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Taxing and Legitimizing the Sharing Economy

August 26, 2014

The so-called “sharing economy” has recently gained a lot of steam.  This model, which helps owners of latent high value assets pair up with possible users of those assets, has been cited among the most dynamic and exciting types of start-ups over the past few years. In fact, just this Monday, Illinois Governor Pat Quinn vetoed legislation that would have seriously restricted the extent to which the ridesharing app Uber may do business in the state, citing a fear of stifling innovation. As is often the case, however, the dynamism of these new business models appears to be clashing with the archaic regulations and taxes which might govern the industries upon which these “sharing” businesses are encroaching.

Last week, Airbnb, which describes itself as “a trusted community marketplace for people to list, discovery, and book unique accommodations around the world[,]” announced that it would begin collected Oregon’s 1% lodging tax. This is not the first time Airbnb has made the headlines. Last October, New York State Attorney General Eric Schneiderman subpoenaed the company, seeking information regarding the 15,000 or so hosts who rent rooms via Airbnb. Airbnb attempted to lobby New York City Mayor Bill de Blasio’s office to attempt to get the city to change its rules regarding renting out rooms, but to no avail. According to Airbnb, legitimizing its business in New York City would bring in about $21 million to New York State and City.  Instead of working with Airbnb, members of the city council have indicated they simply want to investigate the company further.

Airbnb is certainly newer than many of the online travel companies ( OTCs) which have been embroiled in litigation with respect to the base upon which they should collect tax. States have gone different directions as to whether OTCs should collect tax at the wholesale rate they pay to the hotels, or whether the tax should actually apply to the marked-up rate charged by the OTCs. It turns out that Airbnb’s decision to collect tax in Oregon probably is not related to the recent developments regarding the OTCs, as it earns its money in an entirely different way than the OTCs. Instead, the decision likely turned on a unique aspect of the Oregon tax which is far from a universally applied approach as well as Portland’s willingness to work with Airbnb’s new business model.

Most states impose their lodging taxes upon persons engaged in renting hotel rooms to transients for less than a particular period of time, typically 30 consecutive days. The Oregon Lodging Tax, however, which took effect last October, applies to lodging providers as well as “transient lodging intermediaries.” Basically, under Oregon law, if you collect the payment from a customer, you have to collect tax on that base. Given this distinction, it is understandable that Airbnb began to collect tax on its Oregon transactions.

Airbnb does not have reason to lament having to collect tax in Oregon. In fact, its agreement with Oregon will only help to legitimize its business within the state. Last month, for instance, the Portland City Council passed legislation that would allow Portlanders to rent out rooms, subject to inspections and notification requirements. Because Portland agreed to legitimize the majority of renting activity that was occurring within the city, Airbnb agreed to begin collecting local taxes.  Its decision to collect Oregon tax certainly dovetailed with Portland’s openness to its business model.

States often apply their archaic laws to new business, and when square pegs fail to fit into round holes, entrepreneurship suffers.  Now, at least in Portland, Airbnb will be able to solidify its legitimacy and the state and city will receive revenue that is due. Other jurisdictions should take note.

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