June 23, 2008

Zipcar Popularity Leads to Taxation Dilemma

What is the difference between a rental car company and a car-sharing company? That’s the question public officials and tax lawyers around the country are trying to figure out as states and cities begin to apply rental car taxes formerly applied only to companies like Alamo and Hertz onto car-sharing companies like Zipcar (formerly Flexcar). Zipcar is a national for-profit while most original car-sharing organizations were non-profit and locally based.

An article in The Wall Street Journal last Thursday details the increasing prices associated with borrowing a car for a few hours. In many cities, the cost of a 2 hour car-sharing trip has gone up between $2 and $4.

If no exemptions are granted, the fees can add up such that Zipcar loses its cost-advantage. In Philadelphia, Zipcar members must pay a 2% state rental-car tax, plus a $2-per-rental state tax, and the city's 2% rental-car tax every time they reserve a car.

This would seem to make it more difficult for the kind of low-income urban dweller who would like to be able to get around without owning a car (and avoid the associated costs of insurance, gasoline, and parking) to be able to do so. Taxes applied to each car reservation are far more onerous to Zipcar users who tend to use the cars more often than Enterprise renters, for example, rent cars. On the other hand, many rental car companies such as Hertz have begun offering hourly rates for car rentals, essentially the equivalent service of a car share company.

Public policies should be encouraging a reduction in car ownership whenever possible. There are many positive externalities associated with fewer cars on the roads including a reduction in air pollutants, less traffic congestion, and a reduced reliance on foreign oil imports. But are there specific externalities associated with joining a car-sharing service per se?

Zipcar spokesperson John Williams believes so:

"Fundamentally, we believe that car sharing is different from car rental," he said. "The question isn't so much about percentage rates as it is a question about smart policy."

Mr. Williams said that after people join car-sharing programs, "there is a behavior shift" -- they drive 40 percent fewer miles, and eventually many of them…sell their cars.

Zipcar claims that each car-sharing vehicle added to the streets removes approximately 15 privately owned cars off the streets. It also says that about 40% of its members would own a car or second vehicle if it weren’t for Zipcar. About 2 million people participate in car-sharing around the country.

That seems to imply that some particular benefit is derived from having cars placed strategically around urban areas so that most people have access to them without needing a car to get there in the first place.

There’s also added flexibility to the Zipcar program that you cannot necessarily get with rental car companies. New Jersey Transit recently partnered with Zipcar, and it allows you to reserve a Zipcar to bridge the gap between where trains can take you and where you need to go. In other words, if you live far from a train station, you can reserve a Zipcar at the train station so you can make it to all the way home.

Nearly 100 different rental-taxes have been enacted nationwide and have cost consumers more than $6 billion since 1990. Opponents claim the tax money goes to fund projects that those burdened by the tax derive no benefit from. The popularity of car-rental taxes comes from the theory that they mostly tax visitors to a given city or state, not the voters living there. However, as car-rental taxes are applied to local residents using car-sharing programs, they are no longer quite as politically palatable. Legislation was introduced last year at the federal level banning the implementation of new rental-taxes while leaving the current ones in place. It aims to rectify the unfairness of targeting a particular industry for taxation.

At the end of the day, tax treatment of car-renting vs. car-sharing businesses will likely depend on what exact services are being offered and whether they deserve special treatment in light of their environmental benefits. Localities might consider developing rental-tax exemptions depending on usage. For example, in Chicago the tax applies to daily rentals but not hourly rentals. Bostonian Zipcar users are charged a flat annual “convention center tax” but not taxed each time they reserve a Zipcar.

While Chicago’s system should prevent having to explicitly discriminate between “car-sharing” and “car-rental” companies for tax purposes, it won’t eliminate the potential to game the system. For example, business travelers might be able to take advantage of the hourly rate to complete their business in a rental car without paying the rental-tax. This tax relief wouldn’t be directed at those who need incentives not to own a car. Similarly, those who may legitimately need this tax relief will be penalized for day-rentals if they have errands that take longer than a few hours to complete.

Ultimately, any remedies for the current situation are bound to have imperfections. However, hourly rental tax exemptions are likely to ensure maximum tax-fairness and maximum positive externalities for the rental car and car sharing industries.


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