IPT 2017 Sales Tax Symposium San Antonio, Texas

September 17-20

Taxing Shared Economies—A Whole New World!

2

Presenters

R. Gregory Roberts – Reed Smith LLP – groberts@reedsmith.com

Christine Hernandez – Airbnb

3

Learning Objectives

Understand the ways that state and local taxing authorities are applying pre-existing tax rules to shared economies

Understand the various enforcement techniques being employed by state and local taxing authorities

Legislative and regulatory developments and their prospective impact going forward

Agenda

Taxes and the Sharing Economy – Why do we care?

Overview by Company Categories Indirect Tax Implications

– Nexus – Collection Responsibility – Taxability – Tax Base

Industry Specific Taxation 4

Taxes and the Sharing Economy: Why do we care?

Estimated 2016 global earnings by sharing economy sector - $20B (Source: PwC (2014))

Estimated 2025 global earnings - $350B (Source: PwC (2014))

Sharing economy companies are replacing functions once controlled by the traditional rental sector – Equipment Rentals – B&Bs and Hostels – Book Rentals – Car Rentals – Media (i.e., DVD and music) rentals 5

Taxes and the Sharing Economy: Why do we care?

Examples of Sharing Economy Companies include: – Car Sharing Companies (Uber, Lyft) – Home Sharing Companies (Airbnb, VRBO,

Homeaway) – Co-Working Companies (WeWork) – Peer-to-Peer Lending Companies (Lending Club) – Freelancing Companies (Upwork, TaskRabbit)

6

Introduction

The sharing economy is prompting unique tax challenges that our brick and mortar tax regimes must grapple with.

Three general categories: – Hospitality – Transportation – Personal Services

7

Introduction

Revenue Streams – Sharing economy companies generate revenue in

different ways: Increased base price on delivered items Service fees levied on platform users Service fees levied on platform providers Membership fees

8

Hospitality Companies

Hospitality – What they do:

An online platform provider enables individuals who have space to rent and customers who want to rent that space to connect.

– How they make money: The Platform provider collects a fee on the price paid by

the occupant for connecting the two parties. – Who they are:

Airbnb Homeaway VRBO 9

Transportation Companies

Transportation – What they do:

An online platform provider enables individuals to get car rides on demand from their location using their phone’s GPS.

– How they make money: The Platform provider collects a fee on the price paid for

connecting the individual driving the car and the passenger.

– Who they are: Uber Lyft 10

Personal Services Companies

Personal Services – What they do:

An online platform provider enables individuals to connect with personal service providers (e.g., fence painting, errands, home maintenance, etc.).

– How they make money: The Platform provider collects a fee on the price paid for

connecting the individual providing the services and the customer.

– Who they are: TaskRabbit Handy Instacart 11

Indirect Tax Considerations

Nexus – Does a sharing economy company have sufficient

nexus with the jurisdictions in which its platform is used to subject it to tax? Each jurisdiction’s varied definition of nexus creates a

different test for each state, as well as municipalities. – An expansive view of nexus says “yes” and the

sharing economy company will be subject to tax wherever its platform is available.

– A traditional view of nexus may say “no.” Why? 12

Indirect Tax Considerations

Some states have attempted to address the problem through legislative changes

Marketplace Provider Statutes – Minnesota

The Marketplace Provider law requires marketplace providers to collect and remit sales tax on sales in Minnesota, unless the sellers on the marketplace website are already collecting the tax.

“Marketplace provider” is defined as “any person who facilitates a retail sale by a retailer” through either: (1) listing or advertising for sale by the retailer in any forum tangible personal property, services, or digital goods that are subject to tax; or (2) Entering into agreements with third parties for collecting payment from the customer and transmitting that payment to the retailer, regardless of whether the marketplace provider receives compensation or other consideration in exchange for its services.

– The law is effective July 1, 2019, or earlier if the U.S. Supreme Court or Congress allows states to collect sales tax from remote sellers. 13

Indirect Tax Considerations

Marketplace Provider Statutes Washington

– EHB 2163, signed into law on July 7, 2017, imposes sales and use tax obligations on “marketplace facilitators”.

– A “marketplace facilitator” is anyone that “contracts with sellers to facilitate for consideration, regardless of whether deducted as fees from the transaction, the sale of the seller’s products through a physical or electronic marketplace operated by the person.” The statute incorporates the RCW 82.04 definition of “sale at retail” or

“retail sale” which includes both tangible personal property and enumerated services.

