Satisfying Lodging or Illegal Hotels? Analyzing the Legal Issues of Airbnb

Photo by Andrea Davis on Unsplash

Bennett Herbert, Citations Editor, University of Cincinnati Law Review

I. Introduction

In 2007, Brian Chesky and Joe Gebbia had an idea to help pay the bills in their expensive San Francisco, California apartment: rent out an air mattress to travelers for cheaper than the cost of a hotel.[1] Fifteen years later, Airbnb is the largest home-sharing company in the world, valued at 31 billion dollars.[2] However, Airbnb is also second place in that they have sued the U.S. government more than any other company over the last four years, second only to Uber.[3]

Airbnb argues that it provides an income opportunity for middle-class citizens, tourism revenue for locations around the world, and a democratization of income from hotel corporations into the hands of individual homeowners.[4] But various legal issues have led to increased tension as to the level of government oversight over Airbnb and its renters.[5] These problems include Airbnb’s impact on housing supply, renters who violate zoning or health regulations, and failure to pay occupancy taxes that hotels and other renters are required to pay.[6]

Part II of this article will provide a background into the ways Airbnb has hurt the housing supply of various communities, discuss how local governments are attempting to better regulate Airbnb, and analyze the success of these attempts. Part III will discuss how governments should approach Airbnb going forward and forecast Airbnb’s likely struggles in the near future.

II. Background

Airbnb has become the most popular home-sharing service in the United States, making up about 51% of all short-term rental listings.[7] The company promotes itself on its positive impact on tourist-created revenue and opportunity for middle-class homeowners to earn money, all while providing a unique and satisfying experience for travelers.[8] However, as its popularity soars, Airbnb’s success brings some undesirable consequences in the form of legal battles.

One large criticism of Airbnb’s business model is that it encourages homeowners to remove their property from being a full-time rentable option for locals, thus lowering the housing supply and raising tenant prices.[9] In Palma de Mallorca, Airbnb contributed to a 40% increase in residential rent prices, forcing many locals to leave the island.[10] As a result, the island voted to ban Airbnb to make housing affordable for residents.[11] Additionally, many of those who rent out their property through Airbnb do so without complying with the zoning or health codes that are required of short-term rentals.[12] For example, according to a report from the New York Attorney General, about 72% of all Airbnb listings in New York City in 2014 were illegal.[13] Finally, many Airbnb hosts fail to pay occupancy taxes that are required of short-term rental properties.[14] A large function of these taxes, normally levied at hotels, is to help alleviate the negative effect that a property being unavailable for long-term vacancy has on the housing market.[15]

Airbnb argues that it is not permitted to collect occupancy taxes from its renters and that it is not responsible for ensuring the properties its users rent comply with zoning or health regulations.[16] It claims the company is merely a platform that connects hosts and visitors, more like Facebook than Marriott.[17] According to Airbnb, the onus is on the hosts to comply with required codes and pay proper taxes.[18]

Not all city and state governments share this sentiment, however.  Many have passed legislation imposing stricter regulation of Airbnb hosts, limiting how many days properties can be used for short-term rentals and one host can rent out on a short-term basis, and requiring Airbnb to share specific information of its hosts.[19] Airbnb has argued this last point is an infringement on its freedom of speech, an illegal search and seizure, and jeopardizes the privacy and safety of its hosts.[20] Local officials have argued it is necessary to ensure Airbnb properties are healthy for visitors and paying their fair share of taxes.[21]

This issue of transparency vs. privacy was recently settled in a New York City lawsuit. In 2018, New York City passed an ordinance that would require Airbnb to share data monthly about its hosts.[22] In January of 2020, a judge blocked the ordinance until litigation finished, calling the law a “breathtaking overreach of privacy.”[23] Despite this ruling, in July of 2020, Airbnb reached an agreement with New York City to provide its hosts’ information on a quarterly basis.[24]

III. Discussion

The number of lawsuits against the U.S. government by Airbnb have dramatically increased in recent years.[25] “Airbnb will be fighting regulatory brush fires across the world for the next decade,” said Aswath Damodaran, a professor at New York University’s Stern School of Business.[26] Considering the inconsistency and wide variety with which state governments have legislated with respect to Airbnb and the lack of case law on Airbnb’s lawsuits against local governments, it is worth evaluating how some of these lawsuits will resolve.

