Thomas A. Dickerson and Sylvia O. Hinds-Radix
Thomas A. Dickerson and Sylvia O. Hinds-Radix ()

If you own a car and own or rent a house or apartment you may have an asset which can be rented to others for short periods of time. What makes this simple concept so revolutionary and disruptive to the hotel and taxi industries, particularly in New York and San Francisco, is the connectivity between owners and renters provided by Internet “digital clearinghouses”1 such as Airbnb, Uber and Lyft. Airbnb is a short-term home or apartment rental company that matches close to 350,000 hosts worldwide with rooms to let with tourists who want to rent them in 35,000 cities2 (15,000 hosts listed on Airbnb reside in New York City).

Uber and Lyft both offer car service, but with a twist. They pay drivers to supply and drive their own cars. Passengers order car service by using a smartphone app to locate an available Uber or Lyft vehicle.3 This article reviews recent actions by the New York State Attorney General to control the onslaught of these Internet-based companies.

Investigations

Tourists love it.4 Venture capitalists love it.5 However, as Airbnb, Uber and Lyft have spread across the United States and beyond,6 their explosive growth has created a stir among hotel and taxi industries and local officials. Here in New York,7 the Attorney General has issued an investigatory subpoena to Airbnb8 seeking information in a number of areas. The office is seeking information, inter alia, about Airbnb’s New York City hosts and their alleged failure to pay hotel occupancy taxes and state and New York City sales taxes. It is also seeking a restraining order to enjoin Lyft “from operating [in New York City, Buffalo and Rochester] an unlicensed for-hire livery service and insurance business in New York State in violation of state and local laws that protect the health, safety and financial well-being of New York residents.”9 The attorney general is also seeking to prevent “price gouging” in violation of General Business Law §396r by limiting Uber’s use of its “surge pricing” model.

Airbnb

After a year of negotiations over the scope of the investigatory subpoena, Airbnb and the Attorney General10 reached an agreement to the effect that Airbnb will provide the Attorney General with “the information he is seeking about Airbnb hosts in New York City…. The attorney general will have a year to use the data to identify bad actors—hosts who are renting out large blocks of rooms in violation of local laws.”11

Tax Issues

It is unlikely that state and local sales taxes will be imposed on Airbnb hosts or Uber and Lyft drivers. It is more efficient to tax Airbnb, Uber and Lyft directly much like Internet resellers such as Overstock, Amazon and Expedia.12 This has been made clear by the Court of Appeals in Overstock.com v. New York State Department of Taxation13 wherein the court rejected the facial challenge of online retailers (including Amazon.com) to the newly created Internet Tax as being unconstitutional “by subjecting online retailers, without a physical presence in the state, to New York sales and compensating use taxes.” In so doing the court noted that “The world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated.14 An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet.”

In Expedia v. City of New York Department of Finance15 the court rejected a challenge by online retailers to the imposition of a local hotel tax to the fees collected from their customers. “This statute allows the City to tax up to six percent ‘of the rent or charge per day’ for each hotel room [and] authorizes the City to collect these taxes from the hotel operator or any ‘person entitled to be paid the rent or charge for the hotel room.’” In finding the hotel tax constitutional the court noted that “Online travel companies…have successfully reshaped the way people book travel.”

The Uber App

Uber operates its ride-sharing business in 128 cities in 37 countries.16 It selects drivers who are already licensed to drive commercial vehicles. Uber has recently introduced UberX which also arranges for car owners, who are not commercially licensed, to drive their own vehicles. This move is one seen as competing with Lyft.

Uber may have a transformative impact upon car ownership and the quality of urban environments17 and has recently been the subject of the first ride-sharing legislation in Colorado. The legislation reads: “SB125 codifies our responsibility to the riding public and drivers by creating a new vehicle class called ‘Transportation Network Companies’” providing for driver background checks and vehicle inspections, and every trip must be insured up to $1 million.18

Uber Lawsuits. In addition, Uber has been the subject of, at least, two lawsuits, O’Connor v. Uber Technologies19 was brought by car service drivers seeking tips. They allege that Uber discourages passengers from tipping by falsely advertising that gratuity is included in the fare, even though the full gratuity is not passed along to the drivers. In Boston Cab Dispatch v. Uber Technologies,20 plaintiffs allege that Uber “has gained an unfair competitive advantage over traditional taxicab dispatch services and license-holders because it avoids the costs and burdens of complying with extensive regulations designed to ensure that residents of Boston have access to fairly priced and safe transportation.”

