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July 28 — While many state legislators have turned their taxing attention to online retail sales and short-term vacation rentals, lawmakers in some states have begun looking to other digital industries, including the burgeoning ride-hailing market.
Only two states in the past year have specifically required transportation network companies (TNCs), such as Uber Technologies Inc. and Lyft Inc., to collect and remit sales tax in their states.
But state revenue officials have begun talking with each other informally about an approach to taxing this market. And policy specialists who work with state lawmakers say they expect a growing discussion of how sales and use taxes might be applied to this new industry in the next few years. Among the questions: how any taxes imposed will compare to those on the traditional livery industry, and the thresholds for when individual drivers should be taxed (and the TNCs' responsibilities to assist in this area).
In June, Rhode Island adopted language that subjected TNCs to the statutory list of services subject to the state’s 7 percent sales and use tax. That mandate took effect July 1, and officials from both Uber and Lyft confirmed that they are following the law, which requires them to collect the sales tax and remit it on a quarterly basis.
Uber told Bloomberg BNA July 27 that it had issued a notice to its riders letting them know that they would now be seeing a charge for state sales tax on their receipts.
Effective July 1st, Rhode Island state law will require that Uber collect a 7% sales tax on all trips that both begin and end within the state of Rhode Island.
This 7% sales tax will be calculated on the gross fare, collected from the Rider, and Uber will pay the 7% sales tax to the state of Rhode Island. You will see an additional line item on your receipts for 7% Rhode Island Sales Tax calculated on the gross fare.
If you have any questions, please don’t hesitate to get in touch. You can reach us at t.uber.com/support.
Sincerely, The Uber Rhode Island Operations Team
In 2015, Nevada adopted legislation that clarified that the state’s 3 percent passenger carrier excise tax would be applicable on TNC fares, as well as those from common motor carriers and taxicabs.
Some states have taken the opposite position: that transportation network services shouldn't be taxed. For example, the Iowa Department of Revenue has determined that TNCs aren't providing a taxable service.
In Arizona, Gov. Doug Ducey (R) in May signed legislation that imposes stricter restrictions on when cities and counties can impose new regulatory burdens on “sharing economy” businesses, such as Uber. It essentially prohibits local government entities from regulating those companies in the same way they would regulate businesses that provide goods and services directly to customers.
A bill pending before the New Jersey Legislature ( A. 3695) would prohibit the state and municipalities from imposing a tax or fee that only applies to a TNC or driver.
It is at the local level that much of the debate has occurred, because municipalities are often charged with oversight of transportation services, including taxis and similar industries. And like at the state level, the majority of the debate has focused on mandates designed to ensure that TNC drivers are subject to the same requirements as the more traditional livery, limousine and taxi services with which they compete, including fees, pick-up and drop-off restrictions, and rules regarding background checks and other safety requirements.
Verenda Smith, deputy director of the Federation of Tax Administrators, said when states begin considering how to tax new forms of commerce, a certain pattern is often followed.
“An emerging industry finds itself shoehorned into existing statutes until a legislature writes something that more neatly fits that industry,” Smith told Bloomberg BNA in a July 29 e-mail. “So in most states, whether Uber and Lyft are taxed like taxis, or not at all, or something else, will initially be dependent on the wording of statutes written for other transportation industry types.”
A TNC is broadly defined as a firm that uses a digital network, or app, to connect drivers using their own non-commercial vehicles with passengers who are seeking a ride for a pre-determined fee based on distance, travel time, type of vehicle and other variables. They are also referred to as ride-sharing or ride-hailing companies
The nation’s two largest TNCs are Uber, which has operations in 48 states, and Lyft, which offers services in 35 states. Both firms are based in California's Bay Area. A third growing firm, Wingz Inc., offers primarily airport transportation in the Southwest.
Uber has been cited as one of the world's most highly visible startups. The company said that as of the end of 2015, it had more than 400,000 active driver-partners.
While both Uber and Lyft declined to discuss their tax policies with Bloomberg BNA, several states, including Connecticut, have reported that the firms have registered and pay required corporation or business registration taxes.
