Are the regulations for Airbnb and hotels creating unfair competition?

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Patrick Sinnema

UNIVERSITY OF GRONINGEN | FACULTY OF ECONOMICS AND BUSINESS SUPERVISOR: CLEMENS LUTZ

SUBMISSION DATE: JUNE 25TH₂₀₁₈ WORD COUNT: 10408

Are the regulations for Airbnb and

hotels creating unfair competition?

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1 Author: Patrick Sinnema

Supervisor: Clemens Lutz Student Number: s2371995

Course: Master (Msc) Thesis of Small business and entrepreneurship University: University of Groningen, Faculty of Economics and Business Submission date: June 25th_{, 2018}

Total word count:

Authors address: Aquamarijnstraat 577, Groningen Telephone number: +31 621381674

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Abstract

The purpose of this master thesis is to see if hotels and accommodations that belong to the sharing economy must meet the same regulations. As example for accommodation sharing, Airbnb is used in this thesis to research. All the regulations hotels and Airbnb have to meet were taken into

consideration and investigated in both primary and secondary research. The next step in the process model was to see if these regulations had compliance and if this was creating cost differences. Secondary data was used to check the formal regulations imposed by government institutions and tax authorities and primary data was created by interviewing Airbnb hosts and hotel managers. These participants were asked about their opinion about the regulations and if they regard it as fair or unfair. With all the gathered data it was possible to conclude that Airbnb has regulations and that it is easy to start with sub-renting your room or house. However, there is low enforcement for Airbnb hosts which creates space for hosts not to pay their taxes. Hotels have to meet much stricter

regulations and high enforcement and this is creating cost differences between both parties. The final conclusion is that different enforcement between Airbnb and hotels are leading to cost differences and thus it can be qualified as unfair competition.

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Introduction

This master thesis will have a look on what the sharing economy is and how peer-to-peer platforms are competing in the hotel industry. Are the regulations for the sharing economy and the hotel industry the same? Or do both systems face different regulations?

As specific peer-to-peer platform, the focus in this master thesis is on Airbnb. In the introduction there will first be a little introduction about the topic and how this is creating a problem. In the end of the introduction there is a research purpose presented.

Travel & Tourism is a key sector for economic development and job creation throughout the world (WTTC, 2016). Cities want to attract many tourist because they bring many benefits. All cities stress the importance of tourism for the local economy: the tourism industry contributes to the local income and provides many people with jobs. In some cities, tourism is the main economic activity and the only current source of local economic development (van der Borg, Costa, & Gotti, 1996). Pressure from tourism in city centres is intensified by the availability of accommodation offered through the new shared economy and peer-to-peer (P2P) platforms, which obviously led to more competition in some businesses. The central point of this shared economy, also called collaborative consumption, is that sharing goods is more important than owning them (Leismann, Schmitt, Rohn, & Baedeker, 2013).

Airbnb is the most successful P2P platform in the field of accommodation. It connects people who have space to spare (hosts) with those who are looking for a place to stay (guests). Since people don’t need large investments to rent buildings or build a hotel, these platforms are easily accessible for every private person. Airbnb proposed a novel business model, built around modern internet technologies and Airbnb's distinct appeal, centred on cost-savings, household amenities and the potential for more authentic local experiences. Most importantly, Airbnb's relatively low costs appear to be a major draw (Guttentag, 2013).

There is a lot of critics on the sharing economy. For example about Uber drivers. To become an Uber driver there is no need to take exams and there are no insurances for their customers:

“Unlike licensed taxi drivers, private citizens providing ride-share services do not always purchase medallions. They also do not take licensing exams, or necessarily carry commercial insurance”

(Malhotra & Van Alstyne, 2014). This is not only the case for Uber, also about Airbnb are many complaints:

The hotel industry in New York City has been particularly outspoken about their concern over Airbnb: In August of 2013, Vijay Dandapani, Chief Executive of Apple Core Hotels complained, “These people [who rent out their apartments] don’t pay taxes…The web sites may tell them they need to pay all taxes, but they don’t require it.”

Then in April of 2014, Lodging Magazine reported that “Many hotel owners have been up in arms because Airbnb hosts are not subject to traditional hospitality based regulations or requirements, such as paying lodging taxes…” (Growthhackers, 2017).

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5 I never pay taxes. (An Airbnb Host from Groningen, 2017)

In a lot of municipalities it is not even published that Airbnb hosts have to pay tourist and income taxes. Of course this creates unfair competition between the providers of shared consumption (Airbnb) and the providers of traditional consumption (hotels). It is interesting to see why some municipalities request Airbnb hosts to pay taxes, but why it is not obliged and why some

municipalities do not request for any taxes. Besides this tax problem, there are huge differences in regulations. Hotels have to fulfil many standards for fire and safety regulations and have to obtain many licenses before they can even start to build. For Airbnb this is all much easier as there are no requirements.

“Concerns on unfair competition also arise because service providers in the sharing economy do not comply with the licensing and certification requirements that apply for traditional businesses”

(Psarros, 2015)

And what if on the website of the municipality is published that Airbnb hosts have to pay taxes and comply to the regulations. Is everyone following these rules? Are there people working that are checking all the Airbnb locations if they have guests over to make sure that the host is paying the tourist tax to the municipality?