Price Gouging? Back in New York, the Attorney General raised the issue of whether21 Uber’s “surge pricing” model may violate General Business Law §396-r which prohibits “price gouging” during “periods of abnormal disruption of the market caused by strikes, power failures, severe shortages or other extraordinary adverse circumstances.”22 Uber’s surge pricing is described as follows: “Uber does not set a single, fixed price for rides. Uber’s rates are dynamic: they rise and fall as demand increases and decreases”

An agreement reached between the Attorney General and Uber dated July 8, 2014, provides that “Uber will not exceed its normal range of prices during any ‘abnormal disruption of the market’ as defined by GBL §396-r…Uber agrees that it will implement surge pricing, and set prices at multiples of the base fare, based solely on customer demand and the supply of available vehicles.”

Blocking Lyft

Lyft is similar to Uber and a vigorous competitor and requires its cars to wear a distinctive fuzzy pink moustache.23 Under Lyft’s system, individuals can make their cars available for use as a car service, This system, however, has been challenged for not complying with safety and licensing standards. Lyft had been operating in Buffalo and Rochester. It decided to enter the New York City market by offering “free rides in Brooklyn and Queens starting Friday evening [July 11, 2014].”24 The day before, the New York City Taxi & Limousine Commission posted a notice that Lyft’s so-called ride share service had not complied with the commission’s safety requirements and other licensing criteria.

The Attorney General sought and obtained a TRO blocking Lyft from launching in New York City. A statement issued by the office read: “We are pro-innovation and pro-competition but allowing Lyft to flout dozens of different laws would, in addition to putting safety of New Yorkers at risk, put law-abiding competitors at a substantial disadvantage”25

On July 28, 2014, Lyft and the Attorney General reached an agreement whereby “Lyft agreed to operate ‘in full compliance’ with existing laws and regulations and that it will start the new service in [New York City] with commercial drivers only [and] Lyft will suspend operations in Buffalo and Rochester August 1 while resolving regulatory issues there.”26

Conclusion

Given the rising popularity of Airbnb, Uber and Lyft and the potential for new sources of tax revenues, accommodations will, of course, be reached, taxes will be levied and paid and the traveling public will be better off for it.

Endnotes:

1. See Geron, “Airbnb And The Unstoppable Rise of the Share Economy,” Forbes (2013), “[A]n economic revolution that is quietly turning millions of people into part-time entrepreneurs, and disrupting old notions about consumption and ownership… Twelve days per month [X] rents his Marin County home on website [Airbnb] for $100 a night, of which he nets $97. Four nights a week he transforms his Prius into a defacto taxi via the ride-sharing service [Lyft], pocketing another $100 a night in the process.”

2. See Kleinfeld, “Airbnb Host Welcomes Travelers From All Over,” www.nytimes.com (April 25, 2014).

3. Ideally, both Uber and Lyft would like to have the owner of the car also be the licensed driver. For example, UberX recently “expanded the insurance coverage it offers ridesharing drivers…UberX…allow(s) members of the public to hail rides at the touch of a smartphone app. Mom-and-pop rather than professionals typically answer their request, in regular cars rather than commercial vehicles” [McBride, "Uber expands insurance coverage for ridesharing drivers," www.reuters.com (March 14, 2014)]. However, as an accommodation to some local authorities drivers with commercial licenses must drive the vehicles. This was the accommodation recently reached between Lyft and the Attorney General as discussed in note 26 and accompanying text.

4. Downes, “Lessons From Uber: Why Innovation and Regulation Don’t Mix,” Forbes (Feb. 6, 2013). (“Uber doesn’t provide its own vehicles or operators, but works with existing licensed drivers…to help keep already-rolling vehicles busy transporting customers”).

