The proliferation of services offered via the sharing economy has made things like hailing a ride or finding a place to stay easier than ever before. The draw of services like Uber and Airbnb is readily apparent—these companies often offer lower-priced alternatives to traditional methods of car ownership and short-term property rental and offer unprecedented convenience to users regardless of location. However, the quandary of how state governments apply sales tax to these services is anything but simple.
Several factors make taxing these companies appropriately very difficult. Here is a glimpse of just how much complexity is involved in the process of applying sales taxes to the services that constitute the “sharing economy.”
Can Governments React Quickly Enough to the Speedy Sharing Economy?
Tax policy is not developed or changed in a vacuum. Everything in tax administration comes from an act of a legislature, so it is important for tax authorities to have the appropriate legal authority. The vast majority of state legislatures meet only a few months every year, and a couple do not even meet every year, making it particularly laborious for the tax authority to react quickly to changes in the sharing economy and the economy at large.
There are those who oppose tax policy changes regardless of the change and those who oppose it because of a specific change. It takes considerable effort in advance of a change to develop a consensus, making changing sales tax policies all the more difficult—especially on a state-by-state basis.
Tax Nuances Abound
We don’t see sales tax on the sharing economy debated or reported because so few states tax services, which is the predominate activity offered for sale by the sharing platform industry. In the U.S., we are starting to see a discussion around the sharing economy in regard to marketplace legislation, but only when the business activity offered by the sharing platform is taxable in that state. For example, while major cities like New York and Chicago have introduced legislation that requires ride-sharing services to collect sales tax, smaller economies like Ohio are now following suit. Last May, Ohio introduced a provision in its budget that would mean ride-sharing services like Uber and Lyft would have to pay a sales tax on behalf of drivers.
To determine whether sales tax applies to sharing economy companies, state tax authorities must understand the good or service they are talking about—whether that be ridesharing, on-demand babysitting, or dog sitting. Identifying the specific type of goods or services has become perplexing because of the vast and fast evolution of the sharing economy itself. Every specific aspect of these businesses creates product nuances designed to differentiate themselves from the rest of the market, but state laws are static and often written very narrowly.
In the end, state adoption of marketplace facilitator-like legislation seems to be the most effective way of getting the tax collected. In the early days of the sharing economy, state and local taxing authorities chose not to enact new laws and rather tried to rely on existing legislation around sales taxation. Those existing laws often imposed the tax on the “operator” of the business, whereas the sharing economy platforms never actually operated the business. In the lawsuits that resulted, the platform operators were often successful because they could prove they did not physically operate the business or service that was taxed—even though they might have handled some or all of the money. Having lost most of those lawsuits, tax authorities began imposing the tax on those who operate the actual platform, in addition to those who operate the business.
Lobbying For—And Against—New Policies
However, taxing the sharing economy goes a lot further than just sales tax. In addition to the incredibly complicated, state-by-state sales tax debate, sharing economy companies also face the tax issues around whether these operating the business are independent contractors or employees. There are vast tax differences based on that classification. This a very old and heavily litigated debate as industries of all sorts have tried over the decades to classify their workers as independent contractors instead of as employees. There are taxes and tax collection obligations imposed on employers for their employees that are not required for independent contractors. These include withholding state and federal income taxes, the employer’s share of social security, and unemployment taxes. All these are likely to shift from the employer to the worker if the worker can be classified as an independent contractor. To this end, sharing economy companies have historically enacted very specific rules to guarantee that the worker is actually independent—such as having control over their schedule, owning their own tools, and being able to work for others.
In terms of sales tax legislation, it’s no secret that much like the contractor versus employee debate, opposition to sales tax is the primary response from sharing economy companies. Many sales tax laws impose the tax on the operator of the business, and many sharing economy businesses facilitate the sharing business instead of actually operating the business. For many years, state and local tax authorities attempted to use existing law to require the facilitator to collect. Now, states are adopting sales tax legislation aimed directly at those who facilitate, which makes it much harder to avoid collection.
The taxation of sharing economy companies is not just a U.S. issue. Like the U.S., every other country’s taxes are written to tax or exempt what is known at the time—whether it be technology, business models, or state of the economy. The growth and creativity in the sharing economy surprised governments around the world. The U.S. is impacted differently from a sales tax perspective because we are one of the few countries where governments primarily impose transaction taxes at the subnational level instead of the national level. It is much easier for the entire country to react to a changing economy than it is for hundreds of state and local governments. As the sharing economy continues to shape the actual economy of the U.S., all 45 sales tax states will continue to react accordingly.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Scott Peterson is Vice President of U.S. Tax Policy and Government Relations at Avalara.