The focus at the state level mainly has been driven by concern over competitive parity with the more traditional livery industry. Some 34 states have passed laws that regulate TNCs with requirements related to safety, insurance and, in some cases, restrictions on where drivers can pick up passengers.
The most recent state where such legislation is being considered is Massachusetts, where a conference committee was expected to report out a bill for action before the Legislature concludes its formal session July 31, but it wasn't clear at publication time what action might be taken.
While the Massachusetts bill isn't expected to contain any language related to taxation of TNCs, state lawmakers are also expected to take up another bill related to the sharing economy that does address taxation related to another growing industry. The bill is an economic development measure also pending in a conference committee that could potentially require companies such as Airbnb to collect and remit the state’s room tax on short-term rentals.
While Gov. Charlie Baker (R) had originally supported the Airbnb tax, he has in recent days stepped back from his position, expressing concern over its impact on business. The issue is expected to be a topic of discussion when the compromise bill is released.
The potential revenue available from short-term lodging arrangements has drawn a lot of attention by state lawmakers, according to Max Behlke, manager of state-federal relations for the National Conference of State Legislatures. In contrast, there has been less focus on tracking and taxing income from other online sharing services such as TNCs, he told Bloomberg BNA July 26.
The prime focus among state lawmakers who have inquired about Uber and Lyft has been labor issues, such as ensuring that these workers are eligible for benefits.
However, Behlke said that as the online sharing industry continues to grow, he expects state lawmakers to begin looking at how tax rules may apply to TNCs such as Uber and Lyft, as well as other gig-economy companies such as TaskRabbit (assistance with chores) and Rover.com (pet-sitting). This will be especially true, Behlke said, in states that already impose a tax on services.
The topic was part of the annual meeting of the Multistate Tax Commission in late July in Kansas City, Mo.
Annette Nellen, professor at San Jose State University, said July 27 that Uber, Airbnb and other peer-to-peer companies present growing tax gap problems for the Internal Revenue Service and for states (145 DTR H-1, 7/28/16).
The tax gap is growing because on-demand service providers such as Lyft and TaskRabbit are a growing part of the economy, she said.
States should identify federal tax rules they conform to or are bound by that might not serve them well and are ripe for change, Nellen said in a talk on ideas for modernizing state taxation systems. She said the problem of tax collection from network platform companies and other peer-to-peer providers “is a big one right now,” especially because of rules on the issuance of IRS Forms 1099-K, Payment Card and Third Party Network Transactions.
When lawmakers consider this topic, the question of whether to require TNCs to collect and remit sales taxes is more clear cut in states that subject traditional transportation companies, such as livery services, to state sales and use tax rules. Rhode Island's law is an example.
However, Connecticut Revenue Commissioner Kevin Sullivan told Bloomberg BNA July 25 that follow-up is then needed to define whether TNCs are livery services or they fall into a separate category of service industry.
“I would be on thin ice” by trying to do something like that administratively right now, he said, adding that the Connecticut Legislature had discussed the potential tax treatment of ride-hailing services during a prior legislative session.
Sullivan, who was recently named second vice president of the Federation of Tax Administrators, said he has discussed the issue informally with his peers from other states, but that no formal FTA project is underway.
He said he understands that Uber has made a practice of registering in the states where it operates for business tax purposes. The company also has a practice of providing its drivers with 1099s. By coming forward to pay a business tax and provide information about the income earned by the drivers, Uber seems to have resolved in some part states' concerns over taxation, he said.
But that still leaves unresolved the issue of smaller sharing-industry companies that continue to operate “under the radar,” Sullivan said.
Sullivan is an advocate for the need to develop new ways to view the changing economy as a means of addressing the so-called tax gap between taxes due and revenue collected. He said his office is working on an initiative to go after that sales tax gap by addressing deficiencies in the system and expects to have a proposal for his state this fall.
Uber and Lyft state on their websites that they provide 1099s for their drivers, whom both companies consider to be independent contractors and not employees.
