Remember a world without the accessibility and ease of Uber? Founded in 2009, Uber has brought the convenience of ridesharing to consumers in cities around the world. At the same time, Uber has grown into a giant thorn in the side of two very distinct entities: your local taxi company, and the tax system that struggles to regulate this growing market for share businesses.

The increasing popularity of niche online marketplaces extends beyond Uber. Take Airbnb, for example. This thriving share site provides an alternative to the traditional hotel room by connecting local hosts to consumers looking for a vacation or short-term rental. The underlying idea behind these concepts is the same: connect the consumer to convenience-providing share businesses.

While the guy at the bar may welcome the simplicity of catching a ride home through Uber, the tax system does not appreciate the increased popularity of Uber, Lyft, or the other share businesses cropping up online. Trying, and failing, to apply a framework that is not fitted to an online share market comes with a large price tag. Cities across the country witnessed this as uncollected taxes began slipping away as consumers opted for rooms found on Airbnb in lieu of a traditional hotel room.

The reason for the loss was simple. When consumers book hotel rooms online, a portion of the final charge for the room goes towards a hotel tax. The rate for the tax varies depending on the state in which the hotel is located, and is usually added on at the final checkout stage. With Airbnb, however, hotel tax was not automatically charged at checkout. Instead, individual hosts were expected to both know about, and pay, the requisite hotel taxes on their rentals.

Unsurprisingly, many Airbnb hosts were unaware that their participation with the share site meant that they were supposed to pay hotel taxes just as is required of a Hilton or Marriott hotel. Recognizing this loss in revenue, as well as the uneven playing field that hotels faced when pitted against Airbnb rentals, some cities shifted the tax burden to the share website. In top destination locations such as Washington D.C., Portland and San Francisco (among others), Airbnb has agreed to routinely pay hotel taxes straight to the city in lump sums. The decision not only places Airbnb on better legal footing, but also promises millions more to the cities in which the agreements are in effect.

While agreements like the ones Airbnb has been working out around the country are nice bandaids for the time being, the tax structure as it currently stands is not equipped to handle the exploding market for online business share models. The problem is not confined to the inequitable distribution of taxes within the hotel business, or even vacation rentals generally. Other issues include how to define the employment status of individuals, such as the Uber driver, who provide the service behind a share business.

California recently tried to untangle the confusion surrounding employment classification for share business service providers in the state. Rejecting Uber’s argument that their drivers are considered independent contractors, California deemed drivers to be employees of the company. Uber appealed this decision, recognizing the impact that the employee versus independent contractor distinction will have on their business. The change in status comes with a large tax impact: if drivers are considered employees, Uber will be responsible for collecting a slew of taxes from their service providers, such as income and unemployment taxes. Of equal concern is the possibility of significant back taxes and penalties that could be imposed following the reclassification of drivers from independent contractor to employee.

It is important for business owners to put serious thought into how employees are classified. Changing the status of workers from independent contractors to employees opens business owners up to the possibility of a worker reclassification audit. Contact a Vienna Tax Lawyer at Frost & Associates today if you are concerned that you may be at risk for an audit. Our attorneys will review the matter and see if you are eligible for the Voluntary Classifications Settlement Program (VCSP) or evaluate your other options in a free consultation.