Taxes begin to catch up with the sharing economy

The sharing economy continues to disrupt traditional industries. Lyft competes with taxis; Airbnb with the hotel industry. However, in the past year criticisms of the trend have emerged as the industries have grown.

More than one million people across the globe will ring in the New Year while staying in an Airbnb property.

For those not familiar, Airbnb provides an online platform linking travelers looking for accommodations to individuals with a spare room or empty apartment for rent on a nightly basis. According to its founders, the site has turned many dust gathering guest bedrooms into a new source of revenue.

Airbnb is a prime example of the sharing economy which creates value by allowing individuals to utilize high-value assets that are underutilized often through an online platform. Other examples include ride sharing services like Lyft and Uber, car sharing platforms, co-working or shared office spaces and freelance sites where people can pick up short term gigs like Taskrabbit.

Some of the criticism of this new business model that have arisen include:

The Independent Contract Model: People providing labor for shared economy jobs are in almost all cases treated as independent contractors. This designation means that individuals are responsible for their own Social Security taxes, do not get access to healthcare or retirement benefits and must cover their own expenses for providing the service.

Some workers enticed by the allure of a flexible and entrepreneurial work option, have become disillusioned after realizing the total costs of independent contracting. In response to driver complaints the Seattle City Council approved an ordinance allowing for drivers for Uber and other ride sharing services the right to organize and collectively bargain for higher wages and better working conditions.

Turning Houses to Hotels: Airbnb has come under fire in high-rent cities like New York, San Francisco and even Seattle for contributing to rising rental housing costs. Rather than the original intent of making use of an extra room in a permanent residence, some property owners and management firms have converted units into full time Airbnb listings. Nightly or weekly rentals can bring in substantially higher profits than annual leases.

Critics have argued that this leads to rising rents as there are fewer units available for people seeking permanent but affordable residences. Furthermore, property owners do not have to comply with tenant rights regulations or fair housing issues for short-term rentals. San Francisco residents recently voted down Proposition F that would place severe restrictions on Airbnb and other providers. However, future efforts are almost guaranteed to continue as housing prices continue to rise.

Lost Tax Revenues: Local governments derive substantial revenue from hotel taxes, licensing fees, sales taxes and other fees paid by traditional businesses. When sharing economy platforms emerged, the regulatory structures made it difficult or impossible to levy taxes. Traditional business in competition with sharing sites have revolted, arguing that by following the regulations, they are at a competitive disadvantage in the marketplace.

In response, many municipalities have begun to adopt tax regimes for sharing economy platforms. Airbnb recently agreed to remit hotel taxes to the city, and Las Vegas negotiated a 3 percent excise tax from ride hailing companies. The future likely holds more regulation and taxation for sharing based businesses.

The sharing economy certainly continues to disrupt traditional industries leveraging the power of mobile technology to create new opportunities to earn income. The size and scope of these billion dollar enterprises means they will not easily go away. However, as regulatory regimes catch up with the times, it will be interesting to see how these networks will continue to evolve.

Ryan Davis is dean of Business and Applied Technology at Everett Community College.

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