A marketplace facilitator must collect and remit sales tax on all Washington sales made through the marketplace if the facilitator is either physically located in Washington or makes $10,000 in gross receipts from sales to Washington customers during the present or preceding year.

– The law is effective January 1, 2018.

14

Indirect Tax Considerations

Marketplace Provider Statutes – Massachusetts

Proposed Regulation 830 CMR 64H.1.7 would require “internet vendors” to collect and remit Massachusetts sales tax on their sales to Massachusetts customers if certain thresholds are met.

– “Internet vendors” is broadly defined and includes a “marketplace facilitator” which “facilitates sales . . . through a physical or electronic marketplace” that it operates.

– The threshold triggering sales tax collection obligation is: $500,000 or more in sales to Massachusetts customers completed over the internet, and completing 100 or more transactions that are delivered to Massachusetts.

– Legislation has also been proposed in New York, Texas, and Rhode Island

15

Indirect Tax Considerations

Collection Responsibility – Who is the vendor responsible for collecting and

remitting the tax? – Marketplace provider statutes place burden on

the platform provider. – Potential applicability of online travel company

cases: Montana Dept. of Rev. v. Priceline.com Travelocity.com v. Wyoming Dept. of Rev. City and County of Denver v. Expedia, Inc.

16

Indirect Tax Considerations

Taxability – Is the transaction subject to tax? – Are there any applicable exemptions?

Tax Base – What is the tax base?

Are the fees paid to the platform/service provider subject to tax?

– Potential applicability of online travel company cases

Audit and Compliance Concerns – Confidentiality of personally identifiable information – Who should be audited

17

Industry Specific Taxes

Industry Specific Taxes – Sharing economy companies also must deal with

specific taxes levied on the underlying transactions (e.g., the rental of a room) facilitated through the platform: Hotel Tax Taxi & Ride Sharing Tax Taxes on specific personal services

18

Hotel Taxes

Hotel Taxes – Jurisdictions often levy hotel occupancy taxes on

individuals who rent hotel rooms. – Many of these taxes are specifically used to fund

downtown capital improvement projects like sports stadiums and convention centers.

– Some platforms are voluntarily entering into agreements with jurisdictions throughout the country in regard to collecting hotel occupancy taxes.

19

Hotel Taxes

Hotel Taxes – Should lodging rented through a sharing economy company be subject to those

same taxes? Are residential accommodations rented through a sharing economy

company subject to tax as “hotels”? – Are they hotels under existing statutory definitions? – Does listing them on an online platform turn them into hotels? – Has the jurisdiction adopted legislation specifically taxing them as hotels?

Who is responsible for collecting the tax? – Definition of vendor, retailer, operator, etc. – Co-vendor provisions – Voluntary agreements

What is the tax base? – Are the fees paid to the platform/service provider subject to tax?

How are the local taxes administered? – Uniformity with state definitions, etc.?

20

Hotel Taxes: Examples

Arkansas, Rev. Legal Counsel Op. No. 20151205: – Furnishing accommodations to transient guests is subject to

the state, city and county sales tax, and the tourism tax. Colorado, Colorado FYI Sales 11:

– Any rental of a lodging unit for less than 30 consecutive days is taxable, and the owner and property manager is required to collect and remit sales tax.

Hawaii, Hawaii TAT Brochure (07/2017): – The transient accommodation tax is imposed on the gross

rental income for renting an apartment, house, condo, hotel room or similar living accommodation to a transient person for less than 180 consecutive days. A transient is any person, including a Hawaii resident, who has a

permanent home elsewhere. 21

Examples

New York – A “hotel” is a building or portion of a building regularly kept

open for lodging guests. It includes an apartment hotel, a motel, bungalow or cottage colony, boarding house or club, whether or not it serves meals. Factors considered: (1) Sleeping accommodations are provided for the lodging of paying

occupants on a regular basis; (2) Typical occupants are transients or travelers; (3) Housekeeping, linen, or other customary hotel services are

provided for occupants; and (4) The relationship between the operator of the establishment and the

occupant is that of an innkeeper and guest, not that of a landlord and tenant.

– But exempted are bungalows for single family occupancy if no housekeeping, food, or other common hotel services, such as entertainment or planned activities, are provided; however the furnishing of linen does not affect the exempt status.

