I used a tax 'loophole' to ride in a nearly empty Uber that the government treats like the subway

Josh Wolff / Business InsiderWaiting for my UberPool.

The mass transit I took to Brooklyn the other night came in the form of a grey Toyota minivan.

It sure didn’t feel like mass transit: My colleague and I filled the middle row, and for most of the rush-hour journey crawling over torn-up Greenwich Village streets and then coasting across the Manhattan Bridge, it was just the two of us with the driver and four empty seats.

Comfortable, but hardly efficient.

I was in an UberPool, the ride-hailing company’s service that picks up passengers heading in the same direction, adding extra pickups and drop-offs — and generally some small talk — but saving each passenger money. It felt like a fancy way to get to part of a city well served by subways.

File5Dan Bobkoff / Business InsiderUberPool automatically sends a bigger vehicle if you use a WageWorks card, even though some of those seats won’t be filled.

But here’s what made it remarkable: I had managed to pay for this ride using pretax deductions from my paycheck, just as someone taking the subway or bus might.

This tax break, which Uber has been offering riders for just over a month, saved me about $5 on this $18 ride. But in a city teeming with buses and subways and cars and taxis, I wondered how it was possible that the Internal Revenue Service was happy with my paying for an Uber as a kind of deduction, especially when taxis and other cars don’t get the same treatment.

The answer has a lot to do with what the IRS considers “transit,” and it explains why I rode in such a big vehicle with so many empty seats. And it’s the story of Uber finding a way to gain another edge over the city’s traditional taxis, this time by taking advantage of a law written before the internet.

How is this allowed?

Taxi riders don’t get tax breaks. Nor do people who drive to work, except for their parking.

Regular carpools also get no break.

But workers have for years been able to use pretax dollars to pay for subways and buses, and to save on bicycles — and starting August 30, UberPool riders in New York City have been able to do the same.

It came through a deal between Uber and WageWorks, a company that administers transit benefits for employers (including Business Insider).

The government allows workers to set aside up to $255 each month to pay commuting costs, and New Yorkers using a WageWorks debit card can use those dollars to pay for trains and mass-transit passes.

A few months back, Uber and WageWorks started talking about ways to let WageWorks customers pay for Uber rides. They realised that through a quirk in the law they might be able to call UberPool a “transit pass,” comparable to a MetroCard used by New York subway riders. But there was a problem. Uber drivers use lots of different kinds of vehicles, but only some qualify as “transit.”

IRS rules — for reasons that long predate anything like Uber — mandate that pretax dollars be used only in vehicles that can seat at least six passengers. Not all Uber vehicles are big enough.

“They can’t just take their regular Uber fleet and any of those cars for UberPool,” Dan Neuberger, WageWorks’ president of commuter services, told Business Insider.

Josh Wolff / Business InsiderIt’s a big vehicle for just two passengers.

So Uber worked out a complicated back-end solution. If you hail an UberPool ride with a smartphone, the app checks what kind of credit card you’re using. If it’s a regular card, Uber will send whichever vehicle is closest. But if you use a WageWorks card, it will send only a vehicle with at least six passenger seats, even though it’s unlikely Uber will fill them.

That’s why I ended up in such a big vehicle with so many empty seats.

The Uber ‘loophole’

When UberPool first offered shared rides in 2014, the company promised that no ride would ever seat more than four passengers at a time.

As recently as Wednesday, the UberPool website promoted the four-passenger maximum, suggesting that at least two seats would always be empty on rides with passengers using pretax dollars.

By Thursday, a day after I asked Uber about this, the company had removed the reference to “4 co-riders total” from the UberPool site.

Screen Shot 2016 10 05 at 12.40.43 PMUber / Dan Bobkoff / Business InsiderAs of October 5, Uber’s site said there would never be more than four passengers in an UberPool, but to use pretax dollars the car must have at least six passenger seats. The company removed that language shortly after.

A spokesman said the company meant to remove that promise in May when it started marketing UberPool as a good option during commuting hours. He said UberPool rides may now have up to six passengers but that it would happen “somewhat infrequently.”

Indeed, some rides will have just one rider: not exactly a “pool,” or mass transit.

Uber can do this because the law is vague on this point.

“They just found a loophole,” Jason Pavluchuk, the government affairs director at the Association for Commuter Transportation, which advocates carpooling and mass transit, told Business Insider.

There’s no rule governing how many people must be in the car at any one time to qualify. There’s no rule saying it even has to be used for commuting to work, even though that’s clearly the intent of the law. It’s perfectly legal to use UberPool pretax coming home drunk from a bar on the weekend, just as it is with an unlimited subway pass. All Uber has to do is make sure the car it sends has at least six seats.

File2Dan Bobkoff / Business InsiderThe backseat of the UberPool remained empty during my journey.

“The intent of the law is commuting to and from work, but there’s nothing illegal about using their transit passes in other ways,” Pavluchuk said.

Uber says that it’s providing a convenient way for people going in the same direction to share a journey and that the pretax commuter benefits will make it more affordable.

“We are opening up carpooling to more people, which is what these provisions of the tax code were written to encourage,” said Matt Wing, Uber’s New York-based spokesman.

Traditional carpooling, however — say four coworkers cramming into a station wagon — gets no tax breaks.

“UberPool is kind of implying it’s like a carpool, but really it’s being declared as a transit pass,” Phil Winters, a director at the Center for Urban Transportation Research at the University of South Florida, told Business Insider.

The big question is why the transit-pass rule is so broad and “whether it’s an oversight for not including the other part of the commuter highway vehicle requirements,” Winters said. “On purpose or an omission?”

