Regulatory arbitrage can be understood to mean those situations in which a participant pursues a particular transaction form or structure in order to secure identified regulatory benefits, even though that structure may add non-regulatory transaction costs. (192) According to one definition, an actor engages in regulatory arbitrage when it manipulates "the structure of a deal to take advantage of a gap between the economic substance of a transaction and its regulatory treatment." (193) The actor will take this step if it determines that the costs of adjusting the plan (including transaction costs and legal constraints such as anti-abuse rules) (194) are outweighed by the regulatory advantages.
The tax opportunism exercised by sharing actors is different from traditional regulatory arbitrage because the sharing businesses have been able to rely on the core feature of their innovative business design--the use of Internet platforms to bring individual producers and consumers together in a manner sufficiently distinct from traditional industry--to take advantage of regulatory gaps. Thus, at least at the outset, the sharing businesses' "first best" business structure provided the basis for the advantageous tax positions they claimed. In contrast, traditional regulatory arbitrage is understood to entail modifying or redesigning business structures at a cost in order to secure such regulatory advantages.
Of course, there will be some overlap between the "opportunism" and "arbitrage" constructs. Some sharing economy business planning may contain components of arbitrage, particularly as the industry evolves. For example, while regulatory opportunities derive from distinct features of the sharing model, sharing economy actors may over time seek to strengthen their regulatory position by making additional business choices that come at some transactional cost. However, because of the unique regulatory opportunities created by their innovative platforms, it is important to distinguish the sharing economy's unique brand of opportunism. As discussed in Part IV, the tax system might pursue distinctive strategies and responses to combat this type of opportunism, as compared with traditional regulatory arbitrage.
Tax opportunism is also distinct from a charge of outright illegality or failure to comply with obvious rules. Some commentators have claimed, for example, that sharing businesses regularly flout the law, perhaps with the goal of allowing the industry to take hold before acquiescing to regulation so as to increase their negotiating leverage vis-a-vis regulatory authorities. (195) We think, however, that in a number of cases, the tax rules are not so obvious that failure to embrace the most onerous interpretation can be fairly labeled "illegal." Tax opportunism takes advantage of actual gaps and inconsistencies in the law, even though such gaps may be small. While taxpayers, tax advisors, and the IRS sometimes disagree on when conduct constitutes intentional noncompliance as compared to viable taxpayer interpretation, both exist, and the law treats intentional disregard differently from plausible interpretation. (196) As was the case with distinguishing tax opportunism from arbitrage, recognizing that tax opportunism may be distinct from illegality may suggest a different set of regulatory strategies for managing such opportunism. (197)
Tax Opportunism in Information Reporting
The position taken by some sharing businesses with respect to third-party information reporting represents a key example of tax opportunism. Information reporting and withholding are two mechanisms by which taxing authorities secure taxpayer compliance with tax payment obligations. Information reporting generally refers to a process by which a third-party payor reports to the IRS amounts that the payor paid to a payee. Withholding occurs when a third-party payor withholds a specified amount from a payment made to the payee and remits that amount to the DRS. (198) Third-party information reporting and withholding help the IRS identify income earned by taxpayers and collect income tax due. (199) Studies suggest that in sectors where information reporting and withholding are difficult to impose (e.g., cash businesses), tax compliance declines. (200)
General Information Reporting Rules
Because most sharing businesses have taken the position that sharing earners are independent contractors, those sharing businesses are not performing tax withholding on amounts paid to sharing earners. (201) Sharing businesses are, however, responsible for information reporting with respect to independent contractor income. (202) There are two primary information reporting regimes that are relevant to the sharing economy: (1) Form 1099-MISC information reporting required under I.R.C. [section] 6041, and (2) Form 1099-K information reporting required under I.R.C. [section] 6050W. (203) I.R.C. [section] 6041 generally requires persons engaged in a trade or business and paying rents, salaries, compensations, remunerations, emoluments, or certain other fixed or determinable gains, profits, and income of $600 or more to report the payment (to the Service and the recipient) on Form 1099-MISC. (204) For tax years before 2011, Form 1099-MISC would have been the form used to report amounts paid to independent contractors.
