New York Attorney General goes after Airbnb for disrupting hotel business

Jason Abbruzzese and Jessica Plaut
Mashable
Sat, 26 Apr 2014 10:21 UTC

As far as the state of New York is concerned, most of Airbnb's business is illegal.

What had been a relatively civil legal proceeding spilled into the press this week when the rental startup and New York Attorney General Eric Schneiderman met in court on Tuesday. Airbnb has said the attorney general "is determined to fight innovation and attack regular people." The attorney general's office claims it has worked with numerous other tech companies to stamp out illegal activity, but that Airbnb is being evasive.

At the center of the dispute are records of Airbnb's hosts who rented their homes in New York. The attorney general wants the information. Airbnb, worried about the impact this could have on its customers and its business, has resisted.

That may seem like a local issue, but the ramifications are big. The case could become a guide for other municipalities that want to limit rentals through Airbnb.

Beyond Airbnb, the case is among the most high profile of any company in the sharing economy, the peer-to-peer marketplaces that some believe could change how we do business everywhere.

Let's start simple.

Give me a quick refresher on Airbnb.

Airbnb is an online platform that allows you to list your house or apartment as a rental. Going away for the weekend? Got a spare bedroom for the next few weeks? You can put it on the site, find a person to rent it and pocket some extra cash.

Less than six years old, the company is already valued at around $10 billion.

Seems like a good idea. What's the problem?

Housing laws in some places prohibit the rental of rooms, apartments or houses under certain conditions.

The business of Airbnb is not illegal, but the rentals can be. New York real estate law prohibits certain housing arrangements. Among the most important to this case: owners or renters of New York apartments cannot rent them out to someone else for less than 30 days unless they are also present. So if you went away for the weekend and rented your apartment out through Airbnb, that would technically be illegal.

Isn't that a lot of Airbnb's business?

The New York attorney general certainly thinks so. About two-thirds of Airbnb's New York City rentals are of this type, according to an analysis commissioned by the state of New York.

Airbnb disputes this, sort of. Airbnb's head of global public policy wrote in a blog post that "87% of Airbnb hosts occasionally rent out only the property in which they actually live." Not exactly a denial that most of its New York hosts break the law, but a strong claim that shadier arrangements like "illegal hotels" are rare. Airbnb said it recently cracked down on hosts with numerous listings that "weren't providing a quality, local experience to guests."

And the state of New York has a problem with that?

Oh yeah. Schneiderman has been working on going after the company for months.

Last fall, his office sent Airbnb a legal notice requesting information on about 15,000 hosts who had listings on the site, in an effort to crack down on tax evasion and "illegal hotels."

An individual tenant who leases out an apartment for a weekend might be breaking the law but is probably not the focus of the state's action. Instead, the state is targeting hosts who have dozens of listings or use Airbnb for illicit activities.

Airbnb is not thought to be evading any taxes, but its customers might be. The rental of homes or apartments is subject to local taxes, some of which the attorney general believes are not being paid.

Airbnb's terms of service put the legal responsibility for paying taxes on its hosts. The company has also worked with other cities, namely Portland and San Francisco, to include city taxes in its arrangements.

If laws were put in place to prevent these kinds of rentals, then what's the point? Does Airbnb offer any positive impact?

Airbnb certainly thinks so. The company claims that it makes New York rent more affordable for hosts and projects that it will generate $768 million in economic activity in New York in 2014 as well as $36 million in sales tax.

This thing is worth $10 billion?

Yup, that little apartment rental business has blossomed into a serious moneymaker. A recent round of fundraising valued the company at $10 billion.

So is this a case of a few bad apples spoiling the bunch?

Perhaps. Airbnb has been subject to some high-profile disasters such as the "XXX Freak Fest" and the trashing of an apartment, but the company claims these are aberrations among its 500,000 hosts across the world.