Can sharing be taxed?

Author:Oei, Shu-yi
Position::Abstract into III. Tax Compliance and Enforcement Challenges in the Sharing Sector: Opportunism and Microbusiness A. Tax Opportunism: The Information Reporting Example, p. 989-1029
 
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ABSTRACT

In the past few years, we have seen the rise of a new model of production and consumption of goods and services, often referred to as the "sharing economy. " Fueled by startups such as Uber and Airbnb, sharing enables individuals to obtain rides, accommodations, and other goods and services from peers via personal computer or mobile application in exchange for payment. The rise of sharing has raised questions about how it should be regulated, including whether existing laws and regulations can and should be enforced in this new sector or whether new ones are needed.

In this Article, we explore those questions in the context of taxation. We argue that, contrary to the claims of some commentators, the application of substantive tax law to sharing is mostly (though not completely) clear, because current law generally contains the concepts and categories necessary to tax sharing. However, tax enforcement and compliance may present challenges, as a result of two distinctive features of sharing. First, some sharing businesses opportunistically pick the more favorable regulatory interpretation if there is ambiguity regarding which rule applies or whether a rule applies. The existence of these ambiguities has been exacerbated by the structures of the new sharing economy and this has led to compliance and enforcement gaps. Second, the "microbusiness " nature of sharing raises unique compliance and enforcement concerns. We suggest strategies for addressing these dual challenges, including lower information reporting thresholds, safe harbors and advance rulings to simplify tax reporting, and targeted enforcement efforts.

TABLE OF CONTENTS INTRODUCTION I. THE SHARING ECONOMY A. Vehicle Ridesharing B. Peer-to-Peer Lodging and Accommodation C. Other Online Peer-to-Peer Marketplaces for Sharing II. TAX ISSUES IN THE SHARING ECONOMY A. Income Taxation of Peer-to-Peer Ride Services B. Income Taxation of Home Sharing C. Self-Employment Taxes and Local Occupancy Taxes III. TAX COMPLIANCE AND ENFORCEMENT CHALLENGES IN THE SHARING SECTOR: OPPORTUNISM AND MICROBUSINESS A. Tax Opportunism: The Information Reporting Example B. Other Examples of Tax Opportunism C. The New Microbusiness Economy IV. TAX ENFORCEMENT STRATEGIES FOR SHARING AND BEYOND A. Policy Issues Raised by Sharing B. Short-Term Strategies for Managing Sharing's Challenges C. Medium- to Long-Term Approaches CONCLUSION INTRODUCTION

In the past few years, we have seen the rise of a new model of production and consumption of goods and services. In this so-called "sharing economy," startups such as Uber, Airbnb, and TaskRabbit enable consumers to summon rides, rent accommodations, or hire services from peers via personal computer or a mobile app, in exchange for payment. (1) On the supply side, these models enable owners of homes, apartments, or vehicles, or those who possess certain skills (such as house painting, home organization, or dogsitting), to monetize those assets or skills. (2) The technological platforms employed by these startups enable individual producers and consumers to transact with each other with unprecedented ease. (3)

Also known as "collaborative consumption," the "peer-to-peer economy," or "peer-to-peer consumption," a broad range of commentators suggest that the sharing economy is transforming the way people consume and supply goods and services, such as transportation, accommodations, and task help. (4) Commentators note that sharing arrangements have the potential to significantly affect traditional industries such as taxicabs, limousine services, and the hotel industry. (5) As such, the sharing economy raises important legal and regulatory issues, including questions of whether and how the new startups should be regulated and questions about the appropriate relationship between regulation and innovation. (6)

One set of emerging questions concerns whether existing laws and regulations are adequate and should be enforced in the sharing sector, or whether new laws and regulations are needed. (7) These questions have taken on particular urgency because of the perception that sharing economy businesses often ignore the law, choosing to lobby and negotiate with regulators only after the fact. (8) Such questions have permeated the tax field as well. (9) Some commentators claim that new sharing economy earners (10) do not know what tax rules apply, do not comply with the tax law, and may believe that sharing should not be taxed. (11) Others argue that existing tax laws and regulations may need to be reconsidered, expanded, or modified in light of sharing's rise. (12) Prompted by such perceived uncertainty, websites, online commentaries, and tax advising services have popped up, advising sharing economy earners on the tax issues raised by sharing and how to comply with their tax obligations. (13)

