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April 3, 2015
Why New York Should Listen to Airbnb's Appeal for Taxation
by Michael Giaquinto

Full Text Published by Tax Analysts®

This article first appeared in the August 4, 2014 edition of StateTax Notes.

I. Introduction

Approximately four months ago, Airbnb, a popular room-sharing website, publicly appealed to New York City for the government to tax the hosts using its service.1 That proposal may seem unorthodox. If anything, businesses usually argue against more taxes. However, Airbnb's position is unique to the intersection of temporary occupancy and the so-called sharing economy2 because no one -- not the company, its users, or the cities in which they all operate -- knows exactly what to do with the revenue.

It is crucial for New York City to figure that out quickly. As the largest market for Airbnb, the city's response will serve as an indicator for other major metropolitan areas and will likely have national ramifications.3 The tax legislation in New York, and in many other cities, is not equipped for that type of economy. Nevertheless, the city must tread carefully given the many policy implications inherent in taxing a room-sharing service. How the tax code treats Airbnb will affect its legitimacy as a business, the future of the sharing economy, and customers' expectations regarding their liability and personal safety.

Ultimately, however, New York and other cities should stop resisting the sharing economy and learn to integrate it into their tax base. Cities are losing out on millions of dollars in potential revenue. Refusing to adapt would be foolish.

II. The Sharing Economy

The term "sharing economy" does not paint an accurate picture of the economic activity involved. The name reeks of socialism, conjuring up images of Marxist hippies eschewing the government. In reality, the sharing economy is about capitalist efficiency. While some economists focus on the efficiency of specialization, that efficiency in its purest form is only theoretical.

The sharing economy looks to put idle assets to use with the help of modern technology.4 Using smartphone applications, an individual can easily rent out his kitchen to someone who needs extra cooking space for a large dinner party. Or he can lend his vacuum to someone who does not wish to buy her own. He can even arrange for out-of-town travelers to use his car. Using social media, he can learn more about the people who wish to use his belongings, and he can use smartphone apps to facilitate payment. Readily available technology means that the sharing economy is only going to expand as it becomes easier for everyone to take part.

III. Lodging in the Sharing Economy

Extending the sharing economy to lodging makes sense. Spare lodging space is a known quantity for most people. It is unlikely that a sudden, permanent need for a guest bedroom or unused in-law apartment will arise. For people looking to make a little extra money, it is a logical move to use extra space in the home. There is little cost involved, other than a bit of cleaning and, depending on the arrangements, potentially some meals. While there is also the threat that one's new houseguest is a serial killer, that fear can be mitigated by background checks through the guest/host rating system along with the comfort of knowing the guest is taking on the same risk with his hosts.

In many cases there is an open market for unconventional lodging. For example, while someone looking to spend the night in the Upper East Side of Manhattan on a Tuesday night in June might spend somewhere around $2505 for a small room in a three-star hotel, that person could also choose to stay in a private studio apartment, equipped with kitchen essentials and free wireless Internet, for $175. A traveler needing fewer frills could sleep on someone's couch for a significantly lower price.

Guests benefit from room sharing in other ways beyond cost. They can stay in neighborhoods that do not have hotels, allowing closer access to desired locations. Further, hosts of shared housing may be more amenable to pets or activities not permitted in traditional hotels.6 Travelers who wish to avoid typical tourist traps may enjoy the insights of a local as opposed to the prepackaged information of the hotel concierge desk. There are many reasons why guests may choose room sharing over a commercial hotel, and there are just as many reasons for people to provide a place to stay.

IV. When the Sharing Economy
Meets the Department of Revenue

One major problem, at least from the perspective of states and municipalities, is that sharing economies operate outside the scope of normal businesses. When someone rents out his kitchen, his vacuum, or his car, the transaction is subject to tax in some way. Depending on the location, those transactions are likely subject to sales tax, and any revenue may have to be reported as income. But there is little incentive for the individual to actually collect those taxes from his guests or report the income. First, there is probably not much of a traceable record of a vacuum rental to prove it occurred. Even if there were, a transaction via PayPal, Venmo, or some other financial exchange tool will not indicate what the exchange actually was. Finally, even if the state or local government could prove that a vacuum was rented for cash, the transaction will likely have been for so little money that it would not be worth it to go after the unpaid taxes. Unless an individual buys a fleet of rental vacuums, the sales will be limited to occasional transactions for small amounts of money.

