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REPORT 10.24.18 How Should We Tax the Economy?

Joyce Beebe, Ph.D., Fellow, Center for Public Finance

Walking out of the airport lobby and getting TaskRabbit, “taskers” who perform work set into an car booked through an app on their own hourly rates, whereas Uber sets a smartphone, hiring a handyman through prices centrally. Whether a service provider the TaskRabbit website to repair a leaking has an occupational license in the industry kitchen sink, searching vacation rental he works in is also not a deciding factor, accommodations on —none of these since not all industries have such licensing functions was possible a decade ago. Yet requirements. today, with the development and growth To add to the complexity in defining of the —which includes a this emerging sector, many research number of mostly online enterprises that studies use the term “sharing economy” match service providers with clients—these interchangeably with gig economy, are common transactions. This report reviews peer economy, collaborative economy, key federal tax considerations for companies on-demand economy, matching economy, There is no clear and workers as the sharing economy access economy, or .1 A boundary as to what becomes more prevalent. few common definitions are summarized the sharing economy below. All definitions include the typical ride-hailing and home-sharing websites like encompasses. All WHAT IS THE SHARING ECONOMY? Uber and Airbnb, but they differ in whether definitions include the they include two other types of typical ride-hailing Although many associate Uber, Airbnb, models: peer-to-peer sales and platform and TaskRabbit with the sharing economy, and home-sharing ownership of assets. Peer-to-peer sales websites like Uber and there is no clear boundary as to what the websites, such as eBay and Etsy, focus on sharing economy encompasses due to the the sale of tangible goods instead of on Airbnb, but differ in novelty of the concept and its constantly services. Some platform companies own the whether they include evolving applications. assets used in transactions with customers Many companies in the sharing economy two other types of and simply rent them out through an app business models: peer- maintain the common feature of using an or website. For example, owns its app- or web-based software platform to fleet of cars, and customers can rent these to-peer sales (Etsy) and match supply with demand; however, this vehicles online. This is different from Uber, platform ownership of feature alone does not serve as a good which does not own the cars that drivers assets (Zipcar). identifier. For example, traditional companies use to transport customers. may adopt web-based applications to interact with customers or have a strong Both Peer-to-Peer Sales and Platform online presence, but these companies are Ownership of Assets typically not part of the sharing economy. As such, having an innovative business The broadest definition for the sharing model is a better indicator than industry economy includes all four business classification. Pricing mechanism is also models—that is, peer-to-peer sales not a distinguishing feature; in the case of websites, entities in which the platforms BAKER INSTITUTE REPORT // 10.24.18

own the underlying “shared” assets, and platform companies” included in a ride- and home-sharing websites. In other JPMorgan Chase & Co. Institute (JPMorgan) words, this definition does not exclude study uses these descriptions but also business models based on the ownership of classifies the companies as labor platforms assets or whether the underlying platform (e.g., TaskRabbits and Uber) and capital provides services or sells goods. platforms (e.g., eBay and Airbnb).7 This Studies that adopt this definition definition is consistent with that used in a include one by Pew Research Center, 2017 proposed U.S. Senate bill on worker There are many more which includes peer-to-peer sales sites classifications, which states that the users/consumers than such as eBay, Etsy, and , as well characteristics of a “marketplace platform” workers/suppliers in the as companies that own the assets and include operating a website or mobile simply rent them out to customers, such application that facilitates the provision sharing economy. Most as Zipcar and Rent the Runway.2 It also of goods and services and features participants rely on the includes websites such as mechanisms for settling transactions.8 gig work as secondary GoFundMe and in its definition. A study by the Aspen Institute includes sources of income A PricewaterhouseCoopers (PwC) study ride sharing, accommodation sharing, task further includes an “entertainment, media, services, short-term car rentals, and food/ that supplement their and communications” sector that consists goods delivery services in its definition primary income; many of music and video streaming services such of the sharing economy. In addition to of them work part time. as Spotify and Library in its Uber, Airbnb, and TaskRabbit, the study definition.3 Another survey-based academic includes companies like , Zipcar, study emphasizes the collective consumption and Care.com. This definition emphasizes nature of the sharing economy and includes only service-based platforms but does not online communities that enable peer-to- include peer-to-peer sales companies. It peer purchases, donations, or shared access also does not exclude platforms that own to goods and services. Websites that allow the underlying assets.9 people to rent, buy, swap, or even donate items are all included.4 Neither Peer-to-Peer Sales or Platform Ownership of Assets Either Peer-to-Peer Sales or Platform Several government reports have Ownership of Assets also studied the sharing economy. A Some research has focused on platforms Congressional Research Services (CRS) that function as online intermediaries to study defines the sharing economy as the match supply and demand and generally collection of markets that match providers includes enterprises that provide services to consumers on a per-job basis in support and sell goods but typically do not own of on-demand commerce. This type of the shared assets. New York University service is labeled “on-demand” because it business professor Arun Sundararajan uses technology to respond to customers’ summarized the three major elements of a immediate or specific needs.10 Because peer-to-peer business in testimony before the study emphasizes the labor the U.S. House Small Business Committee: impacts for workers, only service-based platforms (marketplaces that facilitate platforms such as Uber, , TaskRabbit, exchanges between peers), entrepreneurs , , Postmates, Heal, and (suppliers in the marketplaces), and Pager are included. consumers (individuals who demand goods A study by the U.S. Department of or services).5 With these features, the four Commerce defines “sharing economy” major types of sharing economies6 are companies as “digital matching” entities rental services (e.g., Airbnb), professional that provide online marketplaces that enable service providers (e.g., Uber), general the matching of service providers with purpose (e.g., TaskRabbit), customers. This includes companies that and peer-to-peer sales (e.g., eBay or use IT systems to facilitate peer-to-peer Etsy). Similarly, the features of “online transactions, rely on user-based rating 2 HOW SHOULD WE TAX THE SHARING ECONOMY?