Lyft reports that drivers who gave at least 200 rides and generated at least $20,000 in gross ride receipts from passengers in the last year will receive a Form 1099-K. In addition, drivers who earned at least $600 from activities other than driving (e.g., referral bonuses, mentoring, other bonuses) in the last year will receive a Form 1099-MISC.
This matches a federal mandate that companies are required to notify the IRS of that income and send service providers, such as drivers, a 1099-K of their yearly earnings if they earn at least $20,000 and have 200 or more transactions a year.
Uber says it uses the banking and tax information associated with the driver's “partner account” to send a Form 1099 for drivers who earn $600 or more during a calendar year.
While both companies offer some brief explanation of tax-related issues, both urge drivers to seek professional tax advice.
A spokesman for H&R Block told Bloomberg BNA July 27 that the company works with Uber on helping to provide information for drivers on how to comply with tax rules related to their income. He said the firm also worked with Airbnb to help provide such advice.
Lyft offers a link on its website through which its drivers can get a break on Intuit Inc.’s Turbotax products designed to help them determine their tax liabilities.
Boston College Law School Professor Diane Ring told Bloomberg BNA June 29 that Uber is simply the most prominent example of the new model of production and consumption of goods and services in the sharing economy. She cited one study that said that, as of Dec. 20, Uber had provided a billion rides worldwide.
The rise of sharing has raised questions about how, and if, this new model should be regulated and whether existing laws and regulations can provide this enforcement or if new laws are needed, she said.
Ring and her co-author, Tulane Law School Associate Professor Shu-Yi Oei, argue in a paper titled “Can Sharing be Taxed?” that the application of substantive tax law to sharing is mostly clear, because “current tax law generally contains the concepts and categories necessary to tax sharing.”
They said, however, that tax enforcement and compliance may present challenges, as a result of two distinct features of the sharing economy.
The first is that some sharing businesses take advantage of the ambiguity regarding which rule applies, or if any rule applies, to pick the most favorable regulatory interpretation, which has led to compliance and enforcement gaps.
The second feature, the “microbusiness” nature of the sharing industry, “raises unique compliance and enforcement concerns.” The authors suggested certain strategies to address these concerns, such as lower information reporting thresholds, safe harbors and advance rulings to simplify tax reporting.
Ring said she and Oei did further research into ways Uber and Lyft drivers navigate the tax system, examining discussions and interactions that took place among drivers in several online forums.
Their research found that while forum participants appeared to have a generally good understanding regarding tax filing and some income inclusion obligations, they were far less accurate in their approaches to expenses and deductions. This led the pair to develop several recommendations on how these issues might be addressed, including the need for industry-specific IRS guidance, clarification of how existing tax rules apply to ride sharing and guidance on 1099-K interpretation.
Caroline Bruckner, managing director of the Kogod Tax Policy Center at American University, told a congressional panel in May that despite the extraordinary growth in the on-demand platform economy, “surprisingly little has been done to understand the tax compliance challenges this new frontier presents,” or how it impacts the ability of tax authorities to administer the tax code.
A survey performed by Bruckner and her associates found that many of the taxpayers who participate in the on-demand platform economy don't necessarily realize they are small business owners or that they have tax filing obligations until it's tax time or they receive an IRS notice.
A Bruckner-written report suggested there is a need for the IRS to issue updated guidance related to the need for companies to report income to the IRS earned via on-demand platforms like Uber and Airbnb. This might include lowering the thresholds for when companies are required to notify the IRS and to send service providers a 1099-K. The current reporting levels—triggered at $20,000 in earnings and 200 or more transactions in a year—mean that much of the income earned via those platforms goes unreported.
The IRS has indicated that it is drafting new guidance in this area. However, an IRS spokesman didn't immediately respond to an inquiry about when such guidance might be issued
With assistance from Tripp Baltz in Denver, William H. Carlile in Phoenix, Leslie A. Pappas in Philadelphia and Mark Wolski in St. Paul, Minn.
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Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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