Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
Ride sharing services Uber and Lyft have disrupted the taxi and limousine industry. These service companies have also disrupted how states tax and regulate traditional taxi and limousine companies, and the non-traditional ride sharing companies. In this article, Jackson Brainerd of the National Conference of State Legislatures discusses how states are responding to the tax and regulatory challenges posed by transportation network companies.
By Jackson Brainerd
Jackson Brainerd is a policy associate with Fiscal Affairs Program at the National Conference of State Legislatures, which provides state legislatures and staff with outreach and policy analysis on a wide range of state fiscal issues. In this capacity, he oversees state tax, economic development and labor policy, and has authored a variety of articles and publications on these subjects. He also staffs NCSL's Labor and Economic Development Standing Committee. Jackson is a graduate of Colorado College with a B.A. in Political Science.
It was only seven years ago when the RIDE-hailing giant, Uber Technologies, was launched in San Francisco, connecting ride-seekers to available drivers through the convenience of a smart phone app. Now, it is generating billions in revenue and its cars are ubiquitous, especially in urban areas. Lyft, which offers similar services, but with flamboyantly mustachioed cars, has made quite a name for itself as well. Combined, the two transportation network companies (TNCs) are now providing billions of rides per year.
TNCs have quickly eaten into the profits of taxi and limousine companies with a more expedient product, and grappling with the regulatory and tax administration challenges presented by this industry disruption has been a headache for states and localities. They have had to rush to determine how to maintain a fair playing field for the traditional livery industry without significantly impeding the growth of these burgeoning ride-sharing businesses. At least forty states have now passed laws seeking to legalize these operations and ensure protections for passengers and drivers alike. In 2017, legislation pertaining to the regulation of TNCs has been enacted in Florida, Missouri, North Dakota, New Jersey, New York, and Wyoming. These measures typically involve permits and fees, insurance coverage for drivers, criminal background checks, limits on local authority to tax and regulate, and authorization of airports to charge compensatory fees for use.
States have been slower to take up questions regarding how TNCs fit into state tax systems. Applying the sales tax on TNC rides would seem be a reasonable starting point but, as the Institute for Taxation and Economic Policy (ITEP) noted in a recent report, the services provided by traditional taxi and limousine services are rarely subject to sales or gross receipts taxes; only eight states include them in the tax base (Georgia, Hawaii, New Mexico, Ohio, Rhode Island, South Dakota, Washington, and Wyoming).
In these states, equity would imply TNC rides should be subject to these taxes, but it is not clear they are always being collected. In some instances, TNCs have argued that the applicability of tax laws to peer-to-peer technology operators is ambiguous; in others, TNC drivers simply don't seem to be collecting and remitting them. To avoid confusion, Rhode Island enacted a measure in 2016 specifically requiring TNCs to collect the state's seven percent sales tax. Wyoming included a provision that subjects their services to sales taxation in recently enacted piece of regulatory legislation, as well. A measure proposed in Georgia would explicitly require ride-sharing services to collect and remit the state's four percent sales tax, as taxis and limousines do, and Hawaii has proposed legislation to require TNC drivers to display general excise tax certificates (cab companies pay the excise tax and, in written testimony, allege that TNCs do not).
States stand to gain a significant amount by subjecting TNC rides to sales taxation (ITEP estimates $300 million per year). Several other states that do not subject taxis to sales taxes have enacted legislation that specifically authorizes the imposition of taxes or fees on TNCs. However, as the table below illustrates, there is little uniformity in their respective approaches. States seeking to tax this new industry must also contend with the political unfavorability of service taxation generally. Rather than tax TNCs, for example, New Jersey recently repealed the imposition of sales and us tax on limo transportation services to level the playing field with TNCs.