The temporary lodging market is different. First, the price point is much higher. Listings on Airbnb for Manhattan's East Village range from $90 for a futon to $430 for a two-bedroom apartment. While those prices are still better than at any hotel, especially given the dearth of hotels in that neighborhood, they are much more than the cost to rent a vacuum. Further, most destination cities would normally apply some combination of hotel tax/lodging tax/transient occupancy tax that would far exceed normal sales tax. In New York, the combination of taxes is 14.75 percent.7 In San Francisco, another large market for Airbnb, hotel taxes come out to 14 percent.8 Given a listing of $175, somewhere around the median for Manhattan, that would be a daily lodging tax of a bit more than $25 per day. Considering the thousands of listings every day in New York, that could add up to millions of dollars per month. In fact, Airbnb estimates that taxing its hosts in New York would result in about $20 million of annual revenue.9

V. The State of Taxes for Airbnb

Part of Airbnb's problem is that its own tax policy is essentially nonexistent. Airbnb's official policy, according to its website, is that while it does not collect taxes on bookings, each individual host should be mindful of state and local tax laws and understand how to collect and remit those taxes to the appropriate authorities.10 To some extent, that made sense in Airbnb's nascent days. Much like in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the administration of local occupancy taxes for a fledgling company with no physical presence would have been effectively impossible. In fact, collecting those taxes would have been even more difficult than it would have been for the office supply retailer in Quill, because so many occupancy taxes are not only state based, but city and county based, as well.

At this point, however, administrability concerns are not as valid. Similar situations have come up with other online travel companies.11 Companies like Expedia Inc. purchase blocks of hotel rooms at discounted prices and then add a service charge when selling to the customer. Courts have ruled that Expedia must collect taxes from users based on the amounts the company pays for the hotel rooms, not including the service fee.12 Those companies have not folded under the pressure. Airbnb operates in cities across the globe and is valued at around $10 billion.13 The company pulls service fees out of every booking and is in a better position to administer hosts' tax liabilities, regardless of how many local tax laws it may need to know.

Adding to the outcry for taxation is the fact that Airbnb's success has caused the hotel industry to take notice.14 Registered hotels are already subject to hotel and occupancy taxes and, as a result, face a competitive disadvantage. Airbnb hosts can receive the same payment as hotels and charge 14 to 15 percent less.

The solution is not as simple as tacking on a surcharge to every booking. In cities like New York and San Francisco, hosts may not legally collect taxes from their guests.15 New York law is especially vague on how to treat individuals engaged in the amateur hospitality industry when it comes to taxes.16 To even allow Airbnb to collect from its hosts, cities would need to make significant changes to their tax regulations.

VI. Building a Framework Around Illegality

Another problem shared by Airbnb and the cities in which it operates is that it is unclear whether Airbnb's product is legal. Under New York state law, it is illegal to allow occupancy of a dwelling for a period of less than 30 days.17 The State Legislature enacted that law mainly to prevent landlords from kicking out tenants in order to operate their apartment buildings as makeshift hotels. In a city where housing can be scarce, the goal was to ensure tenants had as much opportunity for housing as possible.

As a result of that law, in 2013 New York City assessed a $2,400 fine against Airbnb host Nigel Warren, who had rented out his bedroom for periods of less than 30 days while he was away.18 After an administrative law judge upheld the ruling, an appeals court overturned it and determined that Warren did not break the law, reasoning that the law did not apply if a resident of the dwelling was also staying there at the time. Because Warren's roommate was in the apartment, the booking was legal.19 That ruling clarified the situation for many Airbnb hosts, although it left ambiguity about hosts who are out of town while their guests are in the home.

Aside from the New York administrative housing codes, which are similar to those in other cities, there is also the matter of a tenant's lease. In many cases, subletting is allowed only with a landlord's permission, if it is allowed at all. Landlords generally want to be the only ones making money off of their property. In many cases they may also be concerned about the safety of other tenants and may wish to limit the traffic coming in and out of any one apartment. Even if Airbnb rentals do not violate the state's administrative code, it is likely that many violate a tenant's lease. An issue then builds around how a city can properly tax an activity that is in violation of a contract.