systems for quality control and to ensure were independent contractors.12 Although trust between providers and consumers, the questions in the BLS survey did not and offer workers flexibility in deciding their directly target gig workers, these workers work hours; workers, in turn, typically use were most likely included as part of the their own assets or tools to provide these independent contractor statistics. Some services.11 According to this definition, eBay, observers therefore compared the 2005 Amazon, Zipcar, and Craigslist are excluded, and 2017 results, the most recent two whereas ride-sharing, home-sharing, and waves available, and concluded that the task services are included, as are financial sharing economy is still quite small; in 2005, services firms such as Lending Club and contingent workers accounted for 4.1% of Funding Circle. the U.S. labor force, 7.4% of which were independent contractors. On the other hand, critics argued that the survey is not a good SIZE AND FEATURES OF THE U.S. measure of the sharing economy because SHARING ECONOMY it only asked about the workers’ main jobs, which excluded workers who drive Uber as a The lack of a consistent definition for secondary income source, for instance.13 the sharing economy—as well as a lack The BLS results are consistent with the of comprehensive, high-quality data on findings of several other studies, which this industry—leads to different estimates generally indicate that less than 1% of the regarding its size. Despite these challenges, working population consistently uses online notable private sector studies generally platforms to arrange work.14 A JPMorgan have found that the sharing economy has From a worker or study shows that 0.4%-0.6% of the the following features: first, there are many supplier perspective, working-age population earned gig income more users/consumers than workers/ in a given month, whereas a McKinsey the most touted feature suppliers. Second, most participants rely Global Institute study estimates that less of the gig economy is on the gig work as secondary sources of than 1% of the U.S. working-age population income that supplement their primary the flexibility and ease were contingent workers who secured gigs income; many of them also work part-time. of getting gigs. The cost or customers through digital marketplaces.15 Third, millennials constitute the largest A 2014 MBO Partners study estimates that barrier of entering a age group that participates in the sharing 2.7 million Americans, or approximately 1% certain line of work is economy, followed by baby boomers. of the total working population, provided much lower. Finally, although the sharing economy is a services through on-demand economy small portion of the overall economy, it has platforms.16 The results of various academic experienced and will continue to experience studies have also consistently concluded unprecedented growth. that this segment of the workforce remains When it comes to the actual quite small, with gig workers accounting for and size of the sharing 0.4%-0.5% of the total workforce.17,18 economy, however, government data, A few private sector surveys have academic research, and private sector generated larger estimates of the total analyses point to slightly different figures. employment and size of the sharing The Bureau of Labor Statistics (BLS) economy. PwC’s survey indicates that collects information on contingent workers, about 20% of the U.S. population had defined as workers who do not expect their engaged in a sharing economy transaction jobs to last for longer than one year, and in December 2014, of which 7% were alternative employment arrangements, service providers earning gig income. This which include independent contractors, study also estimates that five major sectors on-call workers, temporary agency workers, (travel, car sharing, finance, staffing, and and workers employed by contract firms. music and video streaming) generated $14 In 2017, contingent workers made up billion in 2014 and that revenue would grow 3.8% of the U.S. labor force, and 10.1% to $335 billion by 2025. A 2015 Piper Jaffray of workers participated in alternative Investment Research study19 estimates employment arrangements, of which 6.9% that by 2025, home sharing-based rentals 3 BAKER INSTITUTE REPORT // 10.24.18

