Taxes and the On-Demand Economy

A growing number of Americans are getting rides or booking short-term accommodations through online platforms such as Uber and Airbnb. This is nothing new in concept; brokers have operated for hundreds of years as go-betweens for producers and consumers. The ease with which this can be done through the Internet, however, has led to millions of people using these services, and to some of the nation’s fastest-growing, high-profile businesses.

The rise of this on-demand sector, sometimes referred to as the “gig economy” or, by its promoters, the “sharing economy,” has raised a host of questions. For state and local governments, one of them is: How do the services provided by these companies fit into the current tax system? All three of the major categories of revenue sources relied upon by state and local governments, including consumption taxes, income taxes, and property taxes, are impacted to some extent by the on-demand economy. While Uber, Airbnb, and similar on-demand companies are still relatively small in relation to the overall U.S. economy (accounting for 0.5 percent of the U.S. workforce), they are large enough to have a meaningful impact on state tax collections, and their explosive growth and entry into new lines of business will amplify their importance in the years ahead.