There are certainly models for collecting taxes on illegal activities. In Collins v. Commissioner, 3 F.3d 625 (1993), the Second Circuit Court of Appeals ruled that the IRS could still collect taxes on earnings that had been acquired through theft. More recently, Colorado established both a 12.9 percent sales tax and a 15 percent excise tax on marijuana,20 even though marijuana is illegal under federal law. Clearly, revenue collectors do not have any moral qualms about benefiting from illegal actions. Still, there is something different about collecting revenue from an action that violates a contract that is supposed to be enforced by the laws of that city and state. If New York collects taxes from an Airbnb host who is later sued by his landlord, what are the state's obligations of privacy? Does Airbnb provide transaction receipts in response to the landlord's subpoena? Does the company preemptively list hosts from whom it has collected revenue so that landlords can see if a tenant has broken her lease? Proposals in New York would have Airbnb hosts file registration paperwork with the state. Would those lists be made public or subject to Freedom of Information Act requests?

Taxing Airbnb rentals would be, in a way, a tacit approval by New York state and city lawmakers. If they are to condone those transactions through revenue collection, they will have to seriously consider those questions.

VII. Other Policy Concerns

Taxing Airbnb hosts on their rentals would raise numerous policy concerns. There are safety regulations to consider. Professional hotels are subject to any number of safety requirements regarding, for example, occupancy limits, fire exits, and window guards. If cities begin taxing Airbnb properties as hotels, to what extent must hosts comply with similar regulatory standards? The proprietor of a single bed in an apartment may have neither the means nor the ability to install new features. If a city chooses to regulate for safety, is there any enforcement mechanism realistically available? City inspectors can pay surprise visits to hotels, in part because the hotel is always operating as a hotel. If a host rents out a room once or twice a year, does that give a city inspector the right to force his way into the apartment at other times when it is not being used for Airbnb purposes? If so, does that mean that using Airbnb requires hosts to give up their Fourth Amendment rights?

What does condoning Airbnb rentals mean for the hotel market in major cities? There are literally thousands of Airbnb options available in New York on any given night. If New York chooses to legitimize those rentals by taxing them, it might encourage those who were afraid of breaking the law to join in. Healthy competition is almost always a good thing for a capitalist economy, but with little to no overhead, will amateur lodgers artificially flood the market and force some hotels out of business?

VIII. Recommendations

As the largest American market for Airbnb, New York needs to come up with a plan to tax, and therefore legitimize, lodging services under the sharing economy. But there are reasons not to do so. For one, it is likely that not all Airbnb rentals are legal. Second, they may violate provisions of tenants' lease agreements, which may present privacy issues down the line. Finally, Airbnb lodgings will be difficult to regulate, and the city and state may well be collecting taxes from hosts who put their guests' safety at risk.

Despite all of that, New York needs to change its laws in order to allow Airbnb to collect taxes at the time of its online transactions. To avoid doing so would be the equivalent of sticking its legislative head in the sand. The sharing economy is not going away. As technology allows people to be more efficient, they will naturally look for ways to turn that efficiency into a profit-making opportunity. Unused resources, when combined with technological advances, offer extremely easy methods of picking up some extra cash. Empty bedrooms, futons, and air mattresses are some of the most readily available resources that people have.

In other words, people will continue to rent out their extra space regardless of whether New York (and other cities) allows Airbnb to collect taxes or shuts it down within its borders. Airbnb offers a streamlined platform that is easy to use, but in its absence, people would find other ways to do the same things. The sharing economy will continue to grow, regardless of its legality. It is too easy to operate and too difficult to stop.

Taxing Airbnb lodgings would be a good way to raise revenue for little political cost to lawmakers. The tax would be easily administrable by Airbnb itself. The company would only need to know the rate for a given location. In most cases, Airbnb guests already pay a rate that is much lower than that of any nearby hotel; an additional percentage is not likely to affect their decision to stay in a particular place. In fact, increased options for cheaper lodging might bring more tourists to the city, increasing revenue for local businesses. Even if New York applied that revenue to pet programs rather than its general fund,21 it would not be tying the success of those programs to an externality.