Problem statement

The main problem addressed in the introduction is about the growing attention for the sharing economy. With the sharing economy many people are sharing their houses with strangers for some money. Since these collaborative consumption possibilities almost do not have barriers it is really easy to start on Airbnb and other platforms. There are also no clear policies and regulations what the shared economy has to fulfil, which possibly creates unfair competition between suppliers of

collaborative consumption as Airbnb and the suppliers of normal consumption via hotel chains. And when municipalities have created certain rules, these rules are not complied by the hosts. Thus whenever there are rules there is low enforcement.

Research question

The literature gap brings us to the research question of the thesis:

Do the existing regulations lead to, cost differences and thus to, unfair competition between hotel and people sharing their accommodation via Airbnb?

Besides this research question some sub questions are made to make clear if there are differences between Airbnb and Hotels and on which sides they differ. The next sub questions will be answered in this thesis:

- Which regulations are applied to the hotel industry? - Which regulations are applied to the sharing economy? - Do these regulations lead to cost differences?

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6 With the research- and sub questions the following process model is created:

Figure 1. Process model

This process model is made to make clear how all the steps are followed by each other. The model starts with both businesses: the hotel business and the sharing economy business.

The first step in the process model are the formal regulations imposed by the government. In this master thesis there will be research done if the sharing economy and the hotel industry are facing the same regulations. The second point in the model is about compliance. When all the regulations are imposed how does it work with the compliance? Do both economies meet all the requirements and formal regulations? The third step is about the cost differences that might arise when there are different regulations for both economies or when the compliance in one economy is less strict than in the other one. Whenever there are cost differences there is unfair competition as we can see in the last step of the process model.

The question in the process model is whether the cost differences are caused by different regulations or that the regulations are equal but that no one in the shared economy is following those

regulations. When the regulations are equal, is there enough enforcement to check if Airbnb hosts are complying the regulations?

For example about the income tax. Everyone who is making money should declare this at the tax authorities. But on the website of Airbnb it is never stated that Airbnb hosts have to declare this and when they should place this on the website who is going to control that every Airbnb hosts is

declaring all the income he or she made via Airbnb and not just a little bit of what they really earned.

Sharing economy Hotel business Formal

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Literature review

Sharing economy / Collaborative consumption

Collaborative consumption is defined broadly as the peer-to-peer-based activity of obtaining, giving, or sharing access to goods and services, coordinated through community-based online services (Hamari, J., Sjöklint, M., & Ukkonen, A. (2016). More importantly, the various instances of the sharing economy also share the characteristics of online collaboration, online sharing, social commerce, and some form of underlying ideology, such as collective purpose or a common good (Hamari, J., Sjöklint, M., & Ukkonen, A. (2016).

Before the sharing economy was founded, people could face much more problems finding the things they were looking for (rooms, taxi rides or dog sitters). Sharing platforms remove such limits. By offering standardized pricing systems, web-hosted exchanges, searchable databases, reputational information, and smart phone accessibility, services like Uber, Craigslist, and Airbnb connect a city's myriad buyers with its myriad sellers. In doing so, they substantially deepen already deep urban markets (Rauch & Schleicher, 2015).

The most important change has been technological. Improved data storage and analytics make the cost of matching buyers and sellers lower than ever. And with the mass spread of smartphones, people can access web based sharing services anywhere, at any time. Likewise, widespread GPS tracking allows for both better customer service (Uber knows where to meet you) and more careful monitoring (Rauch & Schleicher, 2015). Uber and Airbnb are some of the innovations that are making markets more competitive while improving access to a number of facilities and services (Belk, 2014).

Innovation

Innovation is particularly a booming topic during a time of economic crisis, when we are

reminded that governments must prioritize investments in research and development (R&D) and redefine their innovation policies so as to enhance productivity and foster economic growth (Lobel, 2013). Innovations happens everywhere, and is not just limited to large research centres and

laboratories but also in the garages and basements of courageous inventors. Innovation is more than the latest technology; it is a phenomenon that can result in the improvement of living

conditions of people and strengthening of communities (Ranchordas, 2015).

In a period where innovation has been given the leading role, regulators face the additional responsibility of regulating innovative products and services without stifling innovation (Schacht, 2008). The regulation of innovation in the sharing economy is particularly complex because it is unclear whether these practices fit within existing legal frameworks that apply to equivalent

commercial practices and should play by the same rules, whether these practices should remain to a great extent unregulated, or whether these practices should benefit from less demanding regulations (Schacht, 2008). This hesitation has opened the door to uncertainty and lack of transparency. A great number of sharing practices do not require regulation, since they belong to the personal sphere, similar to what occurs during swaps or rides between friends or charity (Orsi, 2014).

Not all the sharing practices are profit driven, some are more linked to giving. But the ones who are profit driven open the backdoor to fraudulent behaviour, and risk becoming parallel, unsafe, and underinsured practices (Lieber, 2014).

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8 uncertainty, and how to design a set of legal institutions and instruments that encourage it. The first step should be the defining innovation (Ranchordas, 2015).

No barriers, easy to start

Consumption has changed rapidly since the rise of the sharing economy (Botsman & Rogers, 2010). Organisations have popularised the act of consuming directly from peers mediated through an online platform.