could represent as much as 10% of This allows workers’ participation in gig accommodations bookings, generating $107 markets to be more transitory, and lets them billion, while Uber and other ride-sharing use spare time productively.24 For asset companies would account for over 5% of suppliers such as Airbnb hosts, leveraging the global taxi market of $90 billion. underutilized assets can generate great economic benefits, including stimulating new consumption. PROS AND CONS OF THE SHARING From a consumer perspective, the ECONOMY emergence of the sharing economy reduces the prices of certain services and improves Despite the disparity in size and workforce customer experiences.25 A study points out participation estimates for the sharing that globally, Airbnb offers rates that are economy, there are undeniable benefits 30%-60% lower than those of traditional and challenges created by this new hotels.26 Another research study finds that . Airbnb’s entry into Texas has induced a flexible supply of accommodations Benefits that benefits all consumers, including The term “gig economy” stemmed from participants and non-participants of the the notion that each work assignment is sharing economy.27 However, the other side akin to an individual “gig.”20 Thus, the of the coin is that the popularity of Airbnb nature of the work implies that gig workers has a negative effect on hotel revenue: expect to maintain a brief relationship with each 10% increase in the number of Airbnb their clients. From a worker or supplier listings in Texas corresponds to a 0.39% perspective, the most touted feature of decrease in monthly hotel revenues across the gig economy is the flexibility and the state, which in turn negatively impacts ease of getting gigs. Unlike traditional governments’ collection of hotel occupancy entrepreneurs, gig workers do not have to 28 Sharing economy taxes. In the study’s most noticeable establish their own storefronts, incur sales results, the rapid growth of Airbnb listings workers experience and marketing expenses, or build up their in Austin caused an 8%-10% decline in higher income own client base. This means the cost barrier revenue among lower-end hotels and hotels instability compared to of entering a certain line of work is much that do not cater to business travelers. traditional employees. lower because the platform companies, Another research study compared the as online intermediaries, have made self- efficiency of ride-sharing services (e.g., Their work is mostly employment more attractive and simple. Uber) versus traditional taxis by analyzing tied to a certain A prominent example is driving for Uber the fraction of time and the total number of platform. versus driving a taxi: in order to become miles driven in which a driver has a fare- a taxi driver in (NYC), a paying passenger in the car.29 It concludes potential driver needs to purchase a NYC taxi that Uber drivers spend significantly more medallion, which costs between $100,000 time and drive substantially more miles with and $200,000,21 and comply with numerous a passenger in their cars than taxi drivers. document requirements.22 The to-do list to From a government perspective, it has drive for Uber, however, is much shorter, historically been difficult for tax authorities primarily requiring drivers to have access to monitor informal transactions—especially to a four-door vehicle and submit a valid those conducted in cash. Online platforms driver’s license and proof of insurance.23 that enable these transactions keep digital In addition to satisfying the potentially records, which means that tax authorities unmet demand for flexible work schedules can potentially access previously unreported and using a crowd-based rating mechanism tax bases. Thus, the benefit of making the to enhance trust between parties, platform formal is a potential companies provide workers with increase in tax revenue.30 opportunities to bridge employment— i.e., working between two career jobs or between full-time work and retirement. 4 HOW SHOULD WE TAX THE SHARING ECONOMY?

Challenges spread to rural areas, the urban-rural Although the worker or supplier enjoys a divide could become deeper. more flexible work schedule and gets to Although the sharing economy could leverage the existing customer base of potentially lead to higher tax revenues for online platforms, the disadvantage is that governments, it also reinforces the well- one’s work is tied to a certain platform. known challenges of taxing large numbers of Most gig companies discourage workers small taxpayers. Taxes under this model are from operating outside of the platform (e.g., more difficult to collect, more distortionary renting an Airbnb room off platform to avoid (because compliance costs consume a larger the commission). In addition, several studies portion of revenue earned), and generate have shown that gig workers experience only modest revenue gains from small 35 higher income instability compared to . Some analysts also caution traditional employees. Gig workers are that while digitalization makes transactions also mostly responsible for their own more traceable, if tax compliance does not training, professional development, capital improve as overall economic activities grow investments, and maintenance. due to the sharing economy, the portion of A major legal Furthermore, disruptive new the informal economy in relation to the total economy will increase.36 challenge many of technologies always create winners and the labor platforms losers in the marketplace. In addition to face—most notably hotel operators whose profits declined with LEGAL CHALLENGES AND OTHER the expansion of Airbnb, NYC taxi drivers Uber—is whether the REGULATORY ISSUES witnessed customers deflect to Uber in workers are employees pursuit of lower fares, and the value of their The sharing economy also creates thorny or independent yellow cab medallions plummeted from $1 legal issues and emerging regulatory contractors. Airbnb million to less than $200,000 within a few challenges for the . A major 31 years. The proliferation of Uber drivers also legal challenge many of the labor platforms has faced major enhances downward pressure on wages face—most notably Uber, which is the controversies regarding through oversupply, which, ironically, could subject of several pending legal cases—is illegal rentals, hotel lead to employment insecurity. whether the workers are employees or occupancy taxes, In August, the New York City Council 37 independent contractors. and health and voted to freeze issuances of new ride- Most, although not all, platform hauling vehicle licenses for one year to companies view providers as independent safety issues. conduct a study on the industry’s impact on contractors instead of as employees. This 32 the city. Most people believe that fierce classification has important employment protest by taxi drivers against Uber and and labor law ramifications. Employees Lyft drove this decision; however, it is true are more likely to be eligible for minimum that the number of licensed Uber and Lyft wage, overtime pay, benefits, sick pay, vehicles in NYC almost tripled from 25,000 compensation, health to over 80,000 between 2015 and 2018, insurance, and retirement benefits imposing a heavy burden on the already protections, which are not available to non- congested city streets. employees. If a worker is an independent The sharing economy also creates contractor, the platform company is not new types of socioeconomic divides. New required to withhold income taxes, or to technology may impose a disproportionate collect or pay taxes in accordance with burden on small businesses and lower- the Federal Insurance Contributions Act income households with limited access to (FICA, which finances Social Security and 33 or knowledge of these new digital tools. Medicare) and the Federal Unemployment This “digital exclusion” may exacerbate Tax Act (FUTA, which finances income inequality. In addition, the sharing unemployment insurance). economy is an urban phenomenon and The classification of workers for tax requires sufficient population density purposes will likely be determined by the 34 to work. Before the new technologies outcomes of several pending court rulings. 5 BAKER INSTITUTE REPORT // 10.24.18