Nevertheless, it is crucial to remember why sharing economy options like Airbnb are popular in the first place. Not only do people want to avoid high hotel prices, but they also want to have lodging options that go beyond the professional hotel experience. New York should recognize that Airbnb is not a hotel service, and should not categorize it as such by taxing it at the same rates. There are too many policy implications that come with treating an extra bedroom like a hotel in the eyes of the law. And by melding the worlds of hotels and room sharing, the Legislature would be inviting a shift in quality toward the mean of each type of stay. Staying in a hotel should be like depositing money in a bank -- safe and secure, and backed by government guarantee. Booking on Airbnb should be more like investing in securities. A bargain buy may turn out to offer a great reward. A $50-per-night stay in an obscure neighborhood may lead to a wonderful tourist experience. An investment may also turn out poorly. A $150-per-night stay in a seemingly fancy SoHo loft might actually end up being a sleepless night in a dirty apartment in the company of roaches and mice. Hosts take similar chances: One may easily make some extra cash off of an otherwise unutilized room, but might also end up with guests who steal and cause property damage. In an extreme case, a host could find herself in a legal battle with a squatter who will not leave.22 Still, the idea of risk and reward is instilled in American capitalist investment, and policies regarding the sharing economy should recognize and reflect a similar spirit.

People have reasons for not using mainstream professional hotels, and New York's categorization of Airbnb lodgings as hotels for tax purposes would eliminate some of their options. Also, requiring Airbnb hosts to register as hotels could open up a slew of legal and privacy concerns that could drive that economy back underground. Instead, New York should come up with a separate rate. It can designate a temporary occupancy tax, for instance, and charge a lower percentage. It should also mandate that Airbnb make a clear disclaimer of the hazards associated with staying in an unregulated environment so that guests understand their risks when using the service. New York could then tap into a previously untouched tax base while also leading the way in legislation for the new sharing economy. If done correctly, that could be a great opportunity for the city, its residents, and countless tourists looking to experience the Big Apple in a different way.


1 Craig Karmin, "Airbnb to Mayor: Tax Our Hosts, Fund Pet Programs," The Wall Street Journal, Mar. 28, 2014.

2 "The Rise of the Sharing Economy," The Economist, Mar. 9, 2013.

3 Ben Trenfy, "Airbnb to Start Charging Hotel Taxes in a Handful of Cities," NPR's All Tech Considered (Apr. 18, 2014).

4 Supra note 2.

5 Pricing courtesy of June 10 listings on

6 For instance, some Airbnb listings mention that the host is "420 friendly," indicating that marijuana use is acceptable in the home.

7 "Occupy New York," The Wall Street Journal, at A14, Nov. 2, 2013.

8 Stuart Pfeifer, "Airbnb Says It Will Start Paying San Francisco Hotel Tax," Los Angeles Times, Apr. 1, 2014.

9 Supra note 1.

10 Airbnb Terms & Conditions, available at

11 See Chantelle L. Lytle, "Groupon and Expedia: A Comparison of Two Modern Online Trends Creating a Parallel Tax Inquiry," 6 Elon L. Rev. 217, 218 (2014).

12 James A. Amdur, "Obligation of Online Travel Companies to Collect and Remit Hotel Occupancy Taxes," 61 A.L.R. 6th 387, 388 (2011).

13 Supra note 1.

14 Id.

15 Id.

16 Id.

17 Title 28, ch. 7, section 310.1.2, N.Y.C. Admin. Code (2010).

18 Tomio Geron, "Airbnb Wins New York City Appeal on Short-Term Rentals," Forbes Tech Blog (Sept. 27, 2013).

19 Id.

20 "Colorado Marijuana Taxes Brought in $2 Million in January," The Washington Post, Mar. 10, 2014.

21 Airbnb suggested that the tax revenue could assist families leaving homeless shelters, one of Democratic Mayor Bill de Blasio's policy priorities. Supra note 1.

22 Thomas Johnson, "Airbnb Host Can't Get Rid of Squatter," The Washington Post, July 24, 2014.

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