The sharing economy is big business. From Airbnb to Uber, entrepreneurs are taking advantage of opportunities to make some money by using their own property to benefit others. In some cases, states require a tax on these services. In others, states have remained silent. Needless to say, these inconsistencies can cause concern when it comes to potential tax issues for those who make use of the sharing economy.
Two of the more common tax issues that can arise revolve around the physical presence of the entity or individual taxed and the nexus.
What issues arise with physical presence?
In order to impose a tax, states generally must establish that the taxed individual or entity has a physical presence within the state. Issues can arise if the tax is placed on the remote seller, like Airbnb, as opposed to the actual person renting the property. A recent piece in Accounting Today discussed this issue, noting that the Supreme Court of the United States (SCOTUS) case Quill Corporation v. North Dakota makes this issue particularly difficult.
Quill Corporation v. North Dakota was a case that essentially established how states can impose sales and use taxes on remote sellers. Attempts to move forward and impose this tax without establishing that the taxed entity has a physical presence within the state is likely in violation of the holding in this case. Such practices could result in a legal challenge, and the issue could potentially return to SCOTUS.
What is a nexus?
The term nexus essentially means the minimum contact that is required between the taxpayer and the state to justify the state requiring the individual pay a tax. The extent of contact required by the state has varied from state to state. Some states argue that the relationship exists if there is an economic relationship while others argue a physical presence, like that noted above, is necessary.
If the economic nexus is to survive, it is likely that the SCOTUS will need to consider overturning its holding in Quill.
What does this mean for those who partake in the shared economy?
The shared economy provides a number of benefits. Those who use the shared economy can get easily accessible services at reasonable costs while those who offer their services have the potential to make some relatively easy income. Unfortunately, making money with the shared economy may also result in a red flag from the Internal Revenue Service (IRS).
It is wise to seek legal tax assistance if the IRS contacts you due to your work in the shared economy. An attorney can review the situation and any allegations of tax fraud. Your lawyer will review your rights and guide you through the process, better ensuring your interests are protected.