I.R.C. [section] 6050W, effective January 2012 for the 2011 tax year, now requires "payment settlement entities" ("PSEs") to report certain credit card payments and third party network transactions on Form 1099-K. The statute divides PSEs into two groups and applies different information reporting obligations to each. First, banks and other "merchant acquiring entities" (205) must report all payments made to payees in settlement of credit card transactions. (206) Second, all "third party settlement organizations (207) making payments to payees in settlement of third party network transactions must report such payments on Form 1099-K if the payments to the participating payee exceed $20,000 and if there are more than 200 transactions with the participating payee. (208) The term "third party settlement organization" was meant to include services such as PayPal, Amazon, and Google Checkout. (209) Thus, it is clear that "merchant acquiring entities" (such as certain banks) are subject to more stringent information reporting obligations than "third party settlement organizations," because third party settlement organizations need only report when high income and transaction volume thresholds are met.
Two additional rules are significant. First, persons who receive payments from PSEs on behalf of other participating payees and who distribute such payments to those payees are treated as "aggregate payees." An aggregate payee is treated as the payee with respect to the PSE making the initial payment but is itself viewed as the PSE with respect to the participating payees to whom it distributes the aggregated payment. (210) Thus, for example, an aggregate payee receiving payments from a bank in settlement of credit card transactions would receive a Form 1099-K from that bank reporting those payments, and would in turn have to issue a Form 1099-K to each payee to whom it distributed the payments. (211) Presumably, if the originating payor is a bank, then the more stringent "merchant acquiring entity" rule would apply and require the aggregate payee to report all payments, no matter how small.
Second, regulations under I.R.C. [section] 6050W and the instructions to Form 1099-K clarify the intended coordination between Form 1099-K and Form 1099-MISC issuances. If a payment is made by credit card (or through a third party payment network) and that payment would otherwise be subject to reporting on a Form 1099-MISC, no Form 1099-MISC need be issued by the business purchasing the goods or services. Instead, any reporting is done by the PSE on a Form 1099-K, to the extent required by I.R.C. [section] 6050W. (212) For example, if a business pays a repair person $600 via credit card to fix business equipment, then prior to the new I.R.C. [section] 6050W rules, the business would have been required to issue a Form 1099-MISC to the repair person under I.R.C. [section] 6041. After new I.R.C. [section] 6050W, however, the business does not issue a Form 1099-MISC. Instead, the bank paying on the credit card issues a Form 1099-K. (213) Both the regulations and the Form 1099-K instructions provide that in determining whether a payment is subject to the Form 1099-K reporting regime rather than the Form 1099-MISC regime, the $20,000/200 transaction threshold is disregarded. (214) A likely interpretation of this language is that I.R.C. [section] 6050W applies if the payment is made by either category of PSE, and furthermore, that if the payor is a third party settlement organization, then no reporting (under either Form 1099-K or 1099-MISC) would be required for payments below the threshold of $20,000 and 200 transactions. (215) As discussed below, this intersection of the mles gives rise to a potentially large reporting gap in the case of third party settlement organizations. (216) But at least some commentators have proposed an alternative viable interpretation: all payments that are no longer reportable on Form 1099-MISC must now be reported on Form 1099-K, regardless of the de minimis threshold. (217)
Information Reporting Positions Taken by Sharing Businesses and Potential Effects
Against this backdrop, Lyft and Sidecar took the position that, for the 2014 tax year, their drivers (whom they treat as independent contractors) would receive: (1) a Form 1099-K, if the driver provided more than 200 rides and received more than $20,000 for these rides during the year; and (2) a Form 1099-MISC, if the driver earned referral bonuses or other special direct payments from Lyft or Sidecar during the year exceeding $600. (218) Until early 2015, Uber also took this...
Can sharing be taxed?
|Position::||Continuation of III. Tax Compliance and Enforcement Challenges in the Sharing Sector: Opportunism and Microbusiness A. Tax Opportunism: The Information Reporting Example through Conclusion, with footnotes, p. 1029-1069|
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