That’s a real question because, strangely, the IRS rules talk about van commuting in two different places. To use pretax dollars for a “vanpool,” meaning you transport workers to and from an office, you have to meet a lot of requirements. The van, which the government calls a “commuter highway vehicle,” must be used for commuting at least 80% of the time, and at least half the seats must be filled.

But if you pay for the van using a “transit pass,” nothing matters other than the number of seats. That’s what applies to Uber and WageWorks.

It was originally for ‘transit’

New york subway crowdedMichael Semensohn / flickrMany original backers promoted the tax break as a way to boost mass transit, like the New York subway.

Ironically, the tax law benefiting Uber was originally written to get cars off the road.

Long before Uber, and years before even dial-up internet, Larry Filler was on a mission to make mass transit competitive with driving. In the 1980s, as the head of TransitCenter, he became the father of TransitChek, the program that provides tax-free fare cards to workers. Before TransitChek, the only people who got a tax break were those who paid for parking at work.

His “focus originally was on transit, pure and simple,” Filler told Business Insider. “And then it became very well used in New York and it was felt that it should be part of the tax code.”

Inspired by his work in New York, Congress in 1992 passed a bill allowing workers to use tax-free dollars on mass transit, parking, and also vanpools. (Later, it added biking.)

“The primary purpose was to try to equalise the incentive between parking and driving and using transit,” Filler said. “But we did add vanpooling because we saw that as another alternative to driving alone.”

The idea was that vans would be used in cities where there weren’t many other options. Seattle, for instance, is particularly into vanpools. But back then, no one anticipated anything like Uber.

Who benefits?

Josh Wolff / Business InsiderThe seat is a lot more comfortable than the subway.

For most of my UberPool ride, it seemed as if we’d be the only passengers. But once we crossed into Brooklyn, the driver took a turn in the wrong direction and we picked up Cassie Magzamen near the Brooklyn Navy Yard. It’s a neighbourhood with only one subway: the dreaded G train, New York’s only line that avoids Manhattan.

So to make up the transit gap, Magzamen uses UberPool about three times a week.

She never thought of it as mass transit like a subway but, after considering the idea, realised “it’s becoming mass transit for me, unfortunately.”

Magzamen is a freelancer. She didn’t know about the tax break, and she doesn’t qualify for it. And after a few moments, her views changed. In her mind, it’s not in the same category as the subway. She was unsure whether workers should be able to deduct it from their wages. “Is that moral?” she said. “I don’t think so.”

“I think they’re a direct challenge to our public transportation system,” Lucius Riccio, a transportation expert at Columbia University, told Business Insider. He was referring to Uber, as well as competitors like Lyft and another carpool service called Via. “I do think they’re adding more big vehicles to an already congested area.”

Riccio’s argument is that while it can benefit riders in fringe areas like Magzamen’s, they’re often used heavily in areas that are already have public-transit alternatives.

UberPool, for instance, offers $5 rides within most parts of Manhattan during commuting hours. Add in the tax break, and it becomes only marginally more expensive than taking the subway in that area. (The company said it targeted riders on the congested 4-5-6 line for cheap rides.) It’s a lot more expensive to use UberPool in the outer boroughs, as my $18 fare brought home.

But commuting is not a zero-sum game. Some riders could use UberPool just to travel to a closer subway stop, for instance. That could be a boon to some.

Sarah Kaufman, the assistant director for technology programming at the NYU Rudin Center for Transportation, calls services like UberPool, Lyft, and Via “the next generation of public transit,” because they’re more dynamic and customisable than, say, buses.

And there’s a class question here. While UberPool tends to transport wealthier smartphone-toting New Yorkers, she said so-called dollar vans already transport 100,000 New Yorkers a day. They’re a kind of shadow transit system operating in neighbourhoods not well served by public transit. Riders pay $2 cash and often use them to get to better subway stops. But even though these vans meet the same IRS criteria as UberPool, these passengers are unlikely to get the tax break.

“Dollar vans can’t take credit cards,” she said. “There’s no receipt.” It’s a grey market.

She said the people who need these kinds of options — and the tax break — are most often the New Yorkers with the lowest incomes.

What’s next?

Josh Wolff / Business InsiderThe scenic ride over the Manhattan Bridge.

For now, only WageWorks customers in New York can use pretax dollars to pay for UberPools.

Neuberger of WageWorks said the company hoped to expand the UberPool benefit across the country “once all the kinks are worked out.” Interest in the program has been “significant,” he said, though he declined to provide specific figures.

And he said the company would be happy to work with any other ride-sharing company, such as Lyft, if it can prove it can comply with the law and send big-enough vehicles.

Adrian Durbin, a spokesman for Lyft, declined to comment on UberPool or whether Lyft was planning a similar pretax service.

(Via, another carpool service, which transports 3-6 people per ride, also allows passengers to pay with a commuter benefit.)

Of course, taking advantage of this tax break is the kind of savvy that has helped Uber become the world’s richest tech startup, now valued at about $66 billion.

For a city like New York, the question is whether services like UberPool will improve commutes for everyone — perhaps helping people get to a transit stop, or reducing subway crowding — or whether it will create another class of transportation that continues to clog streets.

Uber is pitching pretax pooled rides as a kind of solution.

“This furthers our goal of getting more people in fewer cars, while making New Yorkers’ daily commute more affordable and efficient,” Wing, the spokesman, said.

But if it turns out that the service is competing with subways and buses, transportation advocates could lobby Congress to rewrite the IRS rules.

As for my ride, it took 45 minutes to get from Manhattan to Brooklyn, a few minutes longer than I’d expect from the subway. For me at least, it’s not about to replace my crowded ride underground.

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