What’s Old Becomes New: Regulating the Sharing Economy

Cohen_Molly Zehngebot_Coreyby Molly Cohen and Corey Zehngebot

Heads Up

The Sharing Economy: An old concept made new through the internet-based sharing of underutilized space, skills, and stuff for monetary and non-monetary benefits.  Recently, a proliferation of start-ups have created digital platforms to connect owners with consumers.  These companies encourage people—and businesses—to use resources more efficiently and to share non-product assets (like time) as well as conventional “stuff.”  Citizens can share space in their homes (Airbnb), seats in their car (Lyft, Sidecar, UberX), places to park (Park Circa), used clothing (ThredUp), outdoor gear (gearcommons), time in the day (TaskRabbit, Instacart), and even capital (Zopa, Prosper).  This trend has attracted significant attention from thought leaders (in 2011, Time Magazine crowned it one of ten ideas that will change the world), venture capital (Uber recently received $258M in funding from Google Ventures, and a recent round of financing for Airbnb would value it above $10B), the media, and, most recently, Congress.  Nevertheless, regulatory mechanisms have not kept pace.

Small-scale, non-monetized sharing has historically been ignored or exempted by the legal system (though barter exchange is taxable).  The tipping point is near, however, as sharing with strangers becomes big business.  Forbes estimates the sharing economy generated $3.5 billion in 2013.  To grossly generalize, the law tends to prefer binary divisions: public and private, business and personal, donation and sale, consumer and provider, and, most saliently, my property and yours.  In the sharing economy, many companies blur these boundaries, resulting in a legal gray area.  Proponents, typically a younger, urban demographic, tend to view the regulatory hurdles as protectionism, serving entrenched operators in the market like taxicabs and hotels.  Yet, for municipalities, regulating sharing economy companies requires balancing the safety and welfare of the public with the potential for new economic development opportunities.

We’ve briefly highlighted a number of legal issues raised by the sharing economy.

Ownership: Can you share something that you don’t necessarily own? The app betrspot allows people to sell spots in line and seats at Starbucks.  The transaction transfers only occupancy and not real ownership, but Starbucks may argue that the seat was a non-assignable license, and therefore cannot be sold.  The earliest forays into the sharing economy—file-sharing systems like Napster—were quickly shut down because of alleged copyright violations.  The newer ventures may involve milder, but still important, questions about the nature of ownership.

Consumer Protection: When looking for a dog sitter on DogVacay, how do you know your pet will be well cared for?  Understandably, there are fears that unregulated transactions can endanger consumer safety.  For example, food exchanged via leftover-sharing sites, such as LeftoverSwap, may have been prepared inexpertly or in unsanitary conditions, creating a public health hazard.  As a solution, many companies have found that a two-way rating system of consumer and provider provides sufficient accountability, by serving as a “a self-enforcing form of consumer protection.”  Peer review and self-regulation foster a sense of community and are less costly than traditional enforcement mechanisms, although researchers have raised concerns that sharing economy participants may exhibit discriminatory tendencies.

Taxation: For tax purposes, is a ride-share provider like an UberX driver running a small business or franchise?  There’s been no consensus about how to tax the “sharing economy” due to the diversity of business types.  In some cases, participants may not be required to pay certain specialty taxes: e.g., it is unclear whether Airbnb hosts are required to pay hotel occupancy tax in most municipalities, but they still pay state and federal income tax.  Indeed, in many situations, it’s less clear how sharing economy transactions should or could be taxed.

Insurance: When you use your personal car to participate in a ride-sharing program for profit, are you covered by commercial insurance, personal insurance, or both, or neither?  In the event of an accident, the driver must rely on his or her personal policy, which may refuse the claim on the ground that the car was in commercial use at the time.

While ride-sharing companies typically provide drivers with commercial coverage, these policies don’t cover damage to the actual car.  (In California, companies provide $1 million liability coverage, higher than Massachusetts’ $20,000 minimum for bodily injury insurance for cabs.)  Moreover, commercial policies may not provide coverage when the driver isn’t operating Uber.  In a tragic San Francisco accident, an Uber driver killed a six-year-old.  While a cab driver would have had insurance through his company, there was no insurance for the Uber driver because he did not have a customer at the time of incident.  Since the incident, Uber has expanded its insurance coverage to include all drivers logged into the app and available for a fare.  More generally, there may be an opportunity for insurance providers to provide novel instruments for individuals and businesses.

Liability: Excited to learn to ski, you rent a pair of skis from gearcommons, only to break your arm in an epic fall down the mountain.  You later discover the skis were defective.  Is gearcommons liable?  While sharing economy companies face similar liability issues as brick and mortar companies, their existence as digital platforms creates new wrinkles.  When things go wrong, injured parties may argue that the provider was negligent in screening participants or goods.  Yet, these companies can argue that they are only technology platforms, serving to connect people or businesses, and therefore should not be held liable.  The companies’ claims reference the federal Communications Decency Act, which protects internet content-providers from liability associated with their content.

Zoning: If you live in an area zoned for residential use, is it a violation to rent out your apartment or condo short-term on Airbnb?  What about space in your private single-family home?  Zoning codes draw sharp distinctions between land uses and may or may not accommodate flexibility of use depending on the municipality.  The demographics of cities are changing, and a population increase in young, single workers has already had impacts on housing stock with the development of the micro-unit.  Coupled with concerns about housing affordability and shifts from a 9-to-5 workday to more freelance and project-based work, this area is ripe for some new thinking.

Licensing/Permitting: Common sense says your “pop-up” potluck shouldn’t need a business license, but how can one be sure?  What about eBay?  Should it be licensed as an auction house?  Many sharing economy companies are corollaries to entities that are already highly regulated and licensed (such as taxicabs, hotels, and restaurants).  It is often not clear whether a shared model would require the same permits and/or licenses as traditional operators.

A few municipalities have addressed these issues head-on, either creating legal exemptions for micro-entrepreneurs (as California Public Utilities Commission did for Lyft), or banning them outright (as Austin did by re-defining “rideshare” to exclude these start-ups).  While many cities have essentially been coerced into regulating ride-sharing due to lawsuits or social media campaigns, other issues—such as short-term rentals—are still nascent.

Boston and the Commonwealth of Massachusetts have not directly addressed these issues (except for a contentious and unenforced ban of Uber).  These are not easy issues to “solve”: the start-ups’ rapid emergence defy long regulatory timelines, and regulation may not be necessary in all cases.  However, cities that are willing to experiment and embrace regulatory innovation may thrive, along with the entrepreneurs who leverage new forms of collaborative consumption.  Though issues of compliance and enforcement are also present, the moment is ripe for Boston to be proactive rather than reactive.  There are tremendous environmental, social, and economic benefits of this activity.  How can the legal community be more open-minded about regulating “sharing?”  Boston has been a leader in developing and operating a bike-sharing program, and recently passed “enlightened” zoning to facilitate urban agriculture.  Tackling the sharing economy could be next.

Molly Cohen is a third-year student at Harvard Law School.

Corey Zehngebot, AIA, AICP, works as a Senior Urban Designer and Architect for the Boston Redevelopment Authority.



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