The Sharing Economy Goes to Court: Airbnb Versus New York State - and the Hotel Industry

When you are in the business of upending existing business models, you are also in the business of cutting into and possibly eliminating someone else's livelihood. Whether the service involves short -term rental cars, bikes, taxis or hospitality, you are unlikely to be greeted as a hero by the competition nor is life likely to be serene.

Airbnb finds itself in court in New York state, one of its largest markets. What makes the case especially interesting is that the issue is not overtly about market share and hotel industry opposition.

Airbnb is supposed to be a way for 'the little guy' to connect globally, share good feelings and experiences, all while saving a buck or three. But this is, after all, a market - and it is, most emphatically, New York. Turns out that more than a few listings come from not from struggling writers with an extra bed but from landlords with lots of properties who are trying to cash in on the sharing phenom without paying taxes or for security, safety and many of the other costs that raise prices but keep people safer.

Sensing both the threat and the bad publicity, Airbnb purged its New York lists of multi-listing sharers (who werent supposed to be there anyway) and has started talking about paying taxes. Amusingly, the hotel industry doesnt want Airbnb to pay taxes because they dont want to institutionalize the practice and thereby establish their competitor's bona fides. This will probably end up in some sort of deal which gives the hoteliers some breathing room but creates a bit more legal certainty for the sharers.

The movement is, as they say, a train on the tracks, but since we are all in the business of learning, the industry has perhaps discovered that the market is unlikely to take corrective action to police itself in return for better karma voluntarily without an occasional prod from the authorities. JL

Douglas MacMillan and Craig Karmin report in the Wall Street Journal:

Airbnb is trying to reconcile its popularity as a new option for travelers and source of income for homeowners with its often murky legal status.

Executives from Airbnb Inc. appear in New York's Supreme Court  in the most public test so far of whether the home-rental site used by millions of people operates within the bounds of the law.

The court's ruling, which may come Tuesday or weeks from now, will likely weigh on Airbnb's prospects in New York City, one of its largest markets. The outcome may also set a precedent for how governments deal with the service in thousands of other cities around the world, where Airbnb is trying to reconcile its popularity as a new option for travelers and source of income for homeowners with its often murky legal status.

Leading Airbnb's effort is Belinda Johnson, an Internet veteran who left her job at Yahoo Inc YHOO in Your Value Your Change Short position in 2011 and became Airbnb's general counsel the same year. Ms. Johnson, 47 years old, manages a team of about 20 lawyers and policy experts spread out across the globe, from London to Singapore. They meet regularly with government officials with the goal of relaying what has worked in other cities, Ms. Johnson said in an interview earlier this year.

"When we sit down with policy makers and have these conversations and they understand who our community is, they're inclined to want to help clear a path," she said.

That hasn't been the case in New York, where Airbnb's talks with Attorney General Eric Schneiderman have turned into a bitter dispute over the degree to which Airbnb "hosts" in New York City are in violation of local hotel laws.

The attorney general's office, in an affidavit filed with the New York State Supreme Court, said it found that nearly two-thirds of city apartments rented on Airbnb were illegal. New York state law prohibits people from renting their homes for fewer than 30 days unless the occupants are also present. Last year, Mr. Schneiderman subpoenaed information on Airbnb hosts in his state to determine how many were paying taxes under the state's law and the degree to which the site was being used by operators of illegal hotels.

A member of the attorney general's office looked at Airbnb's New York City listings for Jan. 31, and found that 12,423, or about 64% of 19,522 hosts, wanted to rent the entire apartment and "presumably would not be present during the rental period," according to the affidavit. Virtually none of the hosts required a guest to stay longer than 30 days, the document said.

David Hantman, Airbnb's head of global public policy, argued in a Sunday blog posting that the attorney general had misrepresented the situation. "The vast majority of our community members are regular New Yorkers just trying to make ends meet." He criticized interpretations of the 2010 hotel law, saying it was never meant to apply to New Yorkers occasionally renting out their homes.

The court will rule whether the subpoena can move forward. A ruling in favor of the attorney general's request might make some Airbnb hosts uncomfortable at a time when many observers say the rental activity skirts New York law, says Adam Klausner, a senior lecturer at Cornell University School of Hotel Administration.

"It would have a chilling effect on hosts who are worried that they might be in violation of their lease or New York law," he said.

Settlement negotiations between the attorney general and Airbnb collapsed last week, say people familiar with the matter. Airbnb was willing to send a "cease and desist" letter to any New York host who was renting out more than three units, these people said. But the company wanted a requirement for its hosts to pay taxes as part of any agreement.

"We never had any agreement with the attorney general because he remains determined to comb through the personal data of thousands of regular New Yorkers," an Airbnb spokesman said.

Airbnb recently took its first steps toward taxing users in its top cities. Under a proposed initiative in Portland, Ore., it calls "Shared City," the company would give the city's hosts the option of collecting a 11.5% tax each time they rent out a space to guests, covering the city's 6% tax and the local county's 5.5% tax—the standard "transient lodging taxes" paid by hotels in the region.

A similar proposal has been made in San Francisco, and represents a kind of playbook for how Ms. Johnson and her team plan to advance talks with local officials in other markets.

"While it is daunting because there are 35,000 cities, it isn't as fragmented as it may seem because many of the concerns are the same and so there are solutions that we would tailor for cities," she said. "There's a pattern."

Ms. Johnson has honed her approach over two decades practicing law, frequently in areas of emerging technology. In the 1990s, she served as counsel to Broadcast.com, one of the first companies to stream music over the Web. She helped write some of the first blanket license arrangements that protected rights holders in online digital formats. At Yahoo, Ms. Johnson helped the Internet portal navigate issues like online privacy and its dealing with the Chinese government.

In New York, taxes are one issue that has changed since the attorney general issued its subpoena last fall. Airbnb now says it wants its hosts to pay lodging taxes. If New York would change the current law that prevents hosts from making these payments, the company estimated it would raise at least $21 million a year in state and city taxes.

While some individual hotel owners have complained in the past that Airbnb wasn't playing fair because it hosts didn't pay these taxes, the Hotel Association of New York City says it opposes any plan to tax Airbnb.

"They are not a true hospitality organization operating legally in New York," says Geoffrey Mills, chairman of the association. "We oppose any payment, or decision for taxes to be paid by Airbnb hosts or users, because it would give some legitimacy to their business."