For governments wishing to regulate Airbnb more strictly, a 2018 Supreme Court case provides a good sign for their prospects. In South Dakota v. Wayfair, South Dakota implemented a sales tax for out-of-state merchants that sell at least $100,000 annually in sales.[27] When Wayfair failed to pay this tax, the state sued.[28] The Court ruled that states can require merchants to collect sales tax for online purchases, even if the merchant does not have a physical presence in the state.[29] This overturned a 1992 ruling that such a tax would be unconstitutional.[30] By comparing Airbnb’s business model to Wayfair’s, government officials can undercut one of Airbnb’s strongest arguments of why it should not be accountable for its hosts taxes.

In an attempt to avoid costly litigation, Airbnb has signed Voluntary Collection Agreements (“VCAs)” with some local governments.[31] These VCAs are negotiated agreements that serve in the place of statutes and regulate, among other things, how Airbnb is to collect and deliver taxes from its hosts.[32] As of 2019, Airbnb had agreed to over 150 VCAs across the country.[33] However, in recent years, many cities have felt that the VCA is too weak, not transparent enough, or that Airbnb was hiding their data in violation of the VCA.[34]

For their part, Airbnb could avoid the most restrictive statutes and millions of dollars in legal fees if, instead of fighting these battles in the court, they agree to new VCAs. Even if these are stricter than the previous agreements, they would likely be more beneficial to Airbnb than the future legislation would be if federal courts give local governments the green light they are looking for. This type of concession from Airbnb would be similar to the deal they struck with New York City in June of 2020 when they agreed to provide quarterly information on their hosts.[35] Even though this deal will likely cost Airbnb thousands of New York locations, the benefit of securing legal status in the largest tourist site in the world outweighed those costs, especially because the company went public six months later.[36] “We hope that our willingness to be transparent enables the State and the City to feel reassured that short-term rentals can be effectively regulated without blunt prohibitions,” said Airbnb co-founder Nathan Blecharczyk.[37]

IV. Conclusion

The ramp up of litigation between Airbnb and local officials around the U.S. has resulted in varying outcomes.[38] The VCAs that local governments have made with Airbnb seek to offer a mutually beneficial solution, and while they may have been an improvement in some regards, they have generally failed at effectively securing adequate regulation of Airbnb or guard against its least desirable behaviors.[39] Subsequently, the Airbnb venues in different states, and even different cities within certain states, have different levels of operation.[40] As more localities seek to better regulate Airbnb, it is unlikely the lawsuits will slowdown anytime soon.[41]

Despite some recent rulings in Airbnb’s favor, the Court’s decision in South Dakota v. Wayfair gives reason to believe that Airbnb’s argument that it is merely a mediator between host and traveler will not succeed in a federal court. A federal court will likely allow states to hold Airbnb accountable for its hosts’ taxes despite not having a physical presence in that state, just as the Court ruled South Dakota could tax Wayfair. Local officials should use this ruling to guide future lawsuits against Airbnb. For its part, Airbnb could benefit from continuing to reach agreements like it did in the New York City lawsuit about hosts’ information, and proactively seeking to sign new VCAs with city and state governments. Doing so will result in more regulation than Airbnb faced five years ago, but will allow Airbnb to save millions of dollars in legal fees, avoid being at the mercy of a statute that it has no say in, and maintain investor trust.

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[1] Rebecca Aydin, How 3 Guys Turned Renting Air Mattresses in Their Apartment Into a $31 Billion Company, Airbnb, Business Insider (Sep. 20, 2019), https://www.businessinsider.com/how-airbnb-was-founded-a-visual-history-2016-2.

[2] Id.

