Sharing Economy: The Upside of Disrupting Local Governance

Originally published on ICMA.

The Sharing Economy is in full force and here to stay affecting jurisdictions worldwide. This exponentially growing market is rapidly creating a tidal wave of pioneering activities – bringing both positive and negative impacts – leaving little time for local governments to react and respond.

This has led to governmental pushback over concerns such as business competitiveness, unlicensed business operations, health, safety, minor and serious risks, and zoning violations. Nationally and internationally, local governments have used creative and diverse ways to increase community and social bonds, improve safety and security, address competitive inequalities, and deal with tax implications. Here’s what you need to know.

THE FORMAL DEFINITION. First, let’s review the current definition of “The Sharing Economy” (also referred to as the Collaboration Economy) which is defined by the Merriam-Webster dictionary as an “economic activity that involves individuals buying or selling usually temporary access to goods or services especially as arranged through an online company or organization.” In a nutshell, it’s about access to goods and services, versus ownership. People are ever-increasingly sharing personal assets, welcoming guests into spare rooms, eating food from people’s home kitchens, and paying for rides in the cars with drivers and people they don’t know. Businesses are hosting others in their office space, industries are sharing employees and transporting others’ goods along their supply chains, and municipalities are offering public land for shared food production.

HOW AND WHEN DID THIS EVEN START? Some credit VRBO, Craigslist, and Ebay, all founded in 1995. Many major players soon followed, including Zipcar (2000), Airbnb (2008), Uber (2009), WeWork (2010), and Lyft (2012). These platform-based businesses run on equal parts tech-innovation and contract labor, with cities serving as the underlying foundational markets for their success. Consumers have instant access to a wide array of choices which has catapulted the market. Both Forbes and PriceWaterhouseCoopers project the Sharing Economy will grow to $335B by 2025.

PROS AND CONS FOR CONSTITUENTS. As with most innovation, the Sharing Economy has its pros and cons. Plus sides include the provision of increased access and convenient choices for communities, reduced consumer costs, improvements in economic efficiency, increased income-producing opportunities, reductions in infrastructural deterioration and traffic congestion, reduced carbon emissions, and increased competition in local markets.  Negatives range from safety and security concerns, legal and tax compliance, fraud protection, and others that materialize as these industries grow. Wages are often minimal which is another concern along with the void of employee benefits such as insurance, retirement plans, trade unions, and the automatic handling of certain tax obligations. The people who most need employment benefits and legal protection can easily lose both.

TAX IMPLICATIONS FOR LOCAL GOVERNMENTS. For many local governments, sales, use, license, occupational, and other taxes are their largest sources of revenue, but can be avoided under Shared Economy activities. Other times the tax consequences of the activity under a Shared Economy may shift the business activity from one tax to another (e.g. sales tax to rental tax), which may be at a lessor rate or unavailable for levy at the local level. Even worse, these activities can go unreported altogether and undercut competitors decreasing overall tax revenues altogether. Lodgings taxes are often some of the highest of local tax levies, and now the largest hotelier in the world (Airbnb) does not own a single property and many hosts remain anonymous.

HOW LOCAL GOVERNMENTS ARE RESPONDING. Local governments are sometimes faced with an overwhelming number of Sharing Economy activities. Many are overwhelmed, with little time or opportunity to develop an effective response. Many cities have adopted piecemeal and reactive approaches to regulating Sharing Economy activities that either deprive communities of access to their benefits or overregulate and deter them, rather than more strategic alternatives that efficiently advance urban sustainability, regulatory compliance, and equal competition. The future of the Sharing Economy and local attempts to regulate and benefit from it will be very different from today’s existing, patchwork landscape. The innovative measures of local governments in the future can and will pose serious legal, and ethical questions, regulatory challenges, and political unrest for local communities. If there’s anything we can learn from past industry disruptions – it’s that local leaders have the political power and the economic incentives to be thoroughly involved in its future.

LEARN MORE about how local governments are responding by joining a free Webinar – Sharing Economy: The Upside of Disrupting Local Governance on October 17, 2019 at 1:00 EDT featuring leading subject matter expert Jonathan V. Gerth, Esq., Vice President of Tax & Audit Services with Avenu Insights & Analytics (an ICMA Strategic Partner).