The way that peer-to-peer markets deal with quality assurance and trust is perhaps more surprising. It does not take a PhD in economics to see the potential incentive problems in semi anonymous online transactions. What is especially striking about this degree of trust is that peer-to-peer businesses often dramatically lower the barriers to becoming a seller. London drivers historically spent years studying to obtain a black cab license, and becoming licensed to run a bed and breakfast could take months. The application process to become an Uber driver or Airbnb host takes only a few days or a few hours (Einav, L., Farronato, C., & Levin, J. (2016).

With the upcoming peer-to-peer platforms (P2P), everyone can start renting their own rooms and make a profit out of it. Airbnb is the most successful P2P platform in the field of accommodation. It connects people who have space to spare (hosts) with those who are looking for a place to stay (guests). Airbnb reached more than 3,000,000 hosts 191 countries (Airbnb, 2016).

Airbnb can compete heavily with the hotel industry since they offer accommodations below hotel price level. Entry barriers don’t even exist in these platforms which causes that every single person can start this business.

Problems with the sharing economy

The sharing economy is confronted with several challenges that can influence its sustainability. Pressing issues are consumer protection, working conditions, and fair competition (Malhotra & Van Alstyne, 2014). One of the problems comes from the enormous popularity of the shared economy. With this popularity and the low entry barriers it is for everyone attractive to be part of this new economy. The big disadvantage of this open economy is that it attracts a lot of non-professional workers (Rauch & Schleicher, 2015). In the taxi industry, for example, traditional drivers must pay for cab medallions and pass numerous city tests and requirements whereas Uber drivers just need to sign up. For Airbnb likewise, people just need to sign up and nothing else, whereas official hotels need to sign contracts, meet requirements and pay taxes (Lawler, 2014).

Regulations

Despite the benefits, however, sharing-economy companies have been criticized for the way they operate and, in some cases, have been forced to shut down operations. Users of sharing platforms are transformed into "prosumers," people who produce as well as consume. By blurring the line between consumer and producer, the sharing economy disrupts the traditional model of business where companies own and people consume (Interian, 2016).

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9 Airbnb’s success has attracted attention to “their unregulated practices, their ongoing lawsuits and alleged attempts to circumvent existing local regulations, limit their liability for potential damages, and refusal to provide labor law protection to their service providers” (Finck and Ranchordás, 2016). Airbnb believes that the existing regulatory constraints were developed for a time before the sharing economy and should not apply to them. They believe that the regulations are unfair and have been developed to protect hotels. Finck and Ranchordás (2016) also raised these points. Hotels believe that Airbnb has an unfair advantage and is spared some of the costly hotel standards (e.g., fire and life safety systems regulations), taxes, and insurance costs.

Institutions

Institutions are comprised of regulative, normative, and cultural-cognitive elements that, together with associated activities and resources, provide stability and meaning to social life (Scott, 2006). The regulative pillar, which stresses rule-setting, monitoring and sanctioning activities, both formal and informal (Scott, 2006).

The institutional logic underlying the regulative pillar is an instrumental one: Individuals craft laws and rules that they believe will advance their interests, and individuals conform to laws and rules because they seek the attendant rewards or wish to avoid sanctions (Scott, 2013).

We are reminded that rules must be interpreted and disputes resolved; incentives and sanctions must be designed and will have unintended effects; surveillance mechanisms are required but are expensive and will prove to fallible.

A stable system of rules, whether formal or informal, backed by surveillance and sanctioning power affecting actors’ interests that is accompanied by feelings of guilt or innocence constitutes one prevailing view of institutions (Scott, 2013)

Different definitions and conceptions of regulation run through these studies: (1) regulation as authoritative rules, (2) regulation as efforts to state agencies to steer the economy and, (3) regulation as mechanisms of social control (Baldwin et al., 1998).

The categorization of Baldwin et al. (1998) points to an evolution from a narrow conception of regulation to a much broader one both in theory and practice. It tells us about 4 different dimensions.

First, it tells us about who is regulating. Narrow conceptions suggest the centrality of the state. Broader conceptions point to the multiplicity of regulatory actors fighting for attention (education, environment, firm interactions and corporate ethics).

The second dimension bears on the regulatory mode. Rule-making has traditionally been associated with the coercive power or the nation-state. This is generally expressed in “hard” laws and directives. A broadening conception implies a move towards legally non-binding “soft” rules such as standards and guidelines (Mörth, 2004).

A third dimension is that of the nature of rules where a narrow conception assumes formal rules and a broader conceptions points to informal rules. Informal rules are more flexible and thus open to interpretation and adjustment by those being regulated (Kirton and Trebilcock, 2004).

The final, fourth, dimension has to do with the compliance mechanisms where the issue at stake is why those regulated do or do not comply. The evolution, there, is from the traditional association of compliance with the threat of sanctions. Even though many rule-makers do not have the type of regulatory authority traditionally associated with states, they can develop and structure regulatory sets that can be more or less coercive (Scott, 2004).

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10 government or local authorities. Also Chen (2005) is talking about a formal regulatory environment wherein government policies, laws and regulations are compromised.

