Airbnb's Big Dilemma: Regulation Or Taxes

AirBnb offices Airbnb offices

Photo: Chad Riley

After we reported that Airbnb and a host of other startups may be affected by California’s sweeping Money Transmission Act, which regulates almost any company acting as a middleman in a transaction, a reader asked a great question.Why doesn’t Airbnb just declare itself the provider of the rooms, couches, and other lodging its hosts provide? Then it wouldn’t be transmitting money. It would just be buying and selling lodging as one big, distributed, Internet-powered hotel-management company.

Ah, but here’s the rub.

Right now, here’s how Airbnb works.

Hosts lists space for rent on the website. Guests reserve nights and negotiate details with the hosts. When the reservation’s booked, Airbnb collects the rental payment from the guest and charges them a 6 to 12 per cent service fee. It then transmits the funds to the host, minus a 3 per cent fee that, as CTO Nathan Blecharczyk told Business Insider, is really meant to cover just the costs of processing the payment.

Airbnb is the merchant of record, which is payments-speak for the business that appears on customers’ credit-card statements. But it doesn’t view itself as the lodging provider. That’s the company’s argument for why it doesn’t collect hotel taxes and other fees along with the rental charge.

Hosts are supposed to comply with local regulations and taxes. The reality, of course, is that most of them don’t. But that’s not Airbnb’s concern, as long as it structures its business in just the right way.

So Airbnb could recharacterize its transactions as buying lodging wholesale and selling it retail, and thereby avoid regulation as a money transmitter. But then it would expose itself to a host of regulations covering hotel operators that, as a mere market-making middleman, it can avoid.

That’s the kind of dilemma that a lot of marketplace-style startups in California now face, because of the Money Transmission Act—and it’s why the law obviously needs reform.

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