Trust and Transformation in 2013

The Year of the Sharing Economy

With memories of the Great Recession of 2009 still lingering in the minds of many, stagnant salaries and increasing expenses are turning more people to alternative means of making money and meeting their needs for food, shelter and even transportation. Over the past few years, innovative companies such as Airbnb, Etsy, Zipcar, Lyft and Kickstarter have emerged to fill this need.

While sharing goods has always been common between family, friends, and neighbours, the concept of sharing as a profitable business model, rather than an informal community practice, is a more recent phenomenon. Besides the sharing economy, the phenomenon of sharing resources is also known as peer-to-peer (P2P) networks, collaborative consumption or the access economy.

The sharing economy has created a market out of activities that wouldn’t have been considered money making assets a few years ago. Services such as Panda give people the chance to rent out their parking spaces or driveways. DogVacay is a service that connects dog owners with dog sitters who provide spaces for pets; rates start at $25 a night and all reservations include free pet insurance, customer support, daily photo updates and a money-back guarantee. Spinlister allows people to download a phone app to rent bicycles, skis or snowboards for as little as $20 a day.

For people who are willing to show off their cooking skills, sites like Feastly, SupperKing and EatWith are services for people who want to turn their homes into mini restaurants. Users are people who are willing to pay to sit and enjoy a meal at someone’s dining room table, often dining with strangers who sign up for a designated time slot. More than just an alternative to heading to a restaurant, it is a way to meet new people and bring members of the community together for a shared experience.

Lyft is a ridesharing service where users can request rides through a phone app. Unlike taxis, Lyft drivers do not charge fares, but they do receive donations from the riders they pick up. The company got its start in San Francisco in 2012, has expanded to seventeen cities throughout the United States and has plans to expand internationally. The company claims a ride on Lyft costs about thirty percent less than an equivalent cab ride. Drivers and passengers rate each other on a scale of one to five on social networking sites such as Facebook, and drivers affix a cheeky pink moustache to the front of their cars to identify themselves. Lyft now has 100,000 registered users facilitating 30,000 rides a week throughout the country.

Lyft has aimed to build trust amongst its users and claims it only accepts six percent of its applicants. Safety requirements are stringent. Drivers must pass DMV and criminal background checks; be interviewed in person by a Lyft employee; get a vehicle inspection; and undergo a two-hour training and safety session. Drivers are insured with a $1 million per occurrence liability policy and drivers with a low rating are quickly dropped.

Crowdfunding is a financing method that involves funding a project with small contributions from a large group of individuals. Over the past few years, sites such as Kickstarter, GoFundMe, Indiegogo and RocketHub have enabled consumers and organizations to ask for funding for their projects. According to an article from USA Today, crowdfunding websites raised an estimated $2.8 billion in 2012. Kickstarter recently released data that further demonstrates the power and impact of crowdfunding: in 2012, it reported that 2,241,475 people pledged a total of $319,786,629 to successfully fund 18,109 projects on its platform alone. Additionally, more than $300 million worldwide was contributed for a wide range of projects and seventeen of those projects each raised more than $1 million.

One of the most well-known sharing economy services is Airbnb. The online room rental service company was founded in 2008 by internet entrepreneurs Brian Chesky and Joe Gebbia in San Francisco. The idea to start Airbnb stemmed from Chesky and Gebbia’s need to pay the rent in their loft each month. The duo made extra money by converting their living room into a bed and breakfast, accommodating guests on air mattresses and providing homemade meals. From these humble beginnings, the company has rapidly grown to become the world’s largest short-term rental company. By September 2013, Airbnb had over 500,000 listings in 33,000 cities in 192 countries. Listings include private rooms, entire apartments and even boats, tree houses and private islands. Not only is the service used for people to find cheaper accommodations in their travels, but it has also become a source of extra income for many people. Both guests and hosts are reviewed and rated to build trust and reputation.

However, sites such as Airbnb, RelayRides, FlightCar and other sharing economy businesses have come under fire lately in North America. With the concept of the sharing economy emerging over the last few years, there have been a few controversies due to issues such as taxes, regulations and laws.

Because consumers who are using these services are not using traditional companies operating taxis, hotels or rental cars, many mainstream companies feel that these services have an unfair advantage and are taking business away from them. These sharing operations are accused of not paying fees and of a failure to comply with permit requirements, insurance rules and other regulations that govern traditional companies providing these services.

For example, hotel lobbyists in different cities have decried Airbnb because they feel it takes away revenue from their businesses. There have been rumours that the hotel industry is threatening a class action lawsuit against the site.

Recently, New York City’s top prosecutor demanded Airbnb turn in data of people who have listed on the site. This ongoing investigation wishes to determine if residents are breaking a state law barring sublets of fewer than thirty days if occupants are not present. A law, enacted in 2010, makes it illegal to market short-term rentals in New York on sites like Airbnb. Legislators passed the law to guard against tax evasion and slumlords taking advantage of unsuspecting customers who visit the city.

The city has also fielded more than 3,000 complaints and, since examining short-term rental services, issued almost 6,000 notices of violation, including fire, safety and occupancy infractions – which carry fines. Even Airbnb’s hometown of San Francisco requires short-term rentals to charge hotel taxes.

FlightCar, a car-sharing service that matches renters with vehicles left behind at the airport by travelers, is being sued by the city attorney of San Francisco, who is accusing the company of failure to pay San Francisco International Airport the standard fees paid by rental-car agencies — ten percent of gross profits, plus $25 per rental. In its response, FlightCar is refusing to pay the fees because, saying the service is not a rental-car agency. The company also argues that since its primary business is off-airport (the cars loaned out are parked a few miles away), it doesn’t owe the fees. However, the company recently clarified its business model and is negotiating with airport officials to determine the proper fee structure.

Even Airbnb, who initially balked at New York and San Francisco’s demands for hotel taxes has recently released a statement indicating they are now open to collecting room rental taxes and will work with city officials in those cities to craft new legislation that determines what the rules about taxation will entail.

With dining share services such as Feastly, there are no health inspectors checking for kitchen infestations in someone’s home like they do at traditional restaurants. As there is no one, other than the chef, who verifies that food is stored or cooked at appropriate temperatures, these services may come under fire from local regulators as well.

The issue of taxation can be a sticky situation for many people participating in the shared economy. Fees received for services such as room rental or car sharing are considered income by the government and are subject to taxation. In one infamous case, an Airbnb host was fined $2,400 by the City of New York after it was determined he was “operating an illegal hotel.”

Airbnb sends 1099-Misc forms to its users as a reminder of their financial obligations and emphasizes that people are responsible for reporting and withholding. The site also submits tax information on the rental income of its hosts to the federal government.

Of course, the threats of fines, lawsuits and shutdowns of these services affect the long-term strategy and investment potential, so it is expected that many of these sites will compromise in order to stay in business. However, with stagnant job growth and incomes, people will likely continue to find innovative and creative ways to make supplemental income and save money. The sharing economy looks like it is here to stay.