Next to this definition Chen (2005) came up with 3 schools, in which the voluntarist school can be described as the linkage between Airbnb and hotel. The voluntarist school pays relatively little attention to the economic linkages between informal enterprises and formal firms but subscribe to the notion that informal enterprises create unfair competition for formal enterprises because they avoid formal regulations, taxes, and other costs of production. They argue that informal enterprises should be brought under the formal regulatory environment in order to increase the tax base and reduce the unfair competition to formal businesses (Chen, 2005).

In the case of Airbnb there is a lot of vagueness about the regulations. Are the regulations formed by the state? Are their “hard” nation-wide laws or are there just “soft” laws that users of Airbnb have to fulfil? Are the rules free interpretable or are they fixed as that everyone person has to stick to it? And last but not least, what happens if people from Airbnb do not comply to the regulations?

Fair vs. unfair competition

In many cities and countries Uber has adopted an invasive approach, which has sought to bypass regulatory regimes. This has been particularly evident in Europe, where Uber has fought fierce battles with governments, regulators and established taxi operators (Dudley et al., 2017). The serious political dilemma for governments and regulators is that, while Uber provides an efficient and relatively cheap service that is popular with consumers, it can also threaten the status and existence of established operators, and make regulatory regimes appear ineffective.

For Uber itself, however, its expansion illustrates the complexities of how governments and their regulatory regimes come to terms with innovative operators that do not fit standard templates, and challenge established perceptions of organisation, employment, and patterns of life (Dudley et al., 2017).

In London, the taxi drivers and their representative body did not accuse Uber for unfair competition but instead they went to Transport for London (TfL). Since it is the job of the regulator to ensure that innovative services remain within the bounds of what they judge to be fair competition (Cnet, 2017). This same thing goes for Airbnb. Airbnb stormed into the markets as a new radical innovation where regulations are not present. This also led to protests by hotels and neighbours who are against Airbnb. Regulation is often the most significant barrier to future growth for sharing economy firms (Cannon and Summers, 2014).

This was also shown in a research of Psarros (2015) about Airbnb in Greece: “Concerns on unfair competition also arise because service providers in the sharing economy do not comply with the licensing and certification requirements that apply for traditional businesses”.

In the literature there are many, many descriptions of fair and unfair competitions, but there are not one or two all-encompassing definitions to describe (un)fair competition. What is fair for one party might not be fair for the other party.

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11 fairness in non-hypothetical environments since subjects are consistently willing to sacrifice personal cash payoffs for other (fair?) allocations (e.g., Guth, Schmittberger, and Schwarze, 1982; Kahneman, Knetsch, and Thaler, 1986; Forsythe et al., 1994; Andreoni, 1995; Roth, 1995;).

Other theoretical models define fairness on the basis of reciprocity (Rabin, 1993) or comparative payoff outcomes (Fehr and Schmidt, 1999; Bolton and Ockenfels, 2000).

In the United States it is described as follows: Citizens or residents of the United States shall have the same benefits. It therefore appears clear that where there is unfair competition as defined in the Conventions, United States citizens are entitled to the same remedies against each other (March, 1947).

The term unfair competition at common law (in the English court) had its origin in the broad principle of reasonableness and fairness whereby the courts aimed to prevent injury to a rival competitor by misrepresentation (Haines, 1919).

To draw the line between fair and unfair, between reasonable and unreasonable in business methods is very difficult, but this difficulty must be faced before legislation on unfair competition may result in improving business ethics (Haines, 1919).

The same sentiment is expressed by one of the English justices who observed, "to draw a line between fair and unfair competition; between what is reasonable and unreasonable, passes the power of the court." Probably no exact definition of the term can be given. What is unfair depends too much upon the special circumstances and conditions of each case (Haines, 1919).

To come up with a conclusion of the literature review we will first give a final definition of unfair competition. The one mentioned next will be addressed in the whole thesis. Article 10bis of the Paris Convention requires protection against "unfair competition," defined as "any act of competition contrary to honest commercial practices in industrial or commercial matters" (Correa, 2002). The discipline of unfair competition protects fairness in commercial activities. As mentioned, there are no universal moral values or a unique concept of what is honest in commercial behaviour. The definition of what constitutes fair or honest practices varies among countries. They may include competitor's misrepresentation, fraud, threats, defamation, disparagement, enticement of employees, betrayal of confidential information, and commercial bribery, among others (Correa, 2012).

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Methodology

In this chapter the methodology used in the research is explained. Firstly, it is explained why it was chosen to use both qualitative and quantitative data. Afterwards, there will be an explanation on how the research is done.

Research and method

The aim of this study is to see if the regulations between the shared business and the normal business are equal or whether they are diverse. Next, to see if they differ, there will be some research on how the compliance is working. The second step in this study is about the part of these differences that are creating cost differences for both parties. In the end, there is a conclusion if the cost differences are leading to unfair competition.

The research question is addressed as follows: Do the existing regulations lead to, cost differences and thus to, unfair competition between hotels and people sharing their accommodation via Airbnb? Next to the research questions some sub questions are formulated to help answer the main question. These sub questions can be found in the introduction part.

