Taxation of Individuals in the Sharing Economy PDF

PEER REVIEWED ARTICLE Taxation of Individuals in the Sharing Economy Giorgio Beretta* This article explores some of the tax implications that may arise in the context of the sharing economy. In particular, the author analyses the main challenges, from an in...

PEER REVIEWED ARTICLE Taxation of Individuals in the Sharing Economy Giorgio Beretta* This article explores some of the tax implications that may arise in the context of the sharing economy. In particular, the author analyses the main challenges, from an individual taxation perspective, resulting from this new model of production and consumption. In this respect, different typologies of transactions and their tax characterization are surveyed. The contribution also includes a comparative overview of the steps taken so far by countries to regulate this new phenomenon and it formulates some suggestions in designing adequate tax policies. 1 INTRODUCTION rentals rather than occasional resale under which asset ownership is transferred. In a nutshell, costumers in the The past few years have seen the rise of a new model of sharing economy pay for access instead of ownership.2 production and consumption of goods and services, Frequently referred also as ‘collaborative consumption’,3 synthetically referred as the ‘sharing economy’.1 By ‘peer-to-peer economy’,4 ‘gig economy’,5 ‘on-demand using online platforms, this new model enables indivi- economy’,6 ‘1099 economy’,7 as well as with a handful duals who need anything from accommodations and rides of other synonyms, the sharing economy has dramatically to handymen to easily get in contact with peers willing to enhanced the opportunities for individuals to interact in a supply that kind of good or service. mutually beneficial way in the market. The rise of online The sharing economy revolves around the basic idea of platforms such as Uber, Airbnb, BlaBlaCar, Handy and using personal resources, such as spare rooms, cars, TaskRabbit – just to mention few prominent success clothes, time, money, skills and the like more efficiently companies in this field – is transforming the labour between individuals bypassing the traditional middlemen. market to the benefit of millions of workers, unlocking The central tenet behind the sharing economy is letting the value of their time, skills and talents in ways and on a people to harness the idling capacity of unused or under- scale never possible before. Indeed, individuals involved in utilized assets in return of monetary or non-monetary the sharing business have emerged as a new category of benefits or even a blend of the two. Notably, peer-to- ‘micro-entrepreneurs’. As the co-founder of Airbnb peer marketplaces transcend the simple trade conducted Blecharczyk puts it, becoming an entrepreneur in the on eBay, as they focus on facilitating recurring short-term sharing economy is as easy that, for example, ‘with the Notes * PhD Candidate in Management, Finance and Law for Business at the LIUC University (Milan), Faculty of Law. 1 PriceWaterhouseCoopers, The Sharing Economy: How Will It Disrupt Your Business (Aug. 2014), http://pwc.blogs.com, estimates that five key sharing sectors (i.e. peer-to-peer finance, online staffing, peer-to-peer accommodation, car sharing and music/video streaming) have the potential to increase global revenues from around USD 15 billion now to around USD 335 by 2025. 2 A. Sundararajan, The End of Employment and the Rise of Crowd-Based Capitalism (MIT Press 2016); see also A. Sundararajan, From Zipcar to the Sharing Economy, 1 Harvard Bus. Rev. (2013). The increasing dominance of ‘access’ to services over ‘ownership’ of property is a circumstance already highlighted since early 2000s. See e.g. J. Rifkin, The Age of Access: The New Culture of Hypercapitalism, Where All of Life Is a Paid-For Experience (Putnam Publishing Group 2000). 3 R. Botsman & R. Rogers, What’s Mine Is Yours. How Collaborative Consumption Is Changing the Way We Live (HarperCollins Publishers 2010). 4 See, for instance, S. Scanlon, Peer-to-Peer Rental: The Rise of the Sharing Economy, Economist (9 Mar. 2013). 5 The ‘gig economy’ can be defined as a freelance economy, in which workers support themselves with a variety of part-time jobs that do not provide traditional benefits such as pensions and healthcare. In its earliest usage, the term ‘gig’ referred to jazz club musicians of the 1920s. The phrase ‘gig economy’ was instead coined at the height of the financial crisis in early 2009, when the unemployed made a living by gigging or working several part-time jobs. For further reference, see e.g. B. Zimmer, ‘Gig’: Once a Word for a Joke, Now for an Economy, Wall Street Journal (WSJ) (7 Aug. 2015). 6 See e.g. R. Botsman, The Sharing Economy: Dictionary of Commonly Used Terms (19 Oct. 2015), https://medium.com. 7 See e.g. J. Foxes, The Rise of the 1099 Economy, Bloomberg View (11 Dec. 2015). The term ‘1099 economy’ is particularly popular in the United States, as it refers to the 1099-MISC, which is the form that businesses, non-profits and government agencies have to fill out when they pay someone USD 600 or more a year in non-employee compensation. INTERTAX, Volume 45, Issue 1 2 © 2017 Kluwer Law International BV, The Netherlands  Taxation of Individuals in the Sharing Economy Internet and a spare room anyone can become an design possible tax policies are discussed. Finally, few remarks innkeeper’.8 worth considering in formulating tax policies are highlighted. While the sharing economy provides more wage-earn- ing opportunities to people, states and public authorities, 2 TYPES OF SHARING TRANSACTIONS in turn, struggle to respond to the legal and regulatory questions stemming from such new business model.9 2.1 Introductory Remarks Undoubtedly labour and tax laws stand at the forefront among such legal issues.10 As regards labour issues, while The sharing economy is not a single-sided phenomenon. online platforms secure access to an extremely scalable Sharing may involve different kinds of transactions: traditional workforce, such a business model grants a level of sharing, bartering, lending, trading, renting, swapping and flexibility to participants unheard in the past. The case, gifting are all activities that fall into the area of the sharing therefore, is how to strike a balance between the two.11 economy. Notably, four types of transactions can be distin- Taxation is probably the other most important matter of guished: cash transactions, barter arrangements, cost-sharing concern arising out of sharing transactions.12 Although exis- agreements and gifts/donations. The classification of a transac- tent tax categories are in principle clear, the peculiar structure tion as one of the four above-mentioned models is key to of sharing transactions renders the application of those cate- determining its treatment for direct taxes and, therefore, gories particularly challenging. Moreover, taxing sharing earn- individuals’ decisions regarding profitability of a sharing activ- ings have been proven difficult for tax authorities as much as ity, i.e. whether or not to provide a certain