uber, airbnb and municipalities: maximizing new tax and...

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Presenting a live 90-minute webinar with interactive Q&A

Uber, Airbnb and Municipalities: Maximizing

New Tax and Licensing Revenue Opportunities Navigating Emerging Legal, Regulatory and Tax Issues in the Peer-to-Peer Economy

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, OCTOBER 14, 2015

Christopher T. Lutz, Attorney, Horwood Marcus & Berk, Washington, D.C.

Rebecca L. Moon, Senior Assistant City Attorney, City of Sunnyvale, Sunnyvale, Calif.

Robert T. Shannon, Partner, Hinshaw & Culbertson, Chicago

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Overview of Regulatory & Financial Implications of

the

Shared Economy

Robert Shannon Partner

Hinshaw & Culbertson LLP

Office 312-704-3901

[email protected]

www.hinshawlaw.com

mailto:[email protected]

http://www.hinshawlaw.com

"Sharing Economy"

The system of accessing products, services, transportation, travel or other resources for the purpose of reusing, renting or sharing. The economic effort is supported by digital technology and website availability that matches the consumer with the business provider. Mason University

Frank Shafroth, George

© 2015 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.

6

Overview of Ride-sharing and Home- sharing Issues

Governmental Impact – sharing economy

includes activities that traditionally were

subject to robust regulatory structures but that may or structures.

may not operate within those


7

Overview of Ride-sharing sharing Issues

and Home-

Historic Examples:

•

•

•

Common carriers (taxis)

Innkeepers (hotels/motels)

Food purveyors (restaurants)


8

Overview of Ride-sharing and Home- sharing Issues

Those driven

historical regulatory by:

schemes were

1)

2)

3)

4)

5)

Licencing

Public safety

Zoning

Revenue

Maintaining infrastructure


9

Overview of More Recent Developments

Rise of Shared Economy Business

Uber Lyft Sidecar •

•

•

Airbnb

HomeAway

VRBO

But Also:


10

Overview of More Recent Developments

Innovative Technology

•

•

•

Bitcoin

E-cigarettes

Drones


11

Challenge for Local Regulators – Balance

•

•

•

Encouraging innovation

Protecting traditional governmental interests

Maintaining level competitive playing field


12

3 Questions

From a Regulatory

Perspective


13

Question 1:

Do these shared economy and innovative technologies come under the existing

regulatory schemes?


14

Question 2:

If not, are they engaged in the same activities as the traditional industries that are

subject to the existing regulations?


15

Question 3:

If yes, how should they be regulated as unavoidably engage

compared to traditional industry in same or similar activity?


16

How Some Municipalities

are Dealing with These

Regulation Issues


17

Examples of Shared Ride Regulatory Approaches

Chicago's Transportation Network

Provider ("TNP") Ordinance

•

•

•

•

•

Background checks

Train affiliated drivers

Inspect affiliated vehicles

Obtain insurance

Cannot service airports © 2015 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.

18

Philadelphia

• Philadelphia Parking Authority has banned rideshare services

However, Pennsylvania Public Utility • Commission has approved rideshare throughout the rest of the state

services


19

Other governmental ride-share examples

•

•

•

•

New York

Virginia

Dallas

"Regulation Delegation" NYU Arun Sundararajan


20

Examples of Shared Residence Regulatory Approaches

• Denver

Banned short-term rentals of less than 30 consecutive

days altogether

Charlottesville, Virginia

Proposal to require provisional use permits

San Francisco

Requires registration with the Office of Short-Term Rental

Registry

•

•


21

How is This Playing Out in Court


22

Growing wave of legal challenges

In many places

Involving different legal theories

Examples:

Boston

St. Louis

Broward County, Fl


23

Illinois

Illinois Transportation Trade Association, et al. v. The City of Chicago

• Judge dismissed all counts except for Plaintiffs' equal protection claims.

Judge reasoned that The city’s requirements in several areas

including background checks, drug tests, insurance, annual fees,

unregulated fares and vehicle age, maintenance and inspection

“are far more onerous” for taxi drivers

Judge concluded that the differences in the rules that govern taxi

operations and ride-sharing services in Chicago “appear utterly

arbitrary.”

•

•


24

How Local Regulators Balance and Minimize

Can Risk

Manage this of Lawsuits

•

•

•

•

•

Become educated

Be

Be

Be

Be

approachable

collaborative

open minded

fair


25

THE NEW ECONOMY

IN CALIFORNIA

Rebecca L. Moon

Sr. Assistant City Attorney

City of Sunnyvale, California

[email protected]

LAWS ARE MADE TO BE BROKEN?