However, if the courts rule that Uber apartment for less than 30 days unless drivers should be classified as employees, the host is present at the same time.43 In Uber (and other platform companies) October 2016, the state passed a law that would need to pay its workers benefits would impose heavy fines on hosts that and would also incur administrative violate local housing , to which expenses to comply with tax withholding, Airbnb immediately filed a lawsuit. After payment, and collection requirements. intense debate, the company dropped the Several platform companies remarked suit under the condition that the city will that hiring workers as employees instead only impose fines on the hosts instead of of as independent contractors will cost the company.44 20%-30% more, which is a key issue Some cities have begun to address the in these heated court battles.38 A few rental issues and reached compromises with gig companies hire their workforce as the home-sharing industry. For example, employees, citing the legal risks and the recently granted legal status risk of being challenged by the IRS.39 to short-term rentals as long as hosts Globally, the U.S. is not the only registered with the city, paid the city’s hotel Form 1099-K requires country facing worker classification taxes, and obtained rental insurance. The city banks, credit card issues. In the midst of local court cases also stipulated that a unit cannot be rented and lawsuits, studies in Canada and the for more than 90 days annually. In 2014, companies, and “third- U.K. have provided a new perspective, Portland added a new category of housing in party settlement advocating for the application of a different its regulatory framework that governs Airbnb organizations” to employment category. The “dependent rentals; it capped the number of days units report payments to contractors”40 category has been may be rented and mandated that hosts each payee on Form recognized by Canadian common law as an register their and obtain permits. intermediate status between the employee However, a recent audit report issued by 1099-K if the payment and independent contractor roles since the the city shows that more than 80% of the exceeds $20,000 1930s, although provincial and national listings do not follow these requirements.45 and the aggregate labor standards laws generally do not Some observers also claim that Airbnb 41 number of transactions provide a definition of the term. and similar home-sharing companies A U.K. government report calls for have negative impacts on the supply of exceeds 200, yet these the formal establishment of “dependent long-term housing. Because more people thresholds are different contractors”: they are not employees are buying up properties to offer them as from Form 1099-MISC of a company but remain economically short-term rentals, the inventory for long- requirements. dependent on the given company through term accommodations decreases, and low- some kind of contractual relationship.42 The income residents face greater difficulties in U.K. study did not provide a clear definition obtaining affordable housing. There is also for this designation, but its intent was to a proliferation of professional management provide gig workers with better benefits and companies that help owners a decent wage by creating a clear distinction convert their properties to Airbnb-friendly between the dependent contractor role and units and rent them out.46 In addition, the self-employed status. to the extent that Airbnb and hotels are Though it does not have to contend substitutes, because Airbnb units are not with labor questions, Airbnb has faced cleaned daily, the hosts may not utilize major controversies regarding illegal cleaning services as frequently as hotels or rentals, hotel occupancy taxes, and health opt to clean the units themselves. This might and safety issues. lead to reduced employment for labor- The Airbnb platform allows hosts intensive hospitality jobs such as cleaning to rent out their properties to potential and housekeeping.47 renters for a short period of time. Another concern involves consumer Since its inception, the legality of such health and safety issues. Some claim that arrangements has been challenged in the agility and profitability of short-term several major cities. Most notably, New rental platform companies partly stems York state law makes it illegal to rent an from the fact that they are not subject to 6 HOW SHOULD WE TAX THE SHARING ECONOMY?

