How Do States Tax Peer-To-Peer Car Sharing?

Travelers have a lot to juggle this summer: besides pricey airline tickets, higher energy prices, and more costly food and accommodations, there is a rental car shortage in the U.S. Although the situation is not as desperate as last summer when tourists reportedly rented U-Hauls in Hawaii in response to a lack of rental cars, there is still not enough inventory to meet the rebound in travel demand. Many believe the reduced supply of cars is caused by two factors. First, rental car companies sold off a large portion of their fleets during the early phase of the pandemic as a result of plummeting demand. In addition, the  shortage of semiconductors, which are essential to car manufacturing, has contributed to the limited supply. Overall, it takes time to increase the number available rental cars.

As such, many turned to peer-to-peer car sharing companies as an alternative. These platforms enable  people to rent insured vehicles from car owners and drive the car for a specific period of time. Two major industry players, Turo and Getaround, have been around for over a decade; however, the surge in travel demand has made this industry known to many more travelers. In fact, they’ve become so popular that both have taken steps to be publicly listed in a weak equity market: Turo filed for its initial public offering (IPO) in January 2022 and competitor Getaround announced its plan to go public through a Special Purpose Acquisition Corporation (SPAC) in May.

The Peer-To-Peer Car Sharing Industry 

From a mobility perspective, car sharing is an appealing alternative in that it offers an option for transportation without car ownership. Supporters believe it reduces transportation costs, lowers the number of cars on the road, lightens congestion and cuts carbon emissions. There are four major categories of car sharing: Roundtrip car sharing, one-way station based, one-way free floating, and peer-to-peer. Zipcar provides the first three services; their primary difference is where the car is returned.  The last category, peer-to-peer car sharing, is different from the others because the company does not own the fleet of cars; instead, the platform facilitates the sharing of privately owned vehicles.

Peer-to-peer car sharing also differs from ride sharing companies such as Uber and Lyft, where car owners drive passengers to pre-specified destinations. Although car sharing (Turo) and ride sharing (Uber) both involve passenger cars, the nature of car sharing transactions actually aligns closer to home sharing (Airbnb) than ride sharing. In other words, both car sharing and home sharing customers rent an underlying asset from the owner for a certain period of time, instead of receiving a mobility service from the car owner. This is why Turo and Getaround are dubbed “Airbnb for cars;” both companies also call the car owners “hosts.”

There is limited research about the benefits and shortcomings of peer-to-peer car sharing, potentially due to the novelty of this business model. Available studies show that, like the general car sharing industry, this business model reduces costs of transportation, replaces ownership with a rental, and increases consumer welfare. Peer-to-peer car sharing provides unique advantages over traditional car sharing in that the former is easier to scale, meaning that because people do not need to separately purchase a fleet of cars to enter the market, more are able to participate. As a result, the service is more likely to expand to areas with lower population density than other types of car sharing.

On the other hand, critics believe that the increased use in car sharing largely comes from substituting the use of public transportation — not a reduction in the overall use of transportation. In this regard, several desirable features — such as lower number of cars on the road, decreased number of miles travelled and trips made, reduced traffic congestion — are not as prominent.

State Responses 

Earlier models of the sharing economy — such as ride sharing (Uber), electric scooter (Lime and Bird), and home sharing (Airbnb) — disrupted business models that had been in place for decades. State regulators had to manage these innovative structures under outdated rules. After experiencing that steep learning curve, states are better prepared to handle peer-to-peer car sharing.

Another important development that enables states to respond quickly from a tax perspective is the U.S. Supreme Court’s Wayfair case. The court’s ruling gives states legal support to tax remote sales and, although not specifically addressed in Wayfair, pass subsequent marketplace facilitator laws. The SCOTUS decision permits a state to collect sales tax on purchases from out-of-state vendors even if a seller has no physical presence in the state. As long as a sufficient economic connection exists (e.g., sales revenue or number of transactions), a seller is deemed to have an “economic presence” or “nexus” in that state. These rules are applicable to peer-to-peer car sharing because the platforms may have a nexus, or they can be considered as marketplace facilitators in that particular state. Today, all states with sales taxes have laws that impose collection responsibilities on remote sellers and marketplace facilitators.

It is against this backdrop states are acting quickly to issue car sharing regulations. More than half of state legislatures have enacted or revised rules regarding insurance coverage, liability, safety and consumer disclosure requirements. The most recent example of high profile enforcement involves the attorney general of Washington D.C., who imposed a nearly $1 million fine on Getaround in 2021 for misrepresenting the benefits and nature of its car sharing services and failing to pay D.C.’s sales tax.

State Taxation of Peer-To-Peer Car Sharing 

The starting point of discussing how states tax peer-to-peer car sharing is whether it should be treated like a traditional car rental. Currently, over 40 states charge rental car taxes, which can be a flat fee per day, a percentage of rental price (most common), or both. Most charge either excise or sales taxes, but some states charge both. In addition, local jurisdictions and municipalities can impose separate levies. These charges not only vary by city and state, but also by specific locations within a jurisdiction. For instance, airports usually impose facility charges or fees to fund rental car infrastructure or maintenance. Overall, suffice it to say the rental car tax system is complicated.

To date, there are several different models of taxing peer-to-peer car sharing across states: some treat shared vehicles as rental cars and impose the same excise tax rate, others levy sales tax on this economic activity, and still others establish a separate tax rate or per day charge.

Same as Rental Car Excise Tax — Supporters of this regime believe that a rental car excise tax has the advantage of generating tax revenue while largely affecting non-residents. Other taxes that follow similar lines of reasoning include hotel occupancy taxes, commuter taxes, and tourism taxes. These subject policymakers to less political pressure and resistance compared to higher taxes on residents. Finally, it establishes parity between traditional rental car companies and peer-to-peer car sharing platforms, they claim.