A process model (figure 1) is made to make clear how all the steps are followed by each other. The model starts with both businesses: the hotel business and the sharing economy business. The question in the process model is whether the cost differences are caused by different regulations or that the regulations are equal but that no one in the shared economy is following those regulations. When the regulations are equal is there enough enforcement to check if Airbnb hosts are complying with the regulations?

In this research there are two main variables: regulations and unfair competition. For a better understanding both definitions are given again.

The definition of the regulations used in this thesis: Individuals craft laws and rules that they believe will advance their interests, and individuals conform to laws and rules because they seek the

attendant rewards or wish to avoid sanctions (Scott, 2013). In this thesis it is important to look at the hard formal laws imposed by the government as competition between Airbnb and hotels should not be open for interpretation and adjustment but everyone should be exposed to the same regulations. The definition of unfair competition is formulated as follows: "any act of competition contrary to honest commercial practices in industrial or commercial matters" (Correa, 2002).

To answer the main question for this master thesis, qualitative research is done. In this research both primary and secondary data is used. Primary data is defined as original data collected for a specific research goal (Hox and Boeije, 2005). Secondary data is described as data originally collected for a different purpose and reused for another research question (Hox and Boeije, 2005).

Primary data is data that is collected for the specific research problem at hand, using procedures that fit the research problem best. On every occasion that primary data are collected, new data are added to the existing store of social knowledge. Increasingly, this material created by other researchers is made available for reuse by the general research community; it is then called secondary data (Hox and Boeije, 2005).

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13 own research problems. Second, they must be able to retrieve the relevant data. Third, it is

important to evaluate how well the data meet the quality requirements of the current research and the methodological criteria of good scientific practise (Hox and Boeije, 2005).

Participants

In this master thesis, six persons are interviewed to see what their opinion (objective data) is about the regulations and the (un)fair competition between Airbnb and hotels and what the facts are about these two different systems (subjective data). To overcome biases, three people that are actively hosting on Airbnb were interviewed, two hotel managers were interviewed and one person from the municipality of Groningen was asked about her opinion and the existing rules for both systems in Groningen. Six interviews seems like not enough but there are some reasons why there are just six persons interviewed. First of all, many people just don’t want to be interviewed about this topic. Secondly, it is difficult to come into contact with Airbnb hosts as messages that contain personal information (like email address, phone number) are automatically blocked. When you have found someone that wants to be interviewed, it is still the question if the person wants to provide all the information on the questions. A third reason not to interview more hotels is because all of them are fulfilling rules and regulations otherwise they would have been closed already. This means, that there is only one point which creates different answers: opinions about the rules and regulations.

In the interviews, the goal was to create insights if the people were familiar with the rules and regulations, if they apply them or ignore them. Besides this, they were asked regarding the

competition between hotels and Airbnb and if there should be stricter rules for the shared economy. Interviews are generally used in conducting qualitative research, in which the researcher is interested in collecting “facts”, or gaining insights into or understanding of opinions, attitudes, experiences, processes, behaviours, or predictions (Rowley, 2012). Although it is easier and quicker to obtain information via surveys I chose to interview some people for more in-depth and detailed

information. Rowley is also mentioning that, when interviews have been appropriately designed and the interviewees appropriately selected, they may have potential to generate a range of insights and understandings that might be useful. In other circumstances where it is possible to identify some people who are in key positions to understand a situation, such as, say, the managers responsible for implementing a corporate social responsibility policy in a specific brand of a retail chain, interviews might not only be preferable to questionnaires because they provide more details and insights, but also because the key informants are unlikely to take time to fill in questionnaires (Rowley, 2012). Besides the interviews a comparative literature study is carried out to see what the regulations are in the municipality of Groningen and if there are large differences between the shared economy and the normal economy.

Procedure

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Findings

The findings will first present the outcomes according the comparative literature study based on institutions’ rules. In the second part are the results from the interviews presented and this is followed by a comparison between both approaches.

Differences between the hotel chains and Airbnb

There are many aspects on which hotel and Airbnb differ. In this chapter all the licenses, permits and taxes are shown and explained for both systems. In the end there will be a table that shows an overview on which aspects Airbnb and hotels differ. The licenses, permits and taxes are shown in a logic way that begins with the start of the business.

Licenses:

-

Registering chamber of commerce - Terrace license

-

Beverage and catering license - Music rights license

- Checking the risk inventory

Permits:

-

Environmental permit - Operating permit - HACCP certificate - Hygiene code

Taxes:

-

Tourist tax - Income tax - Value added tax

When a hotel wants to start a catering industry company there is a list of tasks that need to be fulfilled before it can really start. This list consists of 12 sequential steps. First of all there must be a registration in the trade register of the Chamber of Commerce (Kamer van Koophandel). After doing this a business plan needs to be written for the municipality and a destination plan needs to be checked.

-Costs of registering at the Chamber of Commerce: €50 (license, just once).

When the current location is not yet totally suitable for the hotel, there might be some changes needed. Since it is not possible to make changes to the building without any license also an environmental permit is needed if the owner wants to make changes to or extend the current

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15 -Costs of environmental permits are dependent on the amount of costs of the total construction costs. The minimum costs are 533 euro for construction costs under 7500 euro and this might raise to 10.000 or even 50.000 euro’s when the costs are exceeding respectively one or five million euro’s.

https://zoek.officielebekendmakingen.nl/prb-2016-6231.html

For the public order, safety restrictions and morality in the vicinity of public establishments an operating permit is needed.