many regulatory requirements. For example, payments for car washes, tolls, fees hotels must comply with federal, state, and (including fees and commissions collected local environmental regulations such as the by Uber), and gas purchases. Airbnb hosts Americans with Disabilities Act, the Clean generally can rent their units for up to 14 Air Act, the Clean Water Act, the Resources days tax-free. However, if a host rents Conservation and Recovery Act, and the rooms for more than two weeks, she will Toxic Substances Control Act, whereas need to keep track of deductible expenses Airbnb hosts are not subject to these such as , cleaning, maintenance regulations and associated costs.48 and repairs, property taxes, insurance, and service fees charged by the platform. A deduction often neglected by young CAN YOU GIG ’EM? gig workers is their contributions to retirement savings vehicles such as IRAs, Although most people are more likely to SEP-IRAs, or SIMPLE-IRAs, which further participate in the gig economy as consumers reduce their taxable income.51 A taxpayer than as providers, the gig economy is may even decide the non-deductible Roth increasingly touching a larger segment of IRA is a beneficial investment because his workers. Below are a few major tax issues tax rate is low. Finally, based on newly The tax system is gig workers face. issued IRS guidelines, gig workers are likely eligible for the qualified business income complicated, with Filing Requirements (QBI) deduction created under the 2017 tax rules that are overly Although the profiles of gig workers act.52 The technical guidance of applying the burdensome for gig are somewhat different than those of deduction, however, is complicated. workers who generally traditional independent contractors, as long as an individual earns income from The $19,399 Discrepancy53 earn a small amount of revenue from such activities (including gig work) outside of the The tax code specifies that if an entity traditional employer-employee relationship, pays an independent contractor more than work to supplement he is treated as a self-employed person or $600, the payer must issue Form 1099- their income. Tax as a small business owner for tax purposes. MISC to both the IRS and the contractor.54 compliance in the However, a separate Form 1099-K was sharing economy Estimated Payments introduced in 2011 as part of the Housing and Self-Employment Tax and Economic Recovery Act, which requires is lagging. Because gig workers are not subject to banks, credit card companies, and “third- withholding taxes, they must budget party settlement organizations” to report for self-employment and income taxes payments to each payee on Form 1099-K themselves and pay quarterly estimated if the payment exceeds $20,000 and the taxes to avoid penalties, in addition to aggregate number of transactions exceeds preparing their annual filings to reconcile 200. Besides the obvious reporting threshold their tax liability. In terms of self- discrepancies for similar services provided, employment taxes, because there is no the regulations state that the rules that “employer” with whom to split the taxes, govern Form 1099-K dominate when both gig workers are responsible for the full apply.55 The issue is platform companies 15.3% self-employment tax on their like TaskRabbit would qualify as third-party earnings (12.4% for Social Security and settlement organizations because they 2.9% for Medicare).49 process customers’ credit card payments and make payments to taskers through a Business Expenses and Deductions central account. Thus, a tasker may receive a On the expenses side, gig workers must Form 1099-K only if he earns over $20,000 56 keep receipts and records of business by providing over 200 distinct services. expenses to calculate their taxable In practice, companies are taking varied income.50 This means Uber drivers need approaches to compliance. According to to track miles driven, parking expenses, the platform companies’ websites, Airbnb 7 BAKER INSTITUTE REPORT // 10.24.18

and Etsy issue Form 1099-K, applying the Treasury to issue guidance regarding how $20,000/200 transaction threshold like Form 1099-K rules apply to sharing economy TaskRabbit.57 Lyft takes a more conservative businesses to ensure consistent reporting. approach, reporting driving-related income Second, although we have not seen on Form 1099-K and non-driving-related the end of sharing economy lawsuits, the income (e.g., referral bonuses and other court rulings in pending cases will likely incentives) on Form 1099-MISC, using a have decisive implications for worker $600 threshold for both.58 Uber issues classification as well as tax collection, and Form 1099-K for payments to drivers of the effects can take years to unfold. While more than $20,000 and over 200 trips or total employment in the sharing economy is deliveries, and Form 1099-MISC for referrals small, it potentially involves the creation of and promotions of more than $600.59 a group of low-income workers that are not Although there is Overall, practitioners agree that the qualified for many basic worker protection debate about the size tax system is complicated, with rules that and benefits. The current system, which of the gig economy are overly burdensome for gig workers classifies them as independent contractors and whether it is who generally earn a small amount of and subjects them to similar tax treatments revenue from such work to supplement as small business owners, will only the future trend of their income. A recent survey of tax exacerbate the issue, especially for the large employment, it is professionals reveals that the top reason portion of gig workers who are young and increasingly likely that the IRS issues a document mismatch inquiry financially inexperienced. one may experience a (Form CP 2000) is a taxpayer’s failure to The solution may not exist in the current mix of traditional and report income earned as an independent worker classification system. Portable contractor, particularly gig workers.60 A benefits or new worker classifications would independent work study investigated Uber and Lyft drivers’ be useful alternatives. A bill introduced in over the course of interactions on discussion forums Congress in 2017 recognized the importance his/her career. and found that drivers’ understanding of allowing independent workers to maintain of the filing requirements and income both worker and entity-contributed benefits inclusions was generally not clear, and upon changing jobs and called for additional their knowledge about deductions and research on portable benefits for them.64 expenses was even worse.61 Besides the Finally, tax compliance in the sharing inefficiency created as individuals spend economy is lagging. A significant number hours researching the complicated tax of taxpayers who receive income from the rules, the long-term consequences of sharing economy are not aware of their overly complicated tax requirements would filing and reporting obligations and therefore be lower tax compliance, thus lower tax fail to make quarterly estimated tax revenue for governments.62 payments or pay self-employment taxes. When gig workers venture into expense deductions, the compliance is even less TAX POLICIES IN THE SHARING accurate. IRS has a Sharing Economy Tax ECONOMY Center65 that features information on many topics relevant for gig workers; however, Policymakers have already taken steps to adding industry-specific guidance in study and manage the sharing economy. layman’s terms would be more helpful. A hearing held in late July 2018 considered A Senate proposal in 2017 addressed many concerns raised by both participants some of these issues. The New Gigs Act66 and non-participants in the gig economy.63 clarifies worker classification standards This report recommends that legislators for those claiming independent contractor focus on the following areas. status. It proposes to have third-party First, the inconsistent reporting networks in the gig economy use thresholds between Forms 1099-MISC and Form 1099-K, and payers in traditional 1099-K should be clarified. It would be independent contractor relationships file uncontroversial for Congress to propose Form 1099-MISC, with reporting thresholds legislation or for the U.S. Department of of $1,000 for both. Finally, the bill requires 8 HOW SHOULD WE TAX THE SHARING ECONOMY?