Some research conducted prior to the emergence of the sharing economy shows that demand for car rental is generally inelastic, meaning that customers are not highly sensitive to tax-induced price increases. A potential explanation is that customers may not have many options other than renting a car to get to their final destinations. However, this is not to say a rental car excise tax has no economic consequences. A higher excise tax does reduce customers’ rental demand (by, for instance, motivating them to use public transportation instead), just not to a significant extent. In the current environment where states are focusing on economic stability and employment, they need to strike the balance between increasing excise tax revenue and its negative impacts on travel.

Examples of states that are now taxing or considered taxing peer-to-peer car sharing include the following: Oklahoma imposes a 6% vehicle rental tax, the same rate as its excise tax on traditional rental cars. In New Hampshire, peer-to-peer car rentals now include a 9% meals and rooms tax.  Arkansas requires peer-to-peer car sharing platforms to collect a 10% rental car tax. Hawaii charges both a $5 per day surcharge, similar to its rental car charges, and a general excise tax. Texas proposed a 10% excise tax similar to car rental companies, but the bill did not advance.

Sales Tax — Opponents of the rental car excise tax model believe that because many peer-to-peer car sharing users are local residents, whereas customers of car rental companies are primarily out-of-town visitors, they should not be treated similarly.

An analysis using transaction level data provided by Turo validates this point. The results show that a substantial portion of peer-to-peer car sharing customers are local residents. Using state-level data for eight states plus Washington, D.C., between 2018 and 2020, roughly half of the customers are residents. These in-state customers are generally more price sensitive than out-of-state guests, the duration of their rental is shorter, and they tend to rent cheaper car models. As such, higher taxes may reduce in-state residents’ rental demand more in the case of peer-to-peer car sharing, compared with traditional car rental arrangements.

Other opponents of the excise tax argue that such a tax is often used to change certain harmful behaviors (such as smoking cigarettes or gambling) or to finance specific expenditures. For the former, peer-to-peer car sharing is not harmful, so no corrective tax is needed, opponents say. For the latter, they argue that if peer-to-peer car sharing excise tax revenue simply flows into states’ general funds, there is no direct connection between the source and use of funds.

When the sharing economy becomes more prevalent, consumers will arguably have more alternatives than traditional car rentals and, therefore, will be more likely to seek other transportation arrangements. In other words, consumer demand for car rentals will become more elastic and behavioral changes may be more significant than before. This means that how those alternatives, including peer-to-peer car sharing, are taxed will have increasingly important revenue implications.

As such, some observers believe that including peer-to-peer car sharing in the sales tax base is superior to imposing a rental car excise tax. Such an approach would expand the tax base and therefore allow a lower sales tax rate. Several states have incorporated peer-to-peer car sharing services into sales tax bases through marketplace facilitator laws. For example, West Virginia and Tennessee follow this approach. Nebraska proposed a similar solution, but the bill did not pass.

Some are concerned that relying on the sales tax system would overburden those who operate mixed-use vehicles. Specifically, rental car companies are exempt from paying sales tax when they purchase new vehicles because the cars are business inputs. But peer-to-peer car sharing hosts may not receive a similar exemption, despite the fact that a portion of the car’s use is for business instead of personal purposes — and only personal use should be subject to tax. However, there are options to address this issue. For instance, as a simplified approach, a state can provide a tax credit at 30% of the sales tax paid, which essentially assumes the owner uses 30% of the car for sharing purposes. If the owners would like to claim sales tax credits higher than 30%, they can provide documentation to show the actual usage.

Separate Regime — This concept encompasses a wide spectrum of arrangements, including different rates and structures. For instance, Virginia’s tax rate is based on the number of shared vehicles the owner has registered on all car sharing platforms. For a fleet of fewer than 10 cars, the tax rate is 7% (which is higher than sales tax rate); for more than 10 cars, the tax rate is 10%, the same as the state’s rental car excise tax rate. Maryland follows a similar approach: If a host has fewer than 10 cars, the tax rate will be 8% (which is higher than sales tax rate). When the host’s fleet exceeds 10 cars, the tax rate will increase to 11.5%, which is the same rate as the rental car excise tax.

In addition, Florida charges a lower daily fee than that for rental cars ($1 per day for peer-to-peer car sharing v. $2 per day for rental cars), plus sales taxes. New York charges a general assessment fee, a regional transportation assessment fee, and a metropolitan commuter transportation district assessment fee, each at 2%; this will increase to 3% in 2023.

A Recent Court Case

Turo has long claimed that it is not a car rental company because it does not own or rent cars of its own. Instead, it says, Turo is a marketplace company — a platform that matches supply and demand. A California Appellate Court in June 2022 concurred that Turo is not a rental car company. Although this case primarily involves whether Turo operated as a rental car business at San Francisco International Airport without a valid permit, the ruling may support Turo’s claim that it is not a car rental company and should not be taxed as such.

Within the last two years, over a dozen states have proposed or adopted car sharing regulations. Regardless how the peer-to-peer car sharing companies are classified or regulated, it is certain that this trend is going to continue; more jurisdictions will develop policies and guidance to regulate and tax this industry. For many consumers, the difference between excise and sales tax may be quite nuanced, and they will likely care more about the final charges and the quality of vehicles. For states that are still engaging in a policy debate, the final decision about excise vs. sales taxes will be more consequential – it may not only impact the amount of tax revenue, but also affect the level of economic activity and innovation. As such, empirical analysis and evaluations of how the designated tax structure will affect efficiency, equity, revenue sufficiency, and administrative simplicity grounds should guide the states’ decisions.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.