job creation and economic growth.

Read Comments (3)

emsig beobachterJul 13, 2015

Ecclesiastes: There's nothing new under the Sun. I don't see why the "Uber" or
Airbnb economy is called sharing. Both Uber and Airbnb get paid for their
services -- that's hardly "sharing." In my opinion, Uber and Airbnb are brokers
that provide more services; or, a type of franchisors. Once we stop buying into
the hype that these companies are completely different from brokerages and
frnachisors of the old economy, we can make rational policy choices. And then
watch elected policy makers mess them up.

Michael KarlinJul 19, 2015

Martin, do we really need to have only two statuses, employee or independent
contractor. Why not think this through and find an intermediate status, with
some employee protections for service providers who are subject to significant
control or regulation by their service recipients and especially for those who
work for only one service recipient? On the other hand, fewer employee
protections where the service provider chooses his or her hours, does not
receive significant training and makes a significant capital investment (such
as in equipment). The margins between two categories will always result in
controversy, but it would be an improvement if we reduced the stakes. It's the
all or nothing results of the current Manichaeist classification system that
makes it such a burning issue.

edmund dantesJul 19, 2015

Along several policy fronts, we've made having full-time employees incredibly
expensive for employers. At the entry level, the costs of benefits, taxes and
regulatory compliance may be larger than the cost of payroll!

Hence, the explosion of part-time employment, in which employers much prefer to
have 10 people limited to 20 hours per week than to have 5 working 40 hours.
Hence the advent of the Uber economy, in which people are empowered to become
independent contractors. These are the market's response to the excessive
burdens that have been placed on employment.

If you try to legislate them away, you will only succeed in driving up
unemployment. Per Bernie Sanders, real unemployment already exceeds 10%. If
we count the explosion of recent Social Security disability applicants for what
it really is--unemployed older Americans who can't find jobs--the unemployment
rate may be closer to 20%.

I've used Uber and I've used taxis, and Uber provides a dramatically superior
experience, usually at lower prices. This is a good thing, we should be
encouraging it, not fighting it. We need more jobs in this country. The
"sharing economy" can make an important contribution.

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