“Innovative disruption” = use of technology to

create new markets and displace existing

industries

Concept introduced by Harvard professor

Clayton Christensen in the late 1990’s

Tech world is now disrupting highly regulated

areas of the economy (transportation, housing,

employment relationships), leading to conflict

with long established laws

27

BIRTH OF “RIDESHARING”

Uber debuted in San Francisco in 2009

Quickly followed by competitors such as Lyft

and Sidecar

Enormously popular with consumers

Immediately clashed with local and state

regulators

Business model – use every available means to

challenge government regulation of for-hire

transportation

28

REGULATION OF TRANSPORTATION IN CA

California Public Utilities Commission (CPUC)

regulates most forms of transportation

Taxi service is regulated locally

“Charter party carriers” (limo services) are

regulated by the CPUC

“Transportation Network Companies” (TNCs)

use a smartphone app to connect customers

with drivers using their personal vehicles – is

this a taxi service or more like hiring a limo?

29

TAXIS VS. CHARTER PARTY CARRIERS

Taxis can accept hails from the curb

Charter-party carriers can only provide pre-

arranged travel

CPUC had to decide if an “electronic hail” using

a smartphone app is pre-arranged or not

Huge consequences for how TNCs are

regulated. Taxi regulation is incompatible with

TNC business model.

30

CPUC RULING

In Sept. 2013, CPUC ruled that TNCs offer pre-

arranged travel and are therefore subject to

state jurisdiction like limo services

Legal challenges by taxi industry unsuccessful

Legislature enacted law requiring TNC drivers

to carry $1M liability insurance

CPUC now considering rules for insurance,

driver drug testing and other issues

31

PROS/CONS OF TNC’S

TNC success fueled by dissatisfaction with taxi service as well as changing values/preferences of consumers

However, taxis still provide valuable service to many in the community

Taxi ordinances require vehicle inspections, insurance, driver background checks, posting/regulation of fares and universal service/non-discrimination

CPUC has reputation for being too cozy with industries it regulates

32

WHAT CAN CALIFORNIA CITIES DO?

Lobby CPUC and Legislature to ensure that

appropriate laws/regulations are adopted to

ensure public safety and protect consumers

Unfair competition lawsuits? (LA, SF)

Modernize taxi ordinances to make taxis more

competitive

Note: state law does allow local regulation of

limos and TNCs at municipal/public airports

Business license tax? – limo exemption

33

ONGOING ISSUES

Pending class action lawsuits may determine

that TNC drivers are employees not

independent contractors. California law is very

favorable to employee status.

CPUC rulemaking in progress

New services are continuing to challenge

existing regulations (e.g. options for riders to

split fares; private bus services)

34

SHARED HOUSING IN SILICON VALLEY

Techie dorms

Hacker homes

Intern houses

Not your

grandma’s

youth hostel!

(These come

with WiFi)

35

CURRENTLY LISTED ON AIRBNB

A tent in someone’s backyard: $25 per night

(San Jose)

36

THE HIGHLY DISTRIBUTED LUXURY HOTEL

“Geekhut’s” rentals include high-end work stations, a fridge full of

groceries, 500 Mbps WiFi and free Netflix, Hulu, and HBOGo. 37

CURRENTLY LISTED ON AIRBNB

School bus converted to a 6-bedroom “luxury

mobile office/living space” for your startup

company: $300 per night (Palo Alto)

38

SUNNYVALE

Suburban community in heart of Silicon Valley

Median home price around $1 million

Average rent approx. $3,000 per month

Not a tourist destination, but critical shortage

of housing for expanding workforce

39

DO THE MATH

$3,000 per month (median rent in Sunnyvale)

= $100 per day

That same apartment for $270 a day

= $8,100 per month

7 bed “hacker dorm” at $35/night

= $7,350 per month

40

HOUSING 2.0

Many cities in California prohibit or regulate

short term rentals in residential zones

Short term rentals through Airbnb, Flipkey etc.

may be considered unlawful hotels/motels

under many city ordinances

Popularity of short-term rental services caught

many cities off-guard and overwhelmed local

code enforcement resources

41

SUNNYVALE’S NEW ORDINANCE

Allows “hosted” short term rentals only (must be host’s primary residence, host must be present on site)

Requires registration and city approval

Maximum of 4 short term renters not including minor children

Prohibits rental of non-habitable space for sleeping

Requires payment of transient occupancy tax

Must be approved by HOA/landlords 42

CONSIDERED BUT NOT ADOPTED

Allow “unhosted” rentals up to “X” days per year? (tried in many cities but difficult to enforce)

Random compliance inspections? (likely unconstitutional – City of LA v. Patel)

Pre-approval inspections, minimum parking requirements, neighbor notification, annual renewals etc. (burdensome permit process will deter compliance with ordinance; compliance in other cities has been extremely low)

43

ENFORCEMENT ISSUES

Hard to prove violations without cooperation from hosting sites

Need warrants or consent to enter homes

May need to use administrative subpoenas to obtain information (see Western City article)

Limited resources available for investigations, surveillance, criminal prosecution and civil nuisance actions

LA Times recently reported that LA is not enforcing its short term rental ordinance

44

TRIAGE APPROACH

Focus available resources at the most

egregious situations especially those with

significant neighborhood impacts or life/safety

issues (unpermitted construction, fire hazards,

rental of non-habitable spaces)

Work with hosting sites to collect TOT

You will not be able to stop all short term

rentals – use regulations as a tool against the

bad actors

45

Tax Compliance Issues in the Sharing Economy

Christopher Lutz

Horwood Marcus & Berk Chtd. Washington, DC

[email protected]

Types of Cases that Have Arisen

• Classification of products and/or services – Is software a service, intangible, or tangible property?