-Costs of an operating permit are €606,20. This permit is valid for three or five years.

https://gemeente.groningen.nl/exploitatievergunning-horeca-aanvragen

One of the most important things in the catering industry has to do with hygiene regulations. Of course also for this aspect there needs to be a code of conduct. The hotel has to show that they follow a certain hygiene code (Koninklijke Horeca Nederland) or come up with a HACCP-plan. -Costs of HACCP-certificate: €69 (permit). This certificate is only valid for one year.

https://haccpdirect.nl/haccp-certificaat/

-Costs of hygiene code: €106 (permit). Businesses have to follow this code, whenever a new hygiene code is developed, businesses need to adapt changes to meet the requirements of the latest code. Usually this changes after 5-10 years. https://www.khn.nl/hygienecode

Alcohol providing is not allowed without a license. So, when the hotel wants to serve booze in their restaurant or lobby also a beverage and catering license needs to be retrieved from the municipality. When there is place for a terrace is it can be exploited nicely when the weather is good, but also for this a special license is required.

-Costs of the beverage and catering license: €400 (just once).

https://gemeente.groningen.nl/drank-en-horecavergunning-aanvragen

-Costs of a terrace license: €139,70 (just once) https://gemeente.groningen.nl/terras-aanvragen-en-lokaliteiten-wijzigen

Music rights: All the music contains music rights, so if the owner wants to play music in the hotel there must be permission. For this approval a license can be retrieved from Buma and Stemra who are taking care of the licenses. When all the permits and licenses are obtained it is time to organize the payment transactions. It might be useful to start a business account to have better insight in the division between the business and the personal bank accounts. The last step that needs to be fulfilled is about risk. Since there is a huge chance of recruiting personnel a risk inventory and –evaluation (RI&E) must be drawn up. In this inventory the current company risks are analyzed and a plan is shown how to minimize these risks in the future.

-The costs of the music rights license is depending on the size where the music is hearable. For a hotel these costs are starting from €739,09 (for a surface 101 till 200 square meters) and might raise to €1398,64 for surfaces from 401 square meters to 500 square meters. Costs are made only the first time when this license is applied.

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16 risk inventory and evaluation need to be changed as well and this involves extra costs.

www.arbo4all.nl/index.php/ri-e

For Airbnb hosts, the municipality of Groningen does not have any special regulations. In Amsterdam the municipality made up a list of regulations where the Airbnb hosts must adhere to. This list consist of the following regulations:

- First of all, every time the Airbnb location is rented it has to be reported at the municipality of Amsterdam

- The building should be used only for living - Only rental by main occupant

- Only incidental rental

- The maximum nights of rent per calendar year is 60 - Paying tourist and value added tax

- Permission from the owners association (Vereniging van eigenaren) or lessor - Maximum of 4 people a night a house

- No nuisance

- A fire-safe home or houseboat

In Amsterdam they consider extra offering of breakfast (paid) not as Airbnb but as Bed & Breakfast wherefore different rules are applied.

Taxes

All the municipalities in the Netherlands can decide on their own which prices they will ask for the tourist taxes, which creates big differences between cities. Some municipalities even have a zero-tax policy. Tourist tax in the municipality of Groningen is one of the highest (5th_{place) in the}

Netherlands. All the tourist taxes are shown in table 2. ( http://www.dvhn.nl/groningen/Veel-toeristenbelasting-op-hotelkamers-in-Haren-en-Groningen-22230419.html)

Tourist tax

Age Price Age Price

Hotels <18 €1,55 >18 €3,15

Pensions & Bed and Breakfasts <18 €1,15 >18 €2,30 Youth hotels, hostels, camping

places and vessels

<18 €0,70 >18 €1,45

Figure 2. Overview of tourist taxes in the municipality of Groningen (Source:

https://noordelijkbelastingkantoor.nl/wp-content/uploads/2018/01/BELASTINGTARIEVEN-2018_V3.pdf)

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17 jurisdictions Airbnb will choose to count and pay tourist tax to the local municipality. Tourist tax is in every jurisdiction determined in a different way and we are working hard to create fair rules for all the renters in the world” (

https://www.airbnb.nl/help/article/376/what-legal-and-regulatory-issues-should-i-consider-before-hosting-on-airbnb).

Value added tax (VAT) and income tax

When you are an entrepreneur you need to pay value added tax (VAT) over the revenue you made. Next to the VAT, the entrepreneur has to pay income tax over all the profit made. Since 2012 is the VAT in the Netherlands 21%, however overnight stays belongs to the category of 6% VAT. On the website of the tax authorities it is mentioned that renting out your own house or apartment also belongs to the category “entrepreneur” which requires the people to pay the value added tax (https://www.belastingdienst.nl/wps/wcm/connect/bldcontentnl/belastingdienst/zakelijk/btw/tarie ven_en_vrijstellingen/diensten_6_btw/logies/logies).

