Breaking the Rules Will Cost You When It Comes to Taxes

Rodney Johnson | Friday, May 02, 2014 >>

Airbnb has been in the news a lot lately.

The company provides an Internet-based platform where people who want to spend money to stay in a room or home, can meet up with people who offer such accommodations.

There used to be a word for this — it was called renting. But not anymore.

According to Airbnb, now such activity is called “sharing,” even though the parties involved are typically strangers, and one person provides accommodations while the other provides cash.

The company needs to avoid all the regulations and liabilities that come with formal business operations, which would dissuade many “sharers” from participating — so it also avoids the term, “renting.”

The emergence of Airbnb highlights a transformative power that gets overlooked in day-to-day living.

Technology is often created or moved forward in order to lower costs or increase production.

This is exactly what Airbnb has done, although they won’t admit it…

By creating a website where I can list my son’s bedroom (that he is not using while he is away at college) for rent, Airbnb has given me the ability to use an asset that otherwise sat dormant.

Instead of occasionally vacuuming and dusting the room, but otherwise keeping the door shut, I can turn the unused square footage into cold, hard cash.

That’s a pretty cool idea, as long as I’m good with strangers traipsing through my home, using the other facilities and potentially interrupting my sleep as they wander around.

Or, I could use Airbnb to rent out the entire home. I live in Tampa and our city is currently hosting the International Indian Film Academy (IIFA) Awards, or Bollywood Awards.

There will be tens of thousands of visitors, many of whom I’m sure would pay handsomely to rent my home, which is very close to downtown.

Either way, I can now easily rent out all or a portion of my home and pocket the cash.

That’s not only a cool innovation by Airbnb, it’s an example of technology being deployed to free up assets (unused space), which increases supply and drives down cost, which is deflationary.

This gives users the ability to spend their savings on other things, which improves their standard of living. It sounds like everyone wins, but that’s not exactly the case.

Under this new arrangement, I might be able to pocket some cash while providing a few Bollywood fans with a great location for a lower price than conventional rentals, but that’s the problem.

The conventional rentals, like hotels and condos, are now losing out. These businesses, with all of their fixed costs and list of fees, can’t compete with Airbnb’s offers, so they’re losing a portion of their clientele.

While this would seem a normal part of the evolutionary cycle — after all, buggy whip manufacturers took quite a hit when the automobile was invented — these groups deserve some sympathy.

Lodging facilities must keep their offerings up to certain standards of cleanliness as well as meet other regulatory requirements.

They must be registered with different authorities — city and state — and keep their licensing in order. Complying with all such regulations is part of doing business, and it’s not cheap.

Also, there’s the small issue of taxes. Lodging facilities pay a lot of taxes.

In addition to typical business taxes and sales tax, hotels and other rentals typically pay additional fees that cities and states tack on to finance a wide range of services and projects.

The reason that taxes are levied here, as well as on rental cars, is because those who pay are typically from out of town, so they don’t vote in local elections.

This makes occupancy taxes easy targets when it comes to raising money. But if we all began offering our rooms and homes through Airbnb, then the revenue from these taxes would fall, and all the programs and projects financed by this tax revenue would suffer.

This is what brings the issues with Airbnb into sharp focus.

As noted above, so far, Airbnb has tried to argue that people offering spare bedrooms — or even entire homes — are not conducting business.

Even though they exchange lodging for money, they are not renting out anything.

In fact, the CEO of Airbnb has claimed that while there are laws that apply to businesses, and laws that apply to people, there are not any laws that apply to those that offer space on Airbnb, because they are a new category: Microentrepreneurs.

Right.

I think there’s a name for this category, it’s called sole proprietorships, and it’s been around a long time.

The obvious reason that Airbnb’s chief doesn’t want to name this service is because it would bring on the headaches of regulations, licensing, and taxation — all of which will drive people out of the service.

Would I rent out my home for a week in order to earn some cash? Maybe.

Would I put up with the hassle of licensing, inspections, and tax filings in order to earn that money? Probably not.

The CEO of Uber, a smartphone app that allows people to offer rides to others for cash (as in, a taxi or limo service), is having this same fight in cities around the U.S., as well as in Europe.

The service offered is clearly car-for-hire, but because it involves individuals and their private cars, instead of declared businesses, Uber is trying to argue that the same rules don’t apply — just as Airbnb claims no laws exist for this class of offering.

It’s nonsense in the face of it, laws do exist for the exact lines of business in question. Airbnb and Uber just don’t want to live by the laws.

To speed along the technological evolution of such services, regulatory authorities and taxing bodies should get in front of the change, not wait until the problems blow up.

There could be a threshold below which no tax filings or other regulatory compliance are required, or perhaps greatly simplified forms for declaring income from such offerings.

There will still be winners and losers, but at least the path to compliance will be clear.

As this situation develops, the people offering such services continue to play a potentially dangerous financial game of musical chairs.

When the music stops — and it will stop — regulatory authorities and taxing entities will end up looking at historical transactions to see who has earned money and what steps they took to pay applicable fees and taxes.

When the answer is zero, those who took in the cash will be required to pay up. For now, using such services seems a lot safer than providing them.


Rodney

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.