• Classification of businesses – Online travel company (“OTC”) cases – Sharing economy facilitators and vendors

• Economic or agency nexus – Where a seller of a service is located – When is a third part acting as an agent/representaive of a

remote seller

• Alternative apportionment – What is the appropriate mechanism for addressing new

technologies and business models? – Relevant with respect to income tax

47

Classification of businesses

• Sharing Economy facilitators • In the context of homesharing (companies such as

Airbnb), there are a number of similarities with the OTCs.

– No reported cases yet on tax liability; however, see New York AG’s subpoenas issued to Airbnb

• There has been much more movement on the legislative side, primarily at the local level

– For instance, Portland, Chicago, and California’s treatment of ridesharing companies. See Lutz, “Legitimizing the Sharing Economy: Reconciling the Tension Between State and Local Policy Concerns and Innovation,” Bloomberg BNA Dec. 5, 2014.

48

Classification of Products and/or Services

• Will be crucial at the state level for purposes of apportioning income

– Receipts from sales of services, intangibles, and tangible property will often be treated very differently

• Whether a transaction involves a product or a service may be dispositive of whether a particular transaction tax applies

– See City of Chicago Transaction Tax

– Most sales taxes exclude services

49

Classification of businesses

• OTC Cases – Priceline.com, Inc. v. City of Anaheim, No. 30-2009-00244120

(2/1/10); Travelscape LLC v. South Carolina Dep’t of Revenue, 08-ALJ-17-0076-CC (2/12/09); City of Charleston v. Hotels.com, LP, 520 F. Supp. 2d 757 (D.S.C. 2007); City of Fairview Heights v. Orbitz, Inc., 05-CV-940-DRH (S.D. Ill. 2006).

– This line of cases questioned whether the OTCs should have collected tax at the wholesale rate that they paid to the hotels, or whether they should have applied the tax to the marked-up price they charged to their customers.

– Most of the statutes imposed tax upon those engaged in renting hotel rooms to transients. Were the hotels renting out the rooms or was their service distinct from renting out rooms?

– The issues faced in these cases may be illuminative as the Sharing Economy develops

50

Economic or Agency Nexus

• Economic nexus is premised on the idea that physical presence is only required for sales tax, and income tax nexus merely requires a company to maintain a market within a state.

• Agency nexus incorporates a physical presence theory, but uses a third party’s presence in the state to give a remote seller nexus

– Click through, remote reporting

– Will the presence of a server create physical presence?

51

Nexus Considerations

• Nexus considerations often relate to interstate commerce; many of these concerns do not necessarily relate to local governments

– But, consider due process concerns

52

Problems and Solutions

• Similarities exist between traditional industry and many sharing economy businesses – Lodging, livery, food services

• Many state and local regulations are silent on the legitimacy of such business models or, in some cases, would appear to specifically proscribe such activities

• Striking a regulatory balance that legitimizes these sharing economy businesses will go a long way to resolving the tax revenue disparities between the traditional industries and sharing economy businesses

53


• Case study: Portland – Prior to September 2014, all rentals of rooms in

people’s homes for less than thirty days were deemed illegal

• The city passed an ordinance allowing residents to rent out rooms if they obtained a $180 city permit and allowed the city to conduct safety inspections of their homes. The ordinance also set limitations; vendors may not rent out more than two bedrooms, nor may they rent out rooms in multifamily apartment buildings.

• With legitimization, Airbnb began collecting tax • Note, however, that the interplay between the Oregon

Lodging Tax and the City’s ordinance was a very important factor

54


• State and Local governments have taken wildly different approaches in confronting sharing economy facilitators and vendors – California Public Utilities Commission (CPUC) initially issued

$20,000 citations to Lyft, SideCar, and Uber for “illegally operating.” These penalties were subsequently abated.

– New York City issued subpoenas to Airbnb seeking information regarding the approximately 15,000 hosts who rented rooms through Airbnb in new York. Airbnb estimates that it would have collected approximately $21 million in tax revenue were registration possible.

– Jurisdictions may have different policy concerns motivating them; recognize that refusal to legitimize these businesses will result in considerable enforcement difficulties and will result in a loss of revenue

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uber, airbnb and municipalities: maximizing new tax and...

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