The more money a person earns, the more income tax has to be paid. The first box goes up to 20.142 euro. When people are in this category they have to pay 36,55% income tax. When their income exceeds this, they will come in a higher ranking which automatically means that more tax has to be paid. When people are renting out an Airbnb and there earnings are 100 euro they already should pay 36,55 euro to the tax authorities for income tax.

Hotel Airbnb Licenses Chamber of Commerce √ X Terrace license √ X Beverage license √ X Music license √ X Risk inventory √ X Permits Environmental permit √ X Operating permit √ X HACCP certifcate √ X Hygiene code √ X Taxes Tourist tax √ ? Income tax √ √

Value added tax √ √

Table 3. Overview of licenses, permits and taxes both systems have to fulfil.

With the first part of the findings we can conclude, and see from table 3, that the rules and

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19

Interviews

In the next paragraph all the information obtained via interviews is described. For the privacy of the participants from Airbnb and hotels, their names are hidden and replaced by Airbnb person X, Y and Z and hotel manager X and Y. I am aware of the little amount of interviews and the little amount of information from the interviews. First of all, many people just did not want to be interviewed about this topic. Secondly, it is difficult to come into contact with Airbnb hosts as messages that contain personal information (like email address, phone number) are automatically blocked. When you have found someone that wants to be interviewed, it is still the question if the person wants to provide all the information on the questions. A third reason not to interview more hotels is because all of them are fulfilling rules and regulations, otherwise they would have been closed already. This means, that there is only one point which creates different answers for the hotel businesses: opinions about the rules and regulations.

Interview with the municipality of Groningen

In the interview with Ms. Bronsema of the Spatial Planning department of the municipality of Groningen it became clear that Airbnb in Groningen is not a big issue yet. In May 2018 there were around 300 listings on the Airbnb website for Groningen whereas Amsterdam has over 2000 listings. Next to the number of listings, Groningen usually does not face (big) problems from Airbnb guests. When Airbnb is growing, the municipality will check if there is a need to introduce a maximum of 60- or even 30 rental days a year.Ms. Bronsema thinks that Airbnb will definitely grow in the coming years and is going to create more nuisance. At the moment the municipality is just looking what Amsterdam is doing with Airbnb, but they are not actively talking with them to prevent the same struggle since there is no need for this. If Airbnb is extremely growing in the coming years and

creating problems the municipality of Groningen will actively talk with the municipality in Amsterdam since Amsterdam is the precursor for everything around Airbnb. This is also the case for the yearly policies about spatial planning in which the developments around Airbnb are taken into account every year. When needed the policies will be adapted to the developments of Airbnb.

At the moment no specific rules are made for Airbnb rentals, people just have to follow the rules of rent policies (to pay rent if they are renting an apartment). There are for example rules for the people who are renting rooms: they cannot rent out rooms to other people if they do not have permission from the house owner. People that have bought a house are able to sub-rent their rooms. However, obviously everyone who is making money with renting out Airbnb locations has to declare this as income at the tax authorities.

We can conclude that the government does not see Airbnb as a problem. However, there are already 300 active listings in Groningen that do not pay income tax or value added tax (VAT). If we take this all together this would yield the government / tax authorities quite some money.

Interview with Airbnb person X

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20 The interviewee was asked if X is paying tourist tax as the municipality announced that 83 addresses in Groningen are paying this to the municipality. Person X told that tourist taxes have never been paid so far. X is mentioning that there are no clear rules for tourist tax and it is stated nowhere that Airbnb hosts have to pay tourist tax. The interviewee is also not paying income tax. The reason for not paying this is that the tax authorities do not have checks and enforcement, so the chance of getting fines is nil. If the interviewee would host on Airbnb for a living, then everything would be declared at the tax authorities. The reason for this is that it would be strange if X was living in a big house, driving in a car but not working. Besides this, X mentions that because of the cheaper Airbnb services many extra tourists are visiting the city of Groningen which creates benefits as well.

Concerning the question about the fair regulations, the interviewee mentioned: The rules are quite fair in my opinion if I look at the beverage and music rights for example. I do not give them alcohol, they can take it for themselves in the shops. But I do see huge differences in the qualifications for the hygiene regulations and I am aware that hotels have to fulfil those standards. So maybe it is an option to equalize this more. For the fire regulations, the house / building owner is the responsible person, so that person has to meet the regulations imposed by the municipality and fire brigade. When a tourist wants to live in a safer building he can search for rooms / houses where smoke alarms and fire extinguishers are included in the apartment. This can easily be added on the website of Airbnb.

X told the following about the question of tax regulations: At the moment there are no clear rules for an Airbnb host. It is stated nowhere what Airbnb exactly should pay for tourist tax and also for the income tax it is not really clear under which kind of income this has to be filled in. If I am making a new advertisement on the website of Airbnb a message pops up with: Please read the regulations of your municipality. I think it would be better if there comes a clear list which includes how much tourist tax you have to pay and everything you earn for renting out your room / apartment has to be declared at the tax authorities! However, it would be even better if Airbnb would start implementing a system that will make sure guests automatically pay the tourist tax and that Airbnb is forwarding these taxes to the municipality. This will take away a lot of ambiguity for the Airbnb hosts and creates more fairness for the hotel owners.