|Table 1. State TNC Taxes/Fees|
|Maryland||Counties and municipalities can impose an additional fee up to 25 cents.|
|Massachusetts||A 20-cent fee is levied on all TNC rides, with half of the funds collected distributed to the cities and towns where the TNC ride originated in order to address the impact of transportation network services on transportation infrastructure. One quarter of the amount collected is used to provide financial assistance to the livery industry.|
|Nevada||An excise tax of 3% of the total fare is charged for transportation services.|
|New York||As part of the recent budget bill , the state will impose an assessment fee of 4% of the gross trip fare of every ride. There is also a 2.5% surcharge that is directed to the black car operator fund to cover workers’ compensation coverage for drivers.|
|Pennsylvania||A TNC must pay to the authority an assessment amount equal to 1.4 percent of the gross receipts from all fares charged to all passengers for prearranged rides that originate in Philadelphia.|
|Rhode Island||TNCs are subject to the states seven percent sales tax.|
|South Carolina||TNC are required to collect a local assessment fee (equal to 1 percent of the total gross trip fare collected from TNC passengers during the quarter), with the funds distributed to each municipality or county where a trip originated during the reporting period.|
|Wyoming||TNCs are subject to laws imposing the state four percent sales tax rate on intrastate transportation of passengers.|
In 2017, several more states have proposed measures to either levy additional taxes or fees on TNCs or exempt them from taxation. House chambers in both Alabama and Louisiana have passed measures that would require TNCs to collect a 1 percent per-ride assessment fee on behalf of TNC drivers. The revenues would then be distributed back to the municipalities in which the rides took place. A measure proposed in Washington would authorize two 10 cent surcharges to offset costs associated with improving transportation options for people with disabilities and homeless students.
Part of the reason behind the growth in the ride-sharing industry is that it is not regulated as stringently as taxi or limo services. Many major U.S. cities, such as New York City, Chicago, Seattle, D.C., and Atlanta, run medallion systems, which require drivers to own pricey permits (medallions) to operate taxis. The sale of medallions has historically provided helpful revenue streams as cities set a cap on the number taxis that can operate and thus drive up the price of medallions. However, this system has undoubtedly helped pave the way for TNCs, who are responding to demands that are not being met due to the medallion caps. (One can see why taxi drivers might be upset about having to pay for the privilege of providing a very similar service as Uber drivers, who do not.) As a result, medallion revenues are now struggling. The minimum bid for the sale of a new taxi medallion in Philadelphia was recently set at $10,000 after selling for as much as $545,000 a few years earlier. New York City Council's FY 2018 financial plan reduced the amount of anticipated revenues from the sale of taxi medallions of over $100 million annually from FY 2018-FY 2020.
Beyond questions about the taxability of TNC rides is whether TNCs are justified as classifying their drivers as independent contractors rather than company employees, as Lyft and Uber do. Naturally, this distinction has significant implications for their drivers, who are not eligible for worker benefits or are subject to minimum wage laws, but it can also affect state and federal revenues. Employers can avoid the costs of employment taxes and shift payment responsibility to the drivers, many of whom are not aware that they bear this responsibility. In general, independent contractors tend to underreport their taxes and income more than employees, which costs state and federal governments billions of dollars a year, both in lost revenue and increased administrative costs.
Nevertheless, many states have laid out statutory conditions to facilitate the classification of TNC drivers as independent contractors, rather than disrupt this key facet of the TNC business model. In fact, some evidence exists that drivers prefer the classification, as it provides flexibility for many of those who see Uber as a source of supplemental income rather than a full-time job (Uber drivers typically work about half as much as taxi drivers). Still, the independent contractor status has been the subject of multiple lawsuits, states like California, Massachusetts, and Florida. Uber and Lyft have both had to pay settlements, but drivers remain classified as independent contractors.
There are other potential solutions to the independent contractor problem. Economists have proposed establishing a new “independent worker” classification to provide some benefits independent contractors currently lack, and facilitate employer tax withholding. A failed Indiana measure sought to keep drivers from being classified as employees, but would have required TNCs to withhold federal and state income taxes as if the driver were an employee. New York, New Jersey, and Washington have proposed legislation to study or implement portable benefits for gig economy workers, who would pay into a pooled system to receive healthcare and retirement benefits.