5. De La Merced, “Uber Attains Eye-Popping New Levels of Funding,” http://dealbook.nytimes.com (June 6, 2014).

6. See Scott, “London Transport Regulator Says Uber Can Legally Operate” (www.nytimes.com (July 3, 2014).

7. The City of New York has also sought to control apartment sharing. See City of New York v. Smart Apartments, 39 Misc.2d 221 (N.Y. Sup. 2013), in which New York City sought to enjoin the operation of an apartment-sharing website claiming that defendant’s placement of tourists in residential apartments for ‘transient’ stays of less than 30 days is illegal because they violate multiple dwelling laws, housing maintenance codes and city building codes and “they bother non-transient residents of the buildings because the transient occupants host loud, late night parties; vomit, dump garbage and smoke in the hallways and generally do not conduct themselves in the civilized genteel manner of the locals.” In granting a preliminary injunction the court noted that “placing tourists in illegal, dangerous accommodations constitutes irreparable injury especially if there is a tragic fire.”

8. The Attorney General’s subpoena sought, inter alia, (1) “An Excel spreadsheet identifying all Hosts that rent accommodations(s) in New York State, including…(c) Address of the Accommodations(s) rented…(d) the dates of guest stay, and the rates charged for the rental…(e) method of payment to Host including account information and (f) total gross revenue per Host generated for the rental…through your website” and (2) “Documents sufficient to identify all tax-related communications your website has had with the Host.”

9. See People v. Lyft, N.Y. Sup. Ct., N.Y. County; A.G.’s Memorandum of Law in Support of Motion For (TRO) and Preliminary Injunction, dated July 11, 2014.

10. See Wingfield, “A Victory for Airbnb in New York,” www.nytimes.com (May 13, 2014); Peterson, “Airbnb is facing off against New York’s Attorney General. Here’s why,” Washington Post (April 22, 2014); Streitfeld, “New York’s Case Against Airbnb Is Argued in Albany,” N.Y. Times (April 22, 2014).

11. Streitfeld, “Airbnb Will Hand Over Host Data to New York,” www.nytimes.com (May 22, 2014).

12. See Dickerson and Hinds-Radix, “Taxing Internet Transactions: Airbnb and the Sharing Economy,” NYSBA Journal, July-August 2014, p. 49.

13. Overstock.com v. New York State Department of Taxation, 20 N.Y.3d 586 (2013).

14. See e.g., Dickerson, Chambers & Cohen, “Personal Jurisdiction and the Marketing of Goods and Services on the Internet,” 41 Hofstra L.R. 31 (Fall 2012).

15. Expedia v. City of New York Department of Finance, 20 N.Y.3d 904 (2012).

16. De La Merced, “Uber Attains Eye-Popping New Levels of Funding,” http://dealbook.nytimes.com (June 6, 2014).

17. See Manjoo, “With Uber, Less Reason to Own a Car,” www.nytimes.com (June 11, 2014).

18. See http://Blog.Uber.Com/Regsdoneright

19. O’Connor v. Uber Technologies, 2013 WL 6354534 (N.D. Cal. 2013).

20. Boston Cab Dispatch v. Uber Technologies, 2014 WL 1338148 (D. Mass. 2014).

21. See Virtanen, “Uber Agrees to Put Brakes on Pricing During Emergencies,” New York Law Journal (July 10, 2014).).

22. See People v. Two Wheels Corp., 71 N.Y.2d 693 (1988)].

23. See Manjoo, “Lyft Hopes to Coax Commuters to Leave Their Cars,” www.nytimes.com (Aug. 6, 2014) (“This week, beginning in San Francisco, Lyft will introduce a new feature, Lyft Line, that instantly matches riders who are traveling between similar places at similar times and offers each of them a deep discount to share a ride rather than go solo.”

24. See “AG Filed Lawsuit to Block Lyft Ride-Sharing Service,” New York Law Journal, July 14, 2014.

25. See People v. Lyft, N.Y. Sup. Ct., N.Y. Cty; Attorney General Press Release July 11, 2014.

26. See “Ride Sharing Service Lyft Resolves Dispute with AG,” New York Law Journal, July 28, 2014.