We can conclude that person X is aware of the rules and regulations but is not paying anything to the tax authorities. Reason for this is that the checks and enforcement are really low so that the chance of being caught is almost nil.

Interview Airbnb person Y

Person Y: I started with Airbnb when friends of mine talked about this concept. This made me think of starting my own business and a few moments later I created a listing on the website of Airbnb. I am an active host since August 2017! The room prices are automatically decided by Airbnb and I think that it is a fair price.

Person Y does not think that Airbnb is peeking at the moment, it is even the case that it will grow much more in the coming years. The reason person Y comes up with this statement is because Airbnb is usually cheaper than hotels and the rooms/houses are located in a better and cosier environment than hotels are. The thing is that most people are not used to Airbnb so they prefer to book a hotel instead of visiting an Airbnb.

Person Y does not want to tell anything about paying taxes and neither if the owner of the building gave permission for renting the room via Airbnb. So we can not draw conclusions as their simply is not enough information.

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21

Interview Airbnb person Z

Person Z got aware of Airbnb via friends, too. When they talked about making good money via renting their rooms / houses, Z was interested as well. Z came up with the same reason as X and Y to rent via Airbnb: You can make seriously good money! Person Z started pretty recently with the business, the listing is active since the beginning of 2018. The price of the accommodation is decided as follows: the normal rent price + 100 euro extra per weekend (Friday-Sunday). However, Z is mentioning that this price is still cheaper than most hotels and that this price is not going to exceed the hotel prices ever.

Furthermore, person Z thinks that Airbnb in the city of Groningen will grow in the coming years. Reasons behind this theory is that there is a huge lack of housing at the moment and more and more students are attracted by the university. In addition, Groningen is getting more attractive to tourists so this will increase in the coming years as well.

Z told the following about paying taxes: “No, I am not paying tourist tax to the municipality, I did not even know that this was necessary”. When I told person Z that this is not necessary but that the municipality of Groningen is investigating if it is possible to include this in the Airbnb system, Z responded with: I think that this creates a fair rule. All the tourists that are coming to Groningen are using the facilities, so they all have to pay for this! Z also did not know about the income tax as this was not mentioned on the website of Airbnb. Z: When I hear this, I think Airbnb should come up with clearer rules as it is now unclear for many people what rules they should abide by. And of course it makes it even more difficult when all the municipalities are handling different regulations. Person Z is not aware of all the regulations that hotels have to fulfil but Z is mentioning that Airbnb is the future regarding short period stays.

Interview hotel manager X

The first question asked to the hotel managers was about their view on the sharing economy and Airbnb in general. Manager X responded with: “In my opinion these systems are unfair to each other because there is no concrete regulation. The current legislation is unable to come up with clear regulations that both systems have to fulfil”. X wanted to add that it is obvious that people are checking how far they can go, but this is not okay! Regarding the government is not doing anything to prevent this problem.

All the costs a hotel has to make to install a central fire alarm system and to maintain this and other safety installations are high. So hotels are paying a lot of money to guarantee the guests safety whereas Airbnb hosts usually pay nothing for this. Because of this, Airbnb hosts can ask way less money from the guests. So this difference makes it unfair.

Hotel manager X said: “The municipality of Groningen should come up with equal regulations for all the systems”.

Interview hotel manager Y

Hotel Manager Y answered the first question about the impression of the sharing economy in general with: “In my opinion it is a nice alternative and a good concept. For me, as a user I experienced a lot of benefits from Airbnb”. Manager Y thinks that they can compete with hotels but Airbnb are

focussing on a slightly different group of customers. This also creates differences in requirements for these different groups and thus it is not a big competitor for the hotel business. However, Airbnb is fulfilling a big wish for a large group of people.

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22 Groningen as Airbnb hosts usually are really connected with the city as well and can provide the guests tips where to go and what to explore in Groningen and the surrounding cities. This can create extra benefits for the city of Groningen and the retail trade. Next to this, it can generate extra people that are visiting special events.

About the regulations Airbnb and hotels have manager Y is clear: “Airbnb and hotels are delivering the same service: Offering a shelter to tourists! This means that both should have the same regulations”. However, I am quite sure hotels have much stricter regulations.

Hotel Manager Y is not familiar with the regulations about the taxes but assumes that tourists at all times should pay the tourist tax, no matter if they stay in an Airbnb or in a hostel. This is thus, at the moment not the case as most Airbnb hosts do not pay tourist tax to the municipality. For the other tax regulations hotel manager Y has no idea as well.

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23

Conclusion and limitations

To give a conclusion for this master thesis, the main research question and the sub questions will be answered. These questions were created as follows:

Do the existing regulations lead to, cost differences and thus to, unfair competition between hotel and people sharing their accommodation via Airbnb?

Sub questions:

- Which regulations are applied to the hotel industry? - Which regulations are applied to the sharing economy? - Do these regulations lead to cost differences?

- Should municipalities come up with stricter regulations for the shared economy? - Is there a lack of enforcement from the institutions to check out the sharing economy?

To come up with an answer for the main research question, first the sub questions will be answered. If we take a look at both regulations we can conclude that hotels have to pass strict rules primarily in the field of hygiene and (fire) safety. This differs completely for Airbnb listings. It is not even

obligatory to have a smoke alarm or