gig businesses to withhold a 5% income tax (2014) (statement of Arun Sundararajan, from their contractors. Although the bill has professor and NEC faculty fellow, New York not advanced, Congress is likely to return to University Stern School of Business), http:// these issues in the future. bit.ly/2OoNM6a. Although there is debate about the 6. The author recognizes that peer-to- size of the gig economy and whether it peer education (e.g., Skillshare and Udemy) is the future trend of employment, it is and peer-to-peer finance (e.g., Kickstarter increasingly likely that one may experience and LendingTree) are separate business a mix of traditional and independent work models and require separate discussions. over the course of his/her career. These 7. Diana Farrell and Fiona Greig, two work styles do not need to be mutually Paychecks, Paydays, and the Online exclusive, since consumers may view the Platform Economy: Big Data on Income platforms as providing an additional option Volatility (New York: JPMorgan Chase & to the existing choices. Depending on Co. Institute, 2016), http://bit.ly/2QTPutc. her traveling needs, a consumer can use Another study utilizes a similar definition: Uber if she only needs to commute from Caroline Bruckner, Shortchanged The Tax an airport to a hotel, and rent a car if she Compliance Challenges of Small Business needs extended access to a vehicle, for Operators Driving the On-Demand Platform instance. There is no doubt that the sharing Economy (Washington, D.C.: Kogod Tax economy poses sweeping legal, commercial, Policy Center, May 2016), http://bit. and social challenges. Policymakers should ly/2AdzDQF. proactively work to manage these issues. 8. Works to Guarantee Independence and Growth Act of 2017, S. 1549/H.R. 4165, 115th Cong. (2017), http:// ENDNOTES bit.ly/2PzPoqh. 9. Aspen Institute, “Forty-Five Million 1. See (1) Sarah Donovan, David Bradley, Americans Say They Have Worked in the and Jon Shimabukuro, What Does the Gig On-Demand Economy, While 86.5 Million Economy Mean for Workers? Congressional Have Used It,” January 6, 2016, http://bit. Research Services Report no. R44365, ly/2El3dHK. February 5, 2016, http://bit.ly/2ynIfmh; 10. Donovan, Bradley, and Shimabukuro, and (2) Niam Yaraghi and Shamika Ravi, What Does the Gig Economy Mean for The Current and Future State of the Sharing Workers? Economy (Washington, D.C.: Brookings 11. Rudy Telles Jr., Digital Matching Institution and Brookings India, March 2017), Firms: A New Definition in the “Sharing https://brook.gs/2PB64h9. Economy” Space, ESA Issue Brief #01–16 2. Aaron Smith, Shared, Collaborative (Washington, D.C.: June 3, 2016), http:// and On Demand: The New bit.ly/2CMIMC7. The inclusion of Rent (Washington, D.C.: Pew Research Center, the Runway or Campus Book Rentals, for May 19, 2016), https://pewrsr.ch/2RQdeQ3. example, are slightly questionable because 3. PricewaterhouseCoopers, The Sharing the companies own the underlying assets Economy, Consumer Intelligence Series they rent out. They do not fit the “digital (New York: PricewaterhouseCoopers, 2015), matching” criteria based on the report’s https://pwc.to/2PB67cP. description in Box 2 on page 6. 4. Juho Hamari, Mimmi Sjöklint, and 12. Bureau of Labor Statistics, Antti Ukkonen, “The Sharing Economy: “Contingent and Alternative Employment Why People Participate in Collaborative Arrangements,” News release no. USDL-18- Consumption,” Journal of the Association for 0942, June 7, 2018, http://bit.ly/2yJGmzA. Information Science and Technology 67, no. 13. Eric Morath, “Was the Gig Economy 9 (2016): 2047-2059. Overblown?” Wall Street Journal, June 7, 5. The Power of Connection: Peer- 2018, https://on.wsj.com/2CKEnQ8. to-Peer Businesses, before the House Committee on Small Business, 113th Cong. 9 BAKER INSTITUTE REPORT // 10.24.18