good or service.14 for users reporting them in their tax returns. Sharing earnings The treatment of sharing earnings for direct tax pur- are in fact rarely reported, rarely controlled by tax authorities poses also depends on whether a tax system defines income and, quite inevitably, even more rarely taxed.13 From a tax in a global or schedular way. Taxable income is defined in policy perspective, therefore, the challenge is how to regulate a global way when any item of income is included in at best such new economic and social structures that appear to taxable income unless specifically excluded. By contrast, step almost outside traditional business arrangements. taxable income is defined in a schedular way when an item This article is structured as follows. Under section 2 a of income is not taxable unless specifically included in a primary analysis of different types of transactions in the shar- given schedule (e.g. employment, business and miscella- ing economy is provided. Section 3 aims at drawing a line neous income).15 However, no country defines income in between business and occasional sharing activities. Section 4 either a purely global or purely schedular way. Thus, even outlines the most prominent tax issues raised by the sharing among systems following the same model, the answer to economy. In section 5 early attempts by some keynote states to whether or not sharing earnings constitute taxable income Notes 8 Botsman & Rogers, supra n. 3, at XI. 9 As regards the sharing economy, new regulations are expected to be released in various fields of the law. In this respect, see S. Miller, First Principles for Regulating the Sharing Economy, 53 Harvard J. Legis. 147 (2016); M. Cohen & C. Zehngebot, Heads Up: What’s Old Becomes New: Regulating the Sharing Economy, 58 Boston Bar J. 6 (2014); V. Katz, Regulating the Sharing Economy, 30 Berkeley Tech. L.J. 1067 (2015); R.A. Kaplan, Regulation and the Sharing Economy, N.Y. L.J. (18 Jul. 2014); A. Stemler, Betwixt and Between: Regulating the Sharing Economy, 43 Fordham Urb. L.J. XX (2016). 10 On 2 June 2016 the European Commission released a ‘Communication on the European agenda for the collaborative Economy’ highlighting the most prominent legal challenges brought about by the collaborative economy. Taxation is among the most notable issues that have been surveyed in the communication. See EU Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on a European Agenda for the Collaborative Economy (2 June 2016), COM(2016) 356 final. See also EU Commission, Commission Staff Working Document, Accompanying the Document Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on a European Agenda for the Collaborative Economy (2 June 2016), COM(2016) 356 final. 11 See V. De Stefano, The Rise of the ‘Just-in-Time Workforce’: On-Demand Work, Crowdwork and Labour Protection in the ‘Gig Economy’, ILO Condition of Work and Employment Series, No. 71, 4 (2016); V. De Stefano, Introduction: Crowdsourcing, the Gig-Economy and the Law, 37 Comp. Lab. L. & Policy J. 3 (2016). 12 In this respect, see S.Y. Oei & D.M. Ring, Can Sharing Be Taxed?, 93 Wash. U. L. Rev. 4 (2016); S.Y. Oei & D.M. Ring, The Tax Lives of Uber Drivers, Evidence from Internet Discussion Forums, Boston College Law School Legal Studies Research Paper, No. 391 (2016); M. Barry & P.L. Caron, Tax Regulation, Transportation Innovation, and the Sharing Economy, 81 U. Chi. L. Rev. Dialogue 69 (2015); R.A. Kaplan & M.L. Nadler, Airbnb: A Case Study in Occupancy Regulation and Taxation, 82 U. Chi. L. Rev. Dialogue 103 (2015). 13 As far as direct taxes are concerned, the European Parliament (European Parliament (EP), Written Question – Platforms Undertakings and Taxation (7 Oct. 2015), E- 013575-15) evidenced that ‘the problem is that in the case of undertakings operating on a “platform” basis (such as Airbnb and Uber), it is left to the discretion of those private individuals who provide services to report their taxable income in accordance with the Member States’ laws. At present it does not seem as if the appropriate tax is being paid on the bulk of the income from the provision of services’. In the answer given on behalf of the Commission Mr Moscovici replied that ‘direct taxation, including individual income taxation, falls within the competence of the Member States. In the absence of EU legislation, Member States have freedom to design their tax systems (including rules to prevent tax evasion) in the most appropriate way to meet their domestic policy objectives subject to general EU Treaty obligations’. As far as indirect taxes are concerned, instead, the VAT treatment of the sharing economy is currently under examination by the EU Commission. For further reference, see EU Commission, Value Added Tax Committee (Article 398 of Directive 2006/112/EC) Working Paper No. 878. Question Concerning the Application of EU VAT Provisions (22 Sept. 2015), https:// circabc.europa.eu. 14 See Oei & Ring, The Tax Lives of Uber Drivers, Evidence from Internet Discussion Forums, supra n. 12 at 43. Commenting this article, Prof. Shaviro points out that high taxes on sharing earnings may determine that sharing activity ‘tends to be substitute “down” to untaxed substitutes such as leisure and non-taxable barter, rather than “up” to more conventionally organized business activity. [ … ] But [ … ] one would have to establish the factual predicate’. See D. Shaviro, NYU Tax Policy Colloquium, Week 9: Shu-Y Oei’s Can Sharing Be Taxed? (Co-authored by Diane Ring) (1 Apr. 2016), http://danshaviro.blogspot.it. 15 See R.S. Avi-Yonah, N. Sartori & O. Marian, Global Perspective on Income Taxation Law, 18 (Oxford University Press 2011). 3  Intertax is likely to vary. Indeed, taking the existent tax laws of basis via online platforms for a fee. Consider, for example, two exemplary countries into account, namely the United the case of a host who receives cash payments for renting States and Italy, the answer to whether and when sharing out an accommodation through Airbnb. Although notable earnings constitute taxable income vary significantly. differences exist in the income tax rules from country to In the United States, the Code defines taxable income by country, almost invariably tax systems treat consideration reference to ‘gross income’. Gross income is defined in a paid to a host in exchange of an accommodation as taxable circular fashion in section 61 as ‘all income from whatever income. Under tax systems that define income in a global source derived’. From the landmark case Commissioner way (e.g. the United States), any item of income is v. Glenshaw Glass Co. (1955)16 on this expression has been included in taxable income unless specifically excluded. interpreted by the US Supreme Court as applying to all Thus, under US tax law there is little doubt as to whether ‘accessions to wealth, clearly realized, and over which the income from such transactions shall be subject to tax. Also taxpayers have complete dominion’. This means that any among tax systems that define income in a schedular way accession to wealth is presumed to be income unless (e.g. Italy), money transactions are generally