Airbnb’s Woes Show How Far the Sharing Economy Has Come

Airbnb, Uber and similar firms are booming, drawing out powerful regulators

  • Share
  • Read Later
Brian Chesky, Airbnb founder
Kim Kulish/Corbis / Corbis

Airbnb founder Brian Chesky.

Until recently, online room rental service Airbnb resisted efforts to regulate its booming business. When cities tried to get the company to collect hotel taxes, the response was essentially this: Your laws are outdated and don’t apply to innovative businesses like ours.

But last week, Airbnb started singing a different tune. In a major reversal, the company said that it’s now open to collecting room rental taxes and will work with city officials in New York and San Francisco to craft new legislation that spells out the rules. “We believe it makes sense for our community of hosts to pay occupancy tax to the cities in which they live, with exceptions under certain thresholds, and we are eager to discuss how this might be made possible,” Airbnb said in a statement.

It is just the latest example of companies in the sharing economy—a burgeoning online niche that lets anyone rent a spare bedroom or use their personal car like a taxi—embracing regulation. In effect, the sharing economy is starting to grow up. Instead of fighting the system, the companies (with some major exceptions) are beginning to accept that it’s better to try to shape the system to their liking as far as possible.

Friendly regulation, after all, creates business certainty and opens the door to more growth. “It’s better to get ahead of this trend than wait and deal with more regulation later,” says Jeremiah Owyang, founder of Crowd Companies, a consulting firm that helps big businesses join the sharing economy. “It’s a way to legitimize the movement, whether at the state level or the municipal level. It indicates that it’s something that’s real.”

Last month, for example, California’s Public Utilities Commission stamped its seal of approval on ride sharing services like Lyft, Sidecar and Uber. The services connect passengers to drivers, who are summoned via smartphone apps and charge a fee or accept donations. Just months earlier, the commission had cracked down on ride sharing by fining the companies involved for operating illegally. But the industry quickly turned the tables through an intense lobbying campaign.

The firms convinced regulators to carve out new category of transportation services for ride sharing. Companies must meet 28 basic insurance and safety requirements. The commission’s decision gives the industry a green light across the entire state. Individual cities will now have a much tougher time trying to ban the services, as many have tried to do at the behest of taxi companies that fear what they describe as unfair competition.

(MORE: The Debt Ceiling Crisis Is Threatening Your Quality of Life)

Playing nice isn’t a universal strategy, however. Companies that adopt a get-along philosophy with one regulator may not with another.

On Monday, Airbnb dropped a bombshell by saying it would fight a subpoena from New York’s Attorney General for information about its 225,000 landlords in the state. A law enacted in 2010 makes it illegal to market short-term rentals in New York on sites like Airbnb. Legislators passed the law to guard against tax evasion and slumlords taking advantage of unsuspecting customers.

In a statement, Airbnb did not mince words: “We always want to work with governments to make the Airbnb community stronger, but at this point, this demand is unreasonably broad and we will fight it with everything we’ve got.” The company promised to instead work with officials to weed out the bad actors, which it described as a small minority of its hosts. It’s unclear whether the Attorney General will accept Airbnb’s effort to minimize the amount of information it discloses. What is certain is that the two sides aren’t likely to resolve the matter anytime soon.

Interest by regulators in the sharing economy coincides with the sector’s growth. For example, since Airbnb’s founding five years ago, more than 8.5 million people have rented rooms, apartments and homes through its service. It’s one thing for bureaucrats to let tiny companies slip through the regulatory cracks. It’s an entirely different matter for large businesses with millions of users.

Sharing economy companies have an obvious incentive to make peace. Operating under the threat of fines, lawsuits and shutdown is not exactly a good long-term strategy or a magnet for investment. Earlier this year, Lyft happened to take $60 million in funding while Airbnb took $120 million. Venture capitalists that put up that kind of money surely want any uncertainty resolved. Many sharing economy companies have had to nimbly react to potential scandals, including Airbnb which created a $1 million guarantee against property damage after one incident garnered widespread attention.

Airbnb’s current troubles center around hotel taxes, a big source of income for many cities. San Francisco, for example, expects to collect $191 million in so-called transient occupancy tax in fiscal 2013. The city’s hotels are supposed to tack on an extra 14% onto guest bills and then remit that money to the city. That same rule applies to regular people who rent rooms to others on a short-term basis.

Airbnb has always left the burden of collecting and remitting the so-called transient occupancy tax on its hosts. How many actually fulfilled the requirement is unclear. But in all likelihood, the number is small to none. In many cities, it’s not clear whether renting out a room through Airbnb is even legal.

For some time, San Francisco has tried to get Airbnb to take over the duty of tax collector. Including the tax in the online checkout process would essentially solve the problem of its hosts shirking payment to the city. After resisting the idea, Airbnb has finally come around. All that needs to be worked out are the details.

(MOREShutdown Effect: Milk Prices Could Double)

Amy Chan, an aide to San Francisco Supervisor David Chiu, who led the discussions with Airbnb, explained that unresolved issues remain over licensing, insurance and handling neighbor complaints. The key is striking a balance. Many residents earn discretionary income from short-term rentals, she said. But their rentals also take affordable housing off the market and bother neighbors if guests throw parties or stomp up the stairs.

“We want to facilitate innovation in our city and creativity, but we also want to make sure that the public outcomes are good and don’t put the burden on neighbors who are dealing with quality of life issues,” Chan says.

Although it is onboard with new regulations, Airbnb hopes to rein in rules that it considers too burdensome. In particular, it wants to make sure that hosts who rent rooms occasionally are not inconvenienced. Do they really need to fill out a lot of paperwork just to remit a few dollars in taxes? Airbnb is hoping the ordinance, when proposed, will exempt such landlords.

Still, the sharing economy still has a lot of work to do if it hopes to emerge from a legal gray zone. Many cities and states are still cracking down on peer-to-peer room and car rentals. While some sharing economy services are getting ample attention from regulators, other niches have yet to be targeted. The sites aren’t exactly going out of their way to be noticed.

Sites like Feastly, SupperKing and EatWith serve as bulletin boards for people who want to turn their homes into defacto restaurants. They invite anyone willing to pay to sit and have a meal at their kitchen table, often alongside strangers who happen to sign up for the same time slot. There are no health inspectors checking for insect infestations, as they do at traditional restaurants. And there’s no one who verifies that food is stored or cooked at an appropriate temperature, other than the chef, of course.