14. (1) Gig Economy Data Hub, “How 22. NYC Taxi & Limousine Commission, Many Gig Workers Are There?” Gig Economy “New Driver Applicants,” https://on.nyc. Data Hub (blog), Cornell University, n.d., gov/2OslpnF. http://bit.ly/2RKICiZ; (2) Emilie Jackson, 23. Uber, “Driver Requirements – How Adam Looney, and Shanthi Ramnath, The to Drive with Uber,” https://ubr.to/2PzDsor. Rise of Alternative Work Arrangements: 24. Donovan, Bradley, and Shimabukuro, Evidence and Implications for Tax Filing What Does the Gig Economy Mean for and Benefit Coverage (Washington, D.C.: Workers? Office of Tax Analysis, January 2017), http:// 25. Telles, Digital Matching Firms. bit.ly/2J0hFDR; and (3) Organisation for 26. Yaraghi and Ravi, The Current and Economic Co-operation and Development, Future State of the Sharing Economy. Tax Challenges Arising from Digitalization – 27. This result is consistent with several Interim Report 2018 (Paris: OECD Publishing, other theoretical and empirical studies. March 2018), http://bit.ly/2QMscoI. See (1) Liran Einav, Chiara Farronato, and 15. James Manyika, Susan Lund, Jonathan Levin, “Peer-to-Peer Markets,” Kelsey Robinson, John Valentino, and Annual Review of 8, no. 1 (2016), Richard Dobbs, A Labor Market that Works: 615–635; and (2) Matt Phillips, “New York Connecting Talent with Opportunity in the City Hotel Rooms Are Getting Cheaper Digital Age (New York: McKinsey & Company, Thanks to Airbnb,” Quartz, February 9, 2015, June 2015, https://mck.co/2OXiQcI. http://bit.ly/2PBssqz. 16. Data from the Federal Reserve Bank 28. Georgios Zervas, Davide Proserpio, of St. Louis shows that in 2014, the U.S. and John Byers, “The Rise of the Sharing working population was about 203 million. Economy: Estimating the Impact of Airbnb See Organization for Economic Co-operation on the Hotel Industry,” Journal of Marketing and Development, “Working Age Population: Research Vol. LIV (October 2017): 687-705. Aged 15-64: All Persons for the United 29. Judd Cramer and Alan Krueger, States,” retrieved from FRED, Federal Reserve Disruptive Change in the Taxi Business: Bank of St. Louis, http://bit.ly/2OnAxm6. The Case of Uber, Working Paper 22083 17. Seth Harris and Alan Krueger, A (Cambridge, MA: NBER, March 2016), http:// Proposal for Modernizing Labor Laws bit.ly/2QXl9tN. The five cities are , for Twenty-First-Century Work: The , New York, San Francisco, and “Independent Worker,” Discussion Paper Seattle. 2015-10 (Washington, D.C.: The Hamilton 30. OECD, Tax Challenges Arising from Project, December 2015), http://bit. Digitalization – Interim Report 2018. ly/2OUi7cn. 31. Yaraghi and Ravi, The Current and 18. Lawrence Katz and Alan Krueger, Future State of the Sharing Economy. The Rise and Nature of Alternative Work 32. Paul Berger and Greg Bensinger, Arrangements in the , 1995- “New York Plans to Cap Uber and Lyft,” Wall 2015, Working Paper 22667 (Cambridge, Street Journal, August 8, 2018, https:// MA: National Bureau of Economic Research, on.wsj.com/2yGXENR. September 2016), http://bit.ly/2pV4NpG. 33. International Monetary Fund, “Digital 19. Michael Olson and Samuel Kemp, Government,” in Fiscal Monitor: Capitalizing Sharing Economy: An In-Depth Look at Its on Good Times (Washington, D.C.: IMF, April Evolution and Trajectory Across Industries 2018), http://bit.ly/2EnYPYK. (Minneapolis: Piper Jaffray Investment 34. Yaraghi and Ravi, The Current and Research, March 2015), http://bit. Future State of the Sharing Economy. ly/2AbCPfz. 35. Bruckner, Shortchanged. 20. Nicole Kobie, “What is the Gig 36. IMF, “Digital Government.” Economy and Why is it so Controversial?” 37. As of publication, the status of Wired, February 7, 2018, http://bit. two most advanced federal lawsuits are as ly/2yfbyHC. follows: (1) In O’Conner v. Uber Technologies, 21. For a list of NYC taxi medallions for Inc. (9th Cir, No 14-16078), the Ninth Circuit sale, see: http://bit.ly/2P2AV9a. Court ordered Uber to withdraw the appeal 10 HOW SHOULD WE TAX THE SHARING ECONOMY?