The rise of the gig economy and growth in alternative work arrangements has created a number of inconveniences for states from a tax administration standpoint. They face a loss revenue from the traditional livery industry and have had to determine how TNCs fit into the already intricate patchwork of state and local taxi and limousine regulations and tax schemes, or if they merit a whole new set of laws as a distinct industry. But, in an economy where more and more purchases are being made for non-taxable services rather than tangible goods and through tax-free online platforms rather than brick and mortar retailers, such disruptions may be necessary to spur state tax systems into the 21st century.
Caroline Bruckner, Shortchanged: The Tax Compliance Challenges of Small Business Operators Driving the On-Demand Platform Economy, Kogod Tax Policy Center (Visited 5/16/2017). http://www.american.edu/kogod/news/upload/shortchanged-caroline-bruckner-kogod-au.pdf
David Bauer, The Misclassification of Independent Contractors: The Fifty-Four Billion Doller Problem, Rutgers Journal of Law and Public Policy Vol 12:2 (Spring 2015). http://www.ntassoc.com/uploads/files/Bauer_Misclassification_Contractors.pdf
Doug Shinkle, Riding By the Rules, State Legislatures Magazine (December 2014). http://www.ncsl.org/research/transportation/riding-by-the-rules.aspx
Elaine S. Povitch, Taxing the New Economy, Starting with Uber, Lyft, Stateline (April 14, 2017). http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2017/04/14/taxing-the-new-economy-starting-with-uber-lyft
Emilie Jackson et al., The Rise of Alternative Work Arrangements: Evidence and Implications For Tax Filing and Benefit Coverage, Working Paper 114, U.S. Department of the Treasury Office of Tax Analysis (January 2017). https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-114.pdf
Emily Badger, Taxi medallions have been the best investment in America for years. Now Uber may be changing that, The Washington Post, Wonkblog, (June 20, 2014). https://www.washingtonpost.com/news/wonk/wp/2014/06/20/taxi-medallions-have-been-the-best-investment-in-america-for-years-now-uber-may-be-changing-that/?utm_term=.fe82e5560ee4
Judd Cramer and Alan B. Krueger, Disruptive Change in the Taxi Business: The Case of Uber, forthcoming American Economic Review: Papers and Proceedings (May 2016). http://www.epi.org/files/2016/disruptive-change-in-the-taxi-business-aea-version-v2.pdf
Laura Lieberman, Extras on Excise: Will New State Tax Bill Prove Minor Delays or Major Detours for Ride-Sharing Services?, Bloomberg BNA SALT Talk Blog (March 15, 2017). https://www.bna.com/extras-excise-new-b57982085340/
National Employment Law Project, Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries, Fact Sheet (July 2015). http://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-on-workers-and-federal-and-state-treasuries/
Patrick Anderson, Ride-hailing service Lyft says it's not collecting R.I. sales tax, The Providence Journal (March 25, 2015). http://www.providencejournal.com/article/20150325/NEWS/150329512
Ross Eisenbrey and Lawrence Mischel, Uber Business Model Does Not Justify a New ‘Independent Worker’” Category, Economic Policy Institute (March 17, 2016). http://www.epi.org/publication/uber-business-model-does-not-justify-a-new-independent-worker-category/
Seth D. Harris and Alan B. Krueger. A Proposal for Modernizing Labor Laws for Twenty-First-Century Work: The “Independent Worker”, Discussion Paper 2015-10, The Hamilton Project (December, 2015). http://www.law.nyu.edu/sites/default/files/upload_documents/Taxing%20the%20Gig%20Economy_%20Thomas.pdf
Zach Shiller and Carl Davis, Taxes and the On-Demand Economy, Institute of Taxation and Economic Policy (March 15, 2017). http://www.itep.org/pdf/ondemandeconomytaxes0317.pdf
Copyright © 2017 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)