[3] Olivia Carville, Andre Tartar and Jeremy C. F. Lin, Airbnb to America’s Big Cities: See You in Court, Bloomberg (Feb. 14, 2020), https://www.bloomberg.com/graphics/2020-airbnb-ipo-challenges/.

[4] Alyssa Foote, Inside Airbnb’s ‘Guerilla War’ Against Local Governments, Wired (Mar. 20, 2019), https://www.wired.com/story/inside-airbnbs-guerrilla-war-against-local-governments/.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Raphael Minder, To Contain Tourism, One Spanish City Strikes a Ban, on Airbnb, New York Times (June 23, 2018), https://www.nytimes.com/2018/06/23/world/europe/tourism-spain-airbnb-ban.html.

[11] Id.

[12] Jessica Glenza, Most Airbnb Rentals in New York City Are Illegal, Says State Attorney General, Guardian (Oct. 16, 2014), https://www.theguardian.com/technology/2014/oct/16/airbnb-illegal-hotels-new-york-city-schneiderman.

[13] Id.

[14] Alyssa Foote, Inside Airbnb’s ‘Guerilla War’ Against Local Governments, Wired (Mar. 20, 2019), https://www.wired.com/story/inside-airbnbs-guerrilla-war-against-local-governments/.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Brendan Pierson, Judge Blocks New York City Law Requiring Airbnb to Hand Over User Data, Reuters (Jan. 3, 2019), https://www.reuters.com/article/uk-airbnb-lawsuit/judge-blocks-new-york-city-law-requiring-airbnb-to-hand-over-user-data-idUSKCN1OX19L.

[21] Id.

[22] Id.

[23] Id.

[24] Olivia Carville, Airbnb Agrees to Give Host Data to NYC in Settlement, Bloomberg (June 12, 2020), https://www.bloomberg.com/news/articles/2020-06-12/airbnb-settles-lawsuit-with-nyc-over-providing-host-data.

[25] Olivia Carville, Andre Tartar and Jeremy C. F. Lin, Airbnb to America’s Big Cities: See You in Court, BLOOMBERG (Feb. 14, 2020), https://www.bloomberg.com/graphics/2020-airbnb-ipo-challenges/.

[26] Id.

[27] South Dakota v. Wayfair, 138 U.S. 2099 (2018).

[28] Id. at 2089.

[29] Id. at 2099.

[30] Quill Corp. v North Dakota, 504 U.S. 298 (1992).

[31] Alyssa Foote, Inside Airbnb’s ‘Guerilla War’ Against Local Governments, Wired (Mar. 20, 2019), https://www.wired.com/story/inside-airbnbs-guerrilla-war-against-local-governments/.

[32] Id.

[33] Id.

[34] Id.

[35] Olivia Carville, Airbnb Agrees to Give Host Data to NYC in Settlement, Bloomberg (June 12, 2020), https://www.bloomberg.com/news/articles/2020-06-12/airbnb-settles-lawsuit-with-nyc-over-providing-host-data.

[36] Danielle Abril, Airbnb’s IPO: 6 Key Things to Know, Fortune (Dec. 10, 2020), https://fortune.com/2020/12/09/airbnb-ipo-share-price-covid-revenue-profit-2020-brian-chesky-abnb-nasdaq/.

[37] Olivia Carville, Airbnb Agrees to Give Host Data to NYC in Settlement, Bloomberg (June 12, 2020), https://www.bloomberg.com/news/articles/2020-06-12/airbnb-settles-lawsuit-with-nyc-over-providing-host-data.

[38] Alyssa Foote, Inside Airbnb’s ‘Guerilla War’ Against Local Governments, Wired (Mar. 20, 2019), https://www.wired.com/story/inside-airbnbs-guerrilla-war-against-local-governments/.

[39] Id.

[40] Id.

[41] Olivia Carville, Andre Tartar and Jeremy C. F. Lin, Airbnb to America’s Big Cities: See You in Court, Bloomberg (Feb. 14, 2020), https://www.bloomberg.com/graphics/2020-airbnb-ipo-challenges/.