until the cases pending in the U.S. Supreme 46. Jon Wheatley, “I Bought An Court are decided. (2) In Razak v. Uber Apartment To Rent Out On Airbnb,” Need/ Technologies Inc., the U.S. District Court for Want (blog), October 28, 2013, http://bit. the Eastern District of Pennsylvania (2:16- ly/2pW8uvy. cv-00573) ruled that Uber drivers are not 47. Roy Samaan, Airbnb, Rising Rent, employees. The plaintiffs planned to appeal and the Housing Crisis in LA (Los Angeles: to the Third U.S. Circuit Court of Appeals, Los Angeles Alliance for a New Economy, which would be the first federal appeals March 2015), http://bit.ly/2Eo82QR. court to hear this type of case. Several 48. Telles, Digital Matching Firms. state courts (California, New Jersey, and 49. Individuals may deduct half of their Massachusetts) have ruled that gig workers self-employment tax from their net business are employees. income before applying the 15.3% tax 38. Noam Scheiber, “Gig Economy rate. To avoid penalty, total estimated tax Business Model Dealt a Blow in California payments must equal at least 90% of the Ruling,” New York Times, April 30, 2018, current year’s tax liability or 100% of last https://nyti.ms/2CM74w0. year’s liability. See IRC Section 6654 (d)(1). 39. Sarah Kessler, “The Gig Economy 50. Non-farm sole proprietorship Won’t Last Because It’s Being Sued to expenses are reported on Schedule C. Death,” Fast Company, February 17, 2015, Rental real estate expenses are report http://bit.ly/2CM7sdW. Examples of on Schedule E. Business expenses are companies that hire employees include deductible in computing adjusted gross Hello Alfred, FlyCleaners, Managed by Q, and income (AGI), which reduces the amount of Shyp. Zirtual’s former CEO commented that self-employment earnings that are subject its costs skyrocketed due to the change of to income and self-employment taxes. employment status, leading to the firing of 51. IRS, “Retirement Plans for Self- all employees. See http://bit.ly/2yGHDaV. Employed People,” April 24, 2018, http://bit. 40. Lauren Weber, “What if There ly/2EkLfVN. Were a New Type of Worker-Dependent 52. IRS, “Tax Cuts and Jobs Act, Contractor?” Wall Street Journal, January 28, Provision 11011 Section 199A – Deduction 2015, https://on.wsj.com/2OWHdax. for QBI FAQs,” August 8, 2018, http://bit. 41. Danny Kaufer, The Gig Economy: A ly/2Ac28Ol. Canadian Perspective (: American 53. Kelly Phillis Erb, “Credit Cards, Bar Association, May 2017), http://bit. The IRS, Form 1099-K And The $19,399 ly/2yIspC0. Reporting Hole,” Forbes, August 29, 2014, 42. Matthew Taylor, Good Work: The http://bit.ly/2EkLfVN. Taylor Review of Modern Working Practices 54. RC Section 6041(a) and Form 1099- (London: Department for Business, Energy & MISC. Industrial , July 11, 2017), http://bit. 55. Treas. Reg. 1.6041-1(a)(1)(iv) and IRC ly/2yjNt2y Section 6050W(a) and(e). 43. Greg Bensinger, “For Uber and 56. See TaskRabbit, “Am I a TaskRabbit Airbnb, New York City Turns Foe,” Wall employee?” http://bit.ly/2AbubgX. Street Journal, August 9, 2018, https:// 57. For more information on company on.wsj.com/2J0imgr. compliance practices regarding Form 1099 44. Katie Benner, “Airbnb Ends Fight issuance guidelines, see (1) Airbnb, “Should with New York City over Fines,” New York I expect to receive a tax form from Airbnb?” Times, December 3, 2016, https://nyti. http://bit.ly/2Eo3vxK; and (2) Etsy, “1099- ms/2OYqVO9. K Tax Form and Your Earnings on Etsy,” 45. Mary Hull Caballero and Kari Guy, https://etsy.me/2CLYjBY. Short Term Rental : Enforcement 58. See Lyft, “Tax information for U.S. is Lax and Effects on Housing Crisis drivers,” https://lft.to/2IWi4Hn. (Portland: Portland City Auditor’s Office, 59. See Uber, “Understanding your tax August 2018), http://bit.ly/2Ov1Qej. documents,” https://ubr.to/2NKgidg.

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60. National Association of Enrolled AUTHOR Agents, “Survey Reveals Top Reasons Taxpayers Receive an IRS Notice for Joyce Beebe, Ph.D., is a fellow in public Incorrect Payment,” July 31, 2017, http://bit. finance at the Baker Institute. Her ly/2EyQvph. research focuses on tax reforms in the 61. Shu-Yi Oei and Diane Ring, “The Tax U.S. and computable general equilibrium Lives of Uber Drivers: Evidence from Internet modeling of the effects of tax reforms. Her Discussion Forums,” Columbia Journal of Tax other research interests include Law 8 (2017): 56-112, http://bit.ly/2pW9srG. accumulation over a person’s lifetime and, The forums are Reddit.com, Uberpeople.net, generally, how public policies influence and Intuit TurboTax AnswerXchange. decision-making. 62. Kathleen DeLaney Thomas, “Taxing the Gig Economy,” University of Pennsylvania Law Review 166 (2018): 1415- 1473, http://bit.ly/2RQU5xt. 63. Hearing on Improving Tax Administration Today, Before the Senate Finance Subcommittee on Taxation and IRS Oversight, July 26, 2018, 115th Cong., http:// bit.ly/2yOPtzl. 64. Portable Benefits for Independent Workers Pilot Program Act, S. 1251, 115th Cong. (2017), http://bit.ly/2Abv7lJ. 65. IRS, “Sharing Economy Tax Center,” February 2, 2018, http://bit.ly/2Ely47h. 66. New Economy Works to Guarantee Independence and Growth Act of 2017, S. See more Baker Institute Reports at: 1549/H.R. 4165, 115th Cong. (2017), http:// www.bakerinstitute.org/baker-reports bit.ly/2PzPoqh. The text of HR 3396 is highly similar to this proposal, with some This publication was written by a researcher (or researchers) who technical differences. It also does not include participated in a Baker Institute project. a withholding requirement, along with the Wherever feasible, this research is solution to Form 1099-MISC and Form 1099- reviewed by outside experts before it is K consistency issues. released. However, the views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.

© 2018 Rice University’s Baker Institute for Public Policy

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy.

Cite as: Beebe, Joyce. 2018. How Should We Tax the Sharing Economy? Baker Institute Report no. 10.24.18. Rice University’s Baker Institute for Public Policy, Houston, Texas.

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