22

Examples

Tennessee – Short-term rentals arranged through websites

such as airbnb.com and vrbo.com subject to sales tax and hotel occupancy privilege tax, but the property owner is responsible for collecting. AG Opinion 15-78 (12/1/15)

Arizona – 2016 legislation establishes a new classification—

the online lodging marketplace classification—for TPT purposes (L. 2016, S.1350 (ch. 208))

23

Examples

Louisiana – “If an establishment meets the definition of a hotel

under these laws, all charges for the furnishing of rooms in that establishment, other than to permanent full-time occupants, constitutes sales of services.” La. Admin. Code § 61:1:4301(c). Are the platform’s fees taxable?

24

Transportation Taxes

Transportation Taxes – Jurisdictions also levy taxes associated with

operating commercial transportation services. – Should the sharing economy’s ride hailing

companies be subject to these same taxes? – Yes: These are cars that are on the street and

causing wear-and-tear on the streets. – No: Quite simply, these are not taxis and are just

individuals picking up an individual while they are already driving.

25

Transportation Taxes

Transportation Taxes – If these sharing economy ride hailing companies

are subject to tax, the same tax base question arises again.

– Which fee is subject to tax? Fee paid to the service provider?; or Cost/price of the transportation?

– Who is responsible for tax remittance? Service provider Driver?

26

Transportation Taxes

Georgia, O.C.G.A. § 48-8-3(25): – Fares for-hire vehicles, such as taxi services,

limousine carriers, ride share network services are exempt from sales tax as long as the owner of the vehicle has purchased a for-hire master license for the vehicle from the state.

Rhode Island, Tax Notice 2016-02: – “Transportation network companies—sometimes

called ride-sharing, ridesharing, ride-sourcing or ridesourcing companies” are subject to Rhode Island’s sales tax. “Transportation network company” means “an entity that

uses a digital network to connect transportation network company riders to transportation network operators who provide prearranged rides”. 27

Transportation Taxes

Taxi Taxes – Allocation & Apportionment – How is the tax allocated when the service

provider is driving multiple individuals to different destinations? Is the tax levied multiple times? Does each passenger pay their share of the tax?

– What taxes are levied and how is the tax and income apportioned when the ride begins in one jurisdiction and ends in another (e.g., pickup at Newark, NJ airport and end in Manhattan)?

28

Transportation Taxes

New York’s Changing Regulations of Transportation Services – TSB-M-09(2)S: State and local sales tax applies to transportation services

provided using limousines and black cars, but does not apply to taxicab or bus services. Taxicabs are motor vehicles, other than limousines and black cars, that transport

passengers for compensation, contain a taximeter, and can be legally hailed for service by a customer.

– TSB-M-09(7)S: Only receipts from the sale of transportation services using limousines and black cars with service beginning and ending in New York State are subject to sales tax, even if it passes outside the state during the trip. When a transportation service begins in one New York State jurisdiction but ends in

another New York State jurisdiction, the local tax that applies is the tax imposed by the jurisdiction where the service begins.

– TSB-M-17(1)M, (1)S: Effective June 29, 2017, there is a 4% state assessment fee on the gross fare of every prearranged trip provided by a transportation network company that originates outside New York City and terminates in the state, but those trips are not subject to the state sales tax. A “transportation network company” is a person, corporation, partnership, sole

proprietorship, or other entity that is licensed to operate in New York state exclusively using a digital network to connect the company’s passengers to the company’s drivers that provide prearranged trips.

– This measure allows ride-sharing companies such as Uber and Lyft to expand outside of New York City and operate throughout the state, with the fares being subject to the 4% assessment. 29

Personal Services

Personal Services – Are the services subject to tax?

Some states tax very few services Some states tax a longer list of services; and A few states broadly tax services

30

Personal Services

If the sharing economy platform is expected to collect the tax on these services, compliance will be extraordinarily difficult: – Multiple state and local jurisdictions – Multiple state and local rates – Inconsistent statutory provisions – e.g., taxability, tax

base, and sourcing Example: Maintenance to real property in New

York – Is work performed on a homeowner’s fence/room a

taxable repair service or an exempt capital improvement? 31

Personal Services

Personal Services – If individuals providing the services are independent

contractors, will they be responsible for knowing the sort of categories of taxes, and correctly remitting those taxes?

– Will the sharing economy platform provider supply its independent contractors with information regarding the taxability of certain services? If the sharing economy company provides this information,

does that potentially open the door wider to the notion that these individuals are employees and not independent contractors?

– How will system-gaming be monitored? 32

Questions and Comments

33