Given the growth of sharing arrangements, we think it is important to be clear at the outset about whether these claims are accurate, so as to avoid making ungrounded and poorly considered policy and regulatory decisions for this new industry. Thus, in this Article, we examine the broad question of whether the tax law is adequate to the task of taxing sharing economy earners, or whether new tax rules and regulations arc required. (14) We argue that the application of substantive and doctrinal tax laws to sharing is generally (though not completely) clear and not particularly novel. (15) This is the case even though the rules themselves may be complex and the application of the law to the facts may sometimes produce a measure of uncertainty. In most respects, what is required is clarification of the tax law's application, rather than new legal or regulatory categories.

On the other hand, tax compliance and enforcement in the sharing sector may present challenges, due largely to two distinctive features of sharing. First, in determining how and whether to comply with existing laws and regulations, sharing economy businesses have displayed the propensity (and distinct capacity) to pick the more favorable legal or regulatory regime if there is ambiguity as to which regime applies. For example, in light of slight ambiguity regarding the applicable Form 1099K information reporting rules, some sharing businesses have taken the position that they are subject to the same information reporting rules as "third party settlement organizations" such as Amazon and PayPal, and thus must comply with less onerous reporting thresholds. (16) We refer to this set of behaviors as "tax opportunism." We emphasize that this term is not meant to be pejorative; rather, it simply denotes the fact that the sharing businesses may be willing and able to take advantage of the opportunities presented by legal ambiguity. Tax opportunism more accurately describes some behaviors of certain sharing economy businesses than the claim that they are simply flouting the law. Furthermore, as we discuss, tax opportunism may be related to regulatory arbitrage (defined as parties incurring transactional costs to achieve a regulatory benefit), but the nuanced differences between the two categories may suggest different regulatory responses.

Second, the sharing sector involves many individual earners who may earn relatively small income amounts, may use otherwise personal property for business purposes, and may be filing and reporting independent contractor income for the first time. These "microbusiness" characteristics may make compliance challenging for taxpayers and enforcement difficult for the IRS. These characteristics are not themselves unprecedented; in fact, the tax compliance issues that they entail are reasonably well understood. (17) However, the rise of sharing has propelled large numbers of earners who are engaged in sharing on a sporadic or part-time basis into the microbusiness world. Such earners may have less incentive than full-time businesses to take steps to ensure accuracy (for example, by hiring a tax preparer). Moreover, the fact that sharing may be a sector of first impression for many tax preparers may make tax compliance and enforcement even more challenging.

We argue that the confluence of these two realities--tax opportunism paired with the microbusiness nature of sharing--may make it particularly difficult to ensure that the new sharing earners are complying with the tax laws. Yet the precise impacts are difficult to predict with certainty.

In Part I, we describe in brief the "sharing economy" phenomenon. In Part II, we discuss the substantive tax rules and doctrines that apply to sharing. We argue that in many (though not all) respects, existing tax laws and doctrines can be adequately applied to sharing, although such application may depend on factual interpretation and classification of the new transactions. In Part III, we define the term "tax opportunism" and describe four examples of it: (1) the decision by certain sharing businesses to take the position that they are "third party settlement organizations" for information reporting purposes; (2) the decision to embrace independent contractor classification for sharing earners; (3) the initial decision by Airbnb to take the position that it is not responsible for collecting local occupancy taxes; and (4) the decision of ridesharing businesses to operate outside taxicab medallion and permitting systems. Next, we discuss the potential problems raised by the microbusiness nature of sharing economy work.

Finally, in Part IV, we address some of the tax policy issues raised by sharing and suggest possible strategies for addressing sharing's challenges. In Part IV.A, we discuss the broader policy issues that are raised and the takeaways that can be gleaned from the rise of sharing. In Part IV.B, we consider relatively simple strategies that may help improve compliance with and enforcement of federal tax laws. These include lower information reporting thresholds, use of safe harbors and advance rulings to simplify expense...

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