subject to Congress provides a specific exemption. The Supreme tax. In this respect, earnings from a short-rental may be Court further clarified the term ‘complete dominion’ in the qualified either as business or miscellaneous income (or case CIR v. Indianapolis P&L (1990),17 ruling that, in deter- even as real estate income), depending on whether the mining whether or not a taxpayer enjoys ‘complete domin- percipient of that income operates in a business or private ion’ over a given sum, it should be considered whether the capacity. Indeed, the subjective factor is highly relevant taxpayer can take actual possession of such wealth. for income tax purposes. No tax relief is granted in case of In Italy, instead, income definition follows a schedular business income; instead, specific allowances may apply in form. Tax is only levied on six income categories (or case of miscellaneous income if sharing earnings are baskets), which are listed in Article 6(1) of the Income below a given threshold. In Italy, for example, provided Tax Act.18 In case of sharing earnings, business and mis- certain conditions are met, income from occasional self- cellaneous income are relevant. These two categories are employment or business activity is entitled to an allowance not of equal rank, as business income shall be considered up to EUR 1,104.19 first. Business activity is defined as a repetitive and pro- fessional activity, i.e. performed repeatedly and in a pro- fessional manner. Should these conditions not be met, sharing earnings from activities carried out occasionally 2.3 Barter Arrangements fall into the category of miscellaneous income. Finally, if Cash transactions do not exhaust the whole spectrum of such earnings do not fall into any of the six baskets, that possible exchanges among peers. The sharing economy in income is not subject to tax. For example, in Italy, the fact enables individuals also to reshape traditional market realized capital gain on the private sale of a piece of art is behaviours, by way of renting, lending, swapping, shar- not taxable, since it is not listed under any particular ing, bartering goods and services through technological schedule. platforms. Such market operations can be broadly defined In sum, differences among domestic tax rules imply as barter transactions. Consider, for example, the case of that the question whether sharing transactions may give an individual who from time to time swaps his home rise to taxable income cannot be answered in a one-fits-all through an online platform such as Nightswapping, manner but depends on: (1) the model of sharing transac- receiving in exchange credits known as travel capital tions considered; and (2) the definition of income that he can only use within the online community, e.g. employed under a given tax system. In the following for being hosted by another member of the community. paragraphs, the tax treatment of each of the four transac- Although no income tax system focuses exclusively on tion models occurring in the sharing economy, either in a cash compensation, such kind of barter transactions global or schedular income tax system, will be surveyed. should not be taxable in the hands of the recipients either in a global or schedular tax system. Indeed, as long as such 2.2 Cash Transactions credits cannot be exchanged for ‘real’ money or other considerations, participants should not face any tax obli- Cash transactions can be defined as operations in which an gation. Even in tax systems employing a broad definition individual provides goods or services on a peer-to-peer of income as in the United States, the taxpayer should not Notes 16 US Supreme Court (28 Mar. 1955), Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). 17 US Supreme Court (9 Jan. 1990), CIR v. Indianapolis P&L, 493 U.S. 203 (1990). 18 Italian Presidential Decree No. 917/1986, Art. 6(1). 19 Italian Presidential Decree No. 917/1986, Art. 13(5), lett. a) and b). 4  Taxation of Individuals in the Sharing Economy be taxed as long as he cannot exchange such credits for schedular tax systems. In the United States, under Code real currency.20 sections 102 and 1015, gifts are not deductible and are excluded from income. Under a schedular system gifts are not generally covered by income categories. In Italy, for 2.4 Cost-Sharing Arrangements example, gifts are generally not relevant for income tax In between the two above-mentioned models stand trans- purposes,23 unless appreciated assets are gifted within a actions in which the provider of a good or service get only business or from a business to a stockholder. In this case, a total or partial refund in return. This seems to be the gains are realized and recognized and are part of the case of users in BlaBlaCar, an online platform which business income schedule if certain requirements are connects drivers with empty seats in their cars to people met. However, these transactions are unlikely to occur in travelling the same way for a cost based only on the price of case of sharing arrangements, as in that scenario people gas, tolls and other fixed expenses borne by the driver.21 usually act in a personal capacity. The question here is whether amounts attributed to the driver in refund by other passengers can be considered as 3 THE CONUNDRUM BETWEEN BUSINESS/ income and, thus, be subject to tax. Again, the answer can PERSONAL FOR CALCULATING INCOME vary depending whether taxable income is defined in a global or schedular way. Given the broad definition of AND DEDUCTIONS income under a global tax system (e.g. in the United Taxation often relies on how the law classifies persons or States), refunds are likely to be considered income and businesses. However, for those participating in the sharing taxed in the hands of recipients. Also under a schedular economy, such classifications are often blurred, as the new system, such earnings may be considered income for tax business model embedded in the sharing economy has purposes. In Italy, for example, refunds received by either largely not been contemplated by existing tax laws. To dependent or independent workers generally constitute put it into the words of Airbnb co-founder Brian Chesky, taxable income. In case of refunds from sharing activities, ‘there were laws created for businesses and there were laws however, an individual is unlikely to be deemed to operate for people. What the sharing economy did was create a in a business capacity. Thus, only miscellaneous income is third category: people as businesses’.24 in principle relevant for income tax purposes. Nonetheless, The classification of sharing economy activities under frequently such refunds fall below the threshold up to existent tax categories is in principle clear. In this respect, which an allowance is conceded. as long as an individual is engaged in sharing transactions only on an occasional basis, income deriving from such 2.5 Gifts and Donations activity cannot be considered business income for tax purposes. By contrast, where an individual carries out Besides helping people either running a business or barely many sharing transactions at a time, he is considered to making their ends meet, the sharing economy reflects our run a business for income tax purposes. inner desire as human beings to feel part of a community This fact makes some authors claim that most of the tax larger than our individual selves, thus serving purposes far challenges brought by the sharing economy can be greater than simply trading stuff, space and talents.22 This addressed under existing tax principles and categories.25 is the case, for example, of Couchsurfing, an online plat- Although this assumption is apparently correct, in the form where people open their home to travellers for free. author’s view it should not be underestimated that the Sharing transactions like this one fall under the category way many of the platforms operate is contributing to of gifts and donations. Generally, gifts and donations are exacerbate significantly definitions contained in tax not relevant for income tax purposes either in global or codes. Therefore, existent tax categories and principles Notes 20 Even other forms of virtual wealth appear to be tax exempt. For further reference on this topic, see A. Bal, Taxation of Virtual Currency. Challenges and Solutions, 43(5) Intertax 380 (2015); A. Bal, Stateless Virtual Money in the Tax System, 53(7) Eur. Taxn. 351 (2013); A. Bal, Taxation of Virtual Wealth, 65(3) Bull. Intl. Taxn. 335 (2011). 21 Another notable example of the kind is embodied by ShareYourMeal, a Dutch-based platform through which individuals share their cooking with people in their local neighbourhood only in return for grocery costs. 22 See R. Botsman, Defining the Sharing Economy: What Is Collaborative Consumption – And What Isn’t? (27 May 2015), http://rachelbotsman.com. 23 Indeed, it also seems very unlikely that such donations may assume any relevance for gift tax purposes, given that small-value donations are specifically excluded from the Italian Gift Tax and that, in any event, really broad allowances (up to approximately EUR 180,000) are provided for indirect donations. See Italian Legislative Decree No. 346/1990, Art. 56-bis. 24 See A. Kessler, Brian Chesky: The Sharing Economy and Its Enemies, World Street Journal (WSJ) (17 Jan. 2014). 25 See Oei & Ring, Can Sharing Be Taxed?, supra n. 12, at 7. According to these authors, ‘the application of substantive and doctrinal tax laws to sharing is generally (though not completely) clear and not particularly novel. This is the case even though the rules themselves may be complex and the application of the law to the facts may sometimes produce a measure of uncertainty. In most respects, what is required is clarification of the tax law’s application, rather than new legal or regulatory categories’. Other authors contend instead that a change in existing regulations is needed, for example, in order to include transportation-sharing mechanisms among the exempted ‘qualified transportation fringe’ of s. 132 of the United States’ Internal Revenue Code (IRC). For further reference see Barry & Caron, supra n. 12. 5  Intertax may not entirely fit into the new business model brought The second matter of concern rests on the fact that in by the sharing economy. In sharing transactions, for the sharing economy people generally exchange personal instance, both the distinctions between employee and properties (e.g. houses, cars, clothes). The problem here is independent contractors and between personal and busi- to govern properly the apportionment of expenses between ness properties have become more and more blurred. business and personal uses, since under existent tax laws As labour law’s scholars have extensively highlighted, only the first ones can be deducted from gross income. the legal dichotomy between self-employers and employ- Again, the question cannot be solved in a one-fits-all ees is by no means exhaustive of all kinds of relationships manner, but the resulting solution depends much on the occurring in the sharing economy. Indeed, workers in the specific provisions concerning cost deductions that vary sharing economy have some characteristics that suggest from country to country. If an individual either runs a that they should be classified as employees, while others business or is self-employed for income tax purposes, by which they should be included among independent existent tax rules can be applied with little concerns. contractors.26 The only tax issue for users in that situation is keeping Moreover, no every individual takes part in the sharing accurately track of all relevant expenses that should be economy in the same way and with identical goals and, deducted from gross income. In this regard, for example, a therefore, should be treated on equal footing for income full-time Uber driver is allowed to deduct expenses for tax purposes. In this respect, a person may use a particular depreciation of car according to the specific provisions of platform only in her spare time and occasionally. For the tax code in the same way as a taxi driver. Far-reaching example, this appears to be the case of a worker who has problems, however, arise with respect to people doing a regular part-time job but supplements his income with sharing activities only occasionally. A first problem is being an Uber driver from time to time. By contrast, that it can be more burdensome for occasional providers other people may be continually engaged in sharing trans- to keep track of all relevant expenses for income tax actions and the compensations received from one or more purposes, given the absence of any bookkeeping obliga- companies in the sharing economy may represent their tion for those extemporary activities. Moreover, an indi- main or sole source of revenues. It may even happen that vidual may not be allowed at all to deduct expenses these workers are engaged in multiple ‘gig’ jobs in the encountered in doing an occasional sharing activity. In very same day. Italy, for example, unless a person runs a rental business, In light of all the foregoing, the question is how to private owners renting out their immovable properties are classify sharing earnings appropriately. Notably, the only entitled to a 5% lump-sum deduction.27 This prac- answer depends almost entirely on the frequency and the tically means that gross rather than net income is taxed. level of professionality in which sharing activities are Moreover, the rental income is factored into the overall conducted. This means that, in a case where a person taxable income of the individual and taxed at ordinary tax does a ‘gig’ job on a regular basis, her sharing earnings rates which range from 23% to 43%, unless the indivi- constitute (or, at least, should constitute) income either dual opts for a substitute tax (cedolare secca) with a basic from self-employment or business activity. In this respect, rate of 21%, which, however, applies on 100% of the such sharing income differs little from income deriving rental income, i.e. with no lump-sum deduction.28 from traditional self-employment or business activity. A Given the relatively small amounts of money earned in full-time Uber driver, for example, should have the same sharing transactions, individuals may be discouraged to tax obligations of a taxi driver. By contrast, where an rent out their immovable properties or, alternatively, even individual is engaged in a ‘gig’ job only occasionally, he inclined not to report that income in their tax returns, if should face less tax burden and obligations than someone the tax burden they encounter is that high. who either is self-employed or runs a business. In sum, it is correct to conclude that, depending on the level and frequency of sharing activities, providers should be subject 4 TAX ADMINISTRATION AND COMPLIANCE to different tax treatments. Although this dichotomy is ISSUES clear in principle, it generally relies on factual criteria that are often difficult to assess, especially in peer-to-peer The advent of the sharing economy raises also concerns marketplaces. about tax administration and taxpayers’ compliance. A Notes 26 See Stefano, supra n. 11, at s. 3. In the United States, the classification of ridesharing drivers as employees or independent contractors is extensively challenged in courts. In this respect, see Cotter v. Lyft, Inc., Docket No. 3:13-cv-04065 (N.D. Cal., 3 Sept. 2013); O’Connor v. Uber Technologies, Inc., Docket No. 3:13-cv-03826 (N.D. Cal., 16 Aug. 2013); Berwick v. Uber Technologies, Inc., No. 11-46739 EK, 2015 WL 4153765, at *1–8 (CA. Dept. Lab., 3 June 2015), on appeal to Cal. Superior Ct. No. 15-546378 (16 June 2015); Alatraqchi v. Uber Technologies, Inc., No. CGC13527887, 2013 WL 7201338, at *1–2 (Cal. Super., 20 Dec. 2013). 27 Italian Presidential Decree No. 917/1986, Art. 37(4-bis). 28 For further reference on taxation of rental income in Italy see M. Gusmeroli & P. Ruggiero, Immovable Property Under Domestic Law, EU Law and Tax Treaties Ch. 15 (IBFD 2015). 6  Taxation of Individuals in the Sharing Economy first difficulty with taxing the sharing economy is how to personal use. Moreover, tax rules concerning deductions apply and collect income and transaction taxes such as, for are usually complex to apply.35 Consider, for example, the instance, in case of short-term rentals, hotel and occu- case of a part-time Uber driver. He has to calculate pancy taxes. Because peer-to-peer businesses have taken deductible costs (e.g. oil, kilometres, repairs) by separat- the position that sharing earners are independent contrac- ing his car’s business costs from personal expenses. This is tors, online platforms are not withholding taxes on any likely to be an issue for many in the field. Some commen- amount paid to sharing earners, although some companies tators even claimed that some individuals may fail to (e.g. Uber and Airbnb) have recently adopted stricter report their earnings from sharing activities, since they reporting policies.29 This means that under existent tax do not perceive sharing transactions as truly business laws providers of goods and services in the sharing econ- transactions that are subject to tax obligations.36 omy are fully responsible for filling in and reporting earnings thereof in their tax returns. It is meaningful to add here that, due to the novelty of sharing activities, tax 5 TAX POLICY OPTIONS FOR REGULATING authorities are often unprepared to control every transac- THE SHARING ECONOMY tion taking place in such marketplaces. Moreover, given These days the sharing economy appears in full swing and the relatively small amounts involved in sharing transac- its rise will likely to continue in the future. Although the tions, monitoring the compliance of the thousands of sharing economy has a positive effect in terms of exploiting individuals who use peer-to-peer websites can be costlier the idling capacity of personal goods and services, signifi- for tax authorities than the revenue that would be rightly cant regulatory challenges have just begun to come to the collected.30 In brief, most of the time taxpayers fail to surface. For one thing, the distinction between business and report such income in their tax returns. Likewise, in case occasional activities loses much of its significance in the of short-term rentals, hotel and occupancy taxes are rarely context of the sharing economy. Moreover, administration collected, although, for instance, Airbnb has started to and compliance of reporting income deriving from sharing collect such taxes in more and more cities and states.31 In activities are often difficult to secure under the existing tax Italy, for example, home rentals of less than 30 days do rules which oblige taxpayers to disclose their sharing earn- not fall under the obligation to be declared for registration ings in their tax returns. tax purposes.32 As a consequence, short-term rental trans- In the face of those challenges, states have basically actions are not monitored by the Italian Tax Authority three options: they could either choose to set up comple- and, thus, such income go frequently untaxed.33 tely new regulations for the sharing economy, decide to Due to the micro-entrepreneurial nature of many shar- shoehorn the sharing economy into existing regulations or ing economy earners, tax compliance can be equally chal- elect to do a bit of both.37 lenging. First, as many sharing workers are reporting So far states have taken substantially different business income and expenses for the first time, they approaches for regulating the sharing economy. Some may be unfamiliar with keeping track of such income states just consider that the tax issues raised by the shar- and expenses and may ignore altogether or understate ing economy could be entirely addressed under existent earned income by tracking the related expenses tax principles and categories. Notably, this is the position inadequately.34 In particular, accurate tracking of taken by Australia. In this respect, the Australian expenses represents an issue for sharing earners working Taxation Office (ATO) has issued guidance clarifying on a part-time basis, since properties employed in the that sharing earnings will be treated on the same footing sharing activity are generally subject to substantial of other business and occasional income for tax purposes.38 Notes 29 For further reference on third-party information reporting and withholding mechanisms in the United States see Oei & Ring, Can Sharing Be Taxed?, supra n. 12, at 40–50. For an overview of the early Airbnb’s position as regards collection and remission of occupancy and hotel taxes in the United States, see Kaplan & Nadler, supra n. 12. 30 Shaviro, supra n. 14. 31 Cities and areas in which occupancy tax collection is enforced by Airbnb include North Carolina, Florida, Oregon, San Francisco, Amsterdam, Paris and Lisbon. For further states and cities on the list see the document In What Areas Is Occupancy Tax Collection and Remittance by Airbnb Available?, https://www.airbnb.com. 32 Italian Presidential Decree No. 131/1986, Part II of the attached Tariff, Art. 2-bis. 33 In principle, the above-mentioned substitute tax (cedolare secca) for property rentals with a basic rate of 21% can be applied also to rentals of less than 30 days. In practice, however, almost no host applies it. See Italian Tax Authority, Circular Letter No. 26/E para. 2.2 (1 June 2011). 34 For further discussion States see Oei & Ring, Can Sharing Be Taxed?, supra n. 12, at 63. 35 Probably helping people involved in sharing transactions to keep track of their expenses as well as understand their tax obligations are among the most prominent reasons why so many applications and blogs are flourishing on the Internet. For further details on this issue, see Oei & Ring, The Tax Lives of Uber Drivers, Evidence from Internet Discussion Forums, supra n. 12, at 63–64. 36 See e.g. D. Baker, Don’t Buy the ‘Sharing Economy’ Hype: Airbnb and Uber Are Facilitating Rip-offs, Guardian (27 May 2014). 37 J. Shuford, Hotel, Motel, Holiday Inn and Peer-to-Peer Rentals: The Sharing Economy, North Carolina, and the Constitution 16 N.C. J. L. & Tech. On. 301 (2015). 38 Australian Taxation Office, The Sharing Economy and Tax (19 May 2015), https://www.ato.gov.au. 7  Intertax This practically means that the tax laws applying to sharing economy companies can share with their users and activities conducted in a conventional manner shall suppliers to help them with their tax obligation (as, for apply equally to activities carried out in the context of instance, a report summing up all the amounts earned by the sharing economy. Thus, regardless of whether indi- providers annually).41 viduals are carrying on a business, income from activities In sum, the position taken by the United Kingdom and such as letting out a room, driving passengers in a car Ontario is that, in the context of the sharing economy, the for a fare, doing odd jobs or other activities for payment problem with tax is not as much as with restructuring the must be reported by providers in their tax returns. tax code rather with enhancing taxpayers’ compliance. Individuals have to keep records of income from that The rationale behind this policy is straightforward. It activity plus any allowable deductions, by accurately assumes that existing tax laws are almost clear and that separating business from personal expenses. In addition, sharing income are generally taxable. What needs to be if individuals provide their services for a commercial fixed, instead, is the degree to which providers in the reason, i.e. with an intention of making a profit, in a sharing economy understand and comply with their obli- regular and repeated manner and in a business-like man- gations under the law. This approach appears quite similar ner, they are considered to run a business for income as to what online platforms are already doing. For instance, well as for goods and services taxes (GTS) purposes. To Airbnb has taken the policy to advice its hosts through its put it into the words of the Grattan Institute, the website that there may be applicable taxes that it is their position of Australia is that ‘tax laws were not designed duty to pay.42 with peer-to-peer economy in mind, but they apply to it. The UK approach to taxation of the sharing economy, Personal income tax and capital gains tax laws are set however, differs significantly from the view taken by appropriately for this new economy’.39 Australia in that the British legislator has extended allow- In a quite similar vein, the United Kingdom’s Tax ances existing in the tax code to exempt low earnings Authority has planned to issue detailed guidance to deriving from sharing activities. To this effect, the UK help providers of sharing activities to meet their tax government has inserted specific tax breaks in its Budget obligations. The HM Revenue & Customs (HMRC) is 2016 worth up to GBP 2,000.43 In the intention of Lord committed to making it easier for participants in the Chancellor Mr Osborne, this move should constitute ‘a tax sharing economy to understand their tax obligations break for the digital age’.44 As recognized in the 2016 and report their income. The intention is that this Budget documents, the rationale behind such a step is new guidance will be published online in an easily that ‘the rapid growth of the digital and sharing economy accessible location. In addition, the UK tax authority means it is becoming easier for more and more people to will consult with sharing economy platforms to explore become micro-entrepreneurs’.45 It is also noteworthy that the potential to develop interactive tools, such as online this 2016 tax break comes after the increase of the ‘rent-a- calculators and mobile apps to help sharing economy room’ allowance provided in the 2015 Budget, which rose users working out, in a fast and simple way, the from GBP 4,250 to GBP 7,500 a year and is applicable to amounts they need to report. The HMCR’s plan could landlords who rent out a spare room in their residence include creating YouTube videos and webinars to help house.46 demonstrate how the guidance applies, as well as using Other countries appear to have taken more radical HMCR’s twitter account to share links and answer steps, attempting to design tailored tax rules for the questions from users.40 sharing economy, evidently on the assumption that cur- A similar view on the sharing economy has been shared rent fiscal categories and principles are not sufficient to by the Canadian province of Ontario, who also intends to grasp all the issues brought by sharing businesses. In this release guidance for increasing compliance among colla- respect, a first option is to develop new tax reporting tools borative economy’s users. This could include an online designed with the help of online platforms. This means calculator to help providers determining how much taxes making online platforms responsible for information they are liable to pay, as well as any relevant material that reporting to tax authorities, as they generally appear to Notes 39 See J. Minifie, Peer-to-Peer Pressure. Policy for the Sharing Economy, Grattan Institute 53 (Apr. 2016), https://grattan.edu.au. 40 For further reference, see D. Wosskow, Unlocking the Sharing Economy. An Independent Review (Nov. 2014), https://www.gov.uk, as well as HM Government, Independent Review of the Sharing Economy. Government Response (Mar. 2015), https://www.gov.uk. 41 Ontario Chamber of Commerce (OCC), Harnessing the Power of the Sharing Economy. Next Steps for Ontario, 12 (Aug. 2015), https://www.occ.ca. 42 See the document How Do Taxes Work for Hosts?, https://www.airbnb.com. 43 For further details, see HM Treasury, Budget 2016 (16 Mar. 2016), https://www.gov.uk. 44 See e.g. L. Davidson, World’s First Sharing Economy Tax Breaks Unveiled in Budget, Telegraph (16 Mar. 2016). 45 See HM Treasury, supra n. 43. at 48. 46 For further details, see HM Treasury, Budget 2015 (18 Mar. 2015), https://www.gov.uk. 8  Taxation of Individuals in the Sharing Economy be better situated than the latter to do the task.47 This reporting with the help of online platforms, which shall seems to be the case of Estonia and Lithuania, whose tax communicate all the sharing earnings of a taxpayer to a authorities have started a partnership with Uber with the third and independent platform that aggregates that tax- intention to develop new platforms for submitting indi- payer’s revenues coming from various sharing activities. vidual providers’ tax returns electronically.48 This stream of tax information will end directly into a Likewise, Belgium has launched a proposal for its pre-filled income tax declaration. In addition, the report Digital Agenda, under which digital platforms are suggests the introduction of a fixed allowance worth up to required to ‘send the necessary information to tax autho- EUR 5,000 for all income deriving from sharing activ- rities in the same ways employers currently do for their ities. In this way, there will be no longer need for users to employees’. The rationale for introducing online plat- compute expenses and deductions. In the report drafters’ forms’ tax reporting is that, in this way, ‘the fiscal infor- intentions, the above-mentioned allowance will ensure mation stream will be reversed’.49 At the same time, enough breath and ‘laisser vivre’ to the sharing economy.53 however, Belgium has proposed to supplement this policy, Moreover, the report clarifies that certain sharing activ- which aims at enhancing tax administration and compli- ities shall not be taxable in any event. These activities may ance, by establishing lower tax rates for those earning include the occasional selling of a good on online market- small amounts of money from sharing transactions. places such as eBay or the rental of a room in a host’s Under the current proposal, which is expected to be residence house. The report also points out that refunds discussed at the Belgian Parliament by the end of 2016, obtained by the driver as a consequence of an agreement of individuals who do not earn more than EUR 5,000 sharing transportation shall not be taxed if such amounts annually for sharing activities will be subject to a one- do not exceed the proportional and fixed costs resulting time withholding tax of 20%, after taking into account an from the trip.54 The reporting of tax information by expense allowance of 50%. Beyond the EUR 5,000 online platforms will act only on a voluntary basis. In threshold, instead, the person will no longer fall under the report drafters’ view, however, big online platforms the scope of the beneficial regulation described above and will be strongly stimulated to report sharing earnings for may also be subject to VAT. In the intention of the guaranteeing sufficient certainty to their users in respect proposers, ‘the new regulation allows people to earn of their tax obligations.55 Indeed, the efficiency of a extra money, on a small-scale, and to try out system of voluntary and automatic tax collection has entrepreneurship’.50 been already tested in France with regard to occupancy The case of France is also quite interesting. France’s taxes in Paris and Charmoix in case of short-term rentals Senate has commissioned a report to develop a policy for made through Airbnb and other home rental platforms. addressing tax problems arising out from sharing Starting from 1 July 2015, Airbnb and other similar transactions.51 In this respect, France has taken the view platforms are in fact required to calculate, collect and that tailored regulations are needed, estimating that the remit hotel and occupancy taxes from every booking current French tax system is not well equipped to handle made through their systems in these localities. It should the revolution caused by the sharing economy.52 The be noted, however, that the collection and remission of report propounds to implement an automatic system of hotel and occupancy taxes is simpler than in the case of Notes 47 In this regard, the OECD highlights that ‘platforms can [ … ] play a role in providing clarity around tax obligations and supporting compliance, either by providing appropriate information to providers and governments, or even directly – for example in some jurisdictions, such as France, Airbnb collects and remits bulk payments of accommodation tax on behalf of hosts, or provides information on tax compliance and statements to support the preparation of tax returns’. See OECD, Tourism Trends and Policies 2016, OECD Library104 (9 Mar. 2016). 48 Estonia is already a leader on simple electronic tax filings. For further details, see M. Aasmäe, ECTB and Uber Collaborate in Seeking Solutions for the Development of the Sharing Economy (9 Oct. 2015), https://www.emta.ee. With regard to Lithuania, see Lithuanian Tax Body and Uber Sign Memorandum on Exchanging Data About Drivers (28 Apr. 2016), http://www.baltic-course.com. 49 The proposal has been advanced by the Minister of Development Cooperation, Digital Agenda, Telecom and Postal Services, Mr Alexander De Croo. For further details, see A. De Croo, Lower Taxes and Easy Tax Regime for Sharing Economy, Press Release (12 Apr. 2016), https://www.decroo.belgium.be. 50 For further details, see A. De Croo, Moonlighting in Sharing Economy at Simple and Transparent Rate of 10% (12 May 2016), https://www.decroo.belgium.be; A. De Croo, Belgian Government Approves Simple and Low Tax Rates for Sharing Economy (6 June 2016), https://www.decroo.belgium.be. 51 M. M. Bouvard, T. Carcenac, J. Chiron, P. Dallier, J. Genest, B. Lalande & A. De Montgolfier, Rapport d’information sur l’économie collaborative: propositions pour une fiscalité simple, juste et efficace (17 Sept. 2015), https://www.senat.fr. Another report on the collaborative economy was submitted to the French government in Feb. 2016. See P. Barbezieux & C. Herody, Rapport au Premier Ministre sur l’économie collaborative. Mission confiée à Pascal Terrasse Député de l’Ardèche (8 Feb. 2016), http://www.gouvernement.fr. 52 Bouvard, Carcenac, Chiron, Dallier, Genest, Lalande & De Montgolfier, supra n. 51, at 8. 53 Ibid., at 34. However, the introduction of a fixed allowance worth up to EUR 5,000 for all income deriving from sharing activities has been sharply criticized in the subsequent report released in Feb. 2016, which worries that such a measure may be at odds with both the principles of ‘ability to pay’ and equality. See Barbezieux & Herody, supra n. 51, at 58. 54 Bouvard, Carcenac, Chiron, Dallier, Genest, Lalande & De Montgolfier, supra n. 51, at 22. This reflects also the position taken by the French Supreme Court in this regard. See Court de Cassation, Chambre Commerciale, Financiere et economique, Arret. No. 261 (12 Mar. 2013). Barbezieux & Herody, supra n. 51, at 66 highlight that, in drawing the distinction between income and refunds, it may also be helpful to look at the specific business model carried out by each online platform. 55 Bouvard, Carcenac, Chiron, Dallier, Genest, Lalande & De Montgolfier, supra n. 51, at 9. 9  Intertax income taxes, since the former are calculated in fixed and to peer-to-peer lending. In Italy, as in most other coun- proportional rates rather than on progressive rates. tries, interest from peer-to-peer lending are in fact taxed As for Italy, a substitute tax at a proportional rate for at a progressive tax rate rather than at a proportional tax sharing earnings, which shall be withheld and remitted to rate as income from similar transactions such as interest the Tax Authority directly by online platforms, has been from money lent to banks. This leads to a discrimination proposed in two Italian bills.56 Under the two pending when an individual comes to decide to whom (banks or proposals, online platforms shall act as withholding peers) lend his money. The problem with withholding agents, by collecting and transferring to the State a fixed taxes is instead that, in order to act as withholding agents, 10% amount on all the sharing transactions up to EUR foreign sharing companies are apparently required to have 10,000 occurring in their marketplaces. A positive upside at least a permanent establishment (PE) in Italy.61 In this of using withholding taxes instead of granting allowances respect, obligations for online platforms need further is that withholding taxes are able to solve administration clarification. and compliance issues, as they represent simple and effec- tive tax collection measures.57 In this respect, the OECD encourages the use of withholding taxes considering them 6 CLOSING REMARKS as ‘effective tax collection mechanisms due to their inher- Every policy implemented so far by states for taxing ent ability to collect at the point that income is earned, sharing transactions shows both several strengths and promote voluntary compliance through third party report- weaknesses. In the author’s view, independently from ing and ensure stable and timely cash flows to which is the tax policy of election, countries should con- government’.58 However, as withholding taxes are typi- sider few key remarks. cally imposed on gross amounts of income, the risk is to On the one hand, policy makers should pay attention overtax taxpayers in case their expenses are significant. not to create separate laws that apply only to the sharing This is why withholding taxes are typically imposed on economy. Doing so would violate two central tenets of tax passive income such as dividends, interest, royalties and policy: that taxpayers should be treated uniformly and capital gains, as they are less likely to entail significant that similar services and goods should be taxed the expenses than business income.59 However, in case of same. In this regard, for instance, the French report expli- sharing transactions, deductible expenses are likely to be citly makes clear that it does not intend to introduce a low. Thus, the introduction of withholding taxes will specific form of taxation for sharing activities, as this probably have no other effect than eliminating altogether would violate the principle of neutrality and equality.62 the problem with mixed-use assets, i.e. the need for users In other words, sharing and traditional business should be to apportion personal and business expenses. After all, treated on equal footing.63 taxing gross income rather than net income, if the costs On the other hand, however, policy makers should not are hard to establish, but at a reduced rate, reflects a underestimate that the sharing economy entails a comple- ‘rough justice’ approach that sacrifices accuracy for getting tely different model of doing business in respect to tradi- it, approximately, right.60 Another argument in favour of tional business activities. Therefore, simply applying withholding taxes is that a substitute tax implemented at existing tax rules to the sharing economy could seriously a proportional rate seems to be the best policy with regard nip its flourishing in the bud. Moreover, in designing tax Notes 56 Italian Senate, Disposizioni in materia di sharing economy, Bill No. S.2268, Art. 7 (‘Trattamento fiscale’) and Italian Chamber of Deputy, Disciplina delle piattaforme digitali per la condivisione di beni e servizi e disposizioni per la promozione dell’economia della condivisione, Bill No. C.3564, Art. 5 (‘Fiscalità’). The Italian Tax Authority has recently released its first comments on the legislative proposal currently under scrutiny by the Chamber of Deputy. See Italian Tax Authority, Camera dei Deputati. Commissioni riunite IX e X. Audizione del Direttore dell’Agenzia delle Entrate. Esame della proposta di legge AC 3564 concernente la ‘Disciplina delle piattaforme digitali per la condivisione di beni e servizi e disposizioni per la promozione dell’economia della condivisione’ (26 July 2016), http://www.agenziaentrate.gov.it. 57 For an insightful discussion on pros and cons of using withholding taxes see F. Zimmer & R. Lyal, Withholding Taxes, in Taxation of Workers in Europe, at 303 (J.M. Moessner ed., EATLP International Tax Series 2010). The compatibility of withholding taxes with EU freedoms has been discussed extensively by the CJEU, for instance, in Gerritse, Scorpio and Truck Center. See ECJ, 12 June 2003, Case C-234/01, Arnoud Gerritse v. Finanzamt Neukölln-Nord; ECJ, 3 Oct. 2006, Case C-290/04, FKP Scorpio Konzertproduktionen GmbH v. Finanzamt Hamburg-Eimsbüttel; ECJ, 22 Dec. 2008, Case C-282/07, Belgian State v. Truck Center SA. 58 OECD, Compliance Risk Management: Managing and Improving Tax Compliance, 53 (Oct. 2004). 59 Withholding taxes are not always used for taxing passive income. In this regard, it might be recalled that in Italy, for instance, taxation of home rentals may be taxed, on an optional basis, at a proportional tax rate rather than through ordinary progressive tax rates. In addition to taxing gross rather than net income, Prof. Lyal argues that withholding taxes may also cause a cash-flow disadvantage for taxpayers, as they are taxed immediately on receipt of a payment rather than at the end of the year. See Zimmer & Lyal, supra n. 57, at 313. However, it may be doubtful if such a disadvantage actually occurs to an appreciable extent, since, even if tax collection involves the submission of a tax return, taxpayers have to make regular advance payments of tax in the current tax year. 60 See Shaviro, supra n. 14. 61 The Italian Tax Authority claims that only resident companies can act as withholding agents. See Italian Tax Authority, Circular Letter No. 1/RT/50550 (15 Dec. 1973); Resolution No. 12/649 (8 July 1980); Resolution No. 5-1437 (17 July 1996); Circular Letter No. 326/E (23 Dec. 1997). However, Art. 23(1) of the Presidential Decree No. 600/1973 does not make any distinction between resident and non-resident companies for withholding purposes. 62 Bouvard, Carcenac, Chiron, Dallier, Genest, Lalande & De Montgolfier, supra n. 51, at 11. 63 This is also the recommendation provided by the EU Commission. See EU Commission, supra n. 10, at 15. 10  Taxation of Individuals in the Sharing Economy rules, roles and duties of online platforms should be works.64 This could help states to provide coherent and clearly set out. effective rules for users in the sharing economy. In this In the end, the task of taxing unfamiliar businesses regard, taxation undoubtedly will be an area worth con- fairly requires an understanding of how each business sidering by policy makers in the coming years. Notes 64 See T.A. Dickerson & S.O. Hinds-Radix, Taxing Internet Transactions: Airbnb and the Sharing Economy, 86 N.Y. State Bar J. 49 (Aug. 2014). Such an understanding also suggests the need of establishing new forms of dialogue between public authorities and online platforms. See Barbezieux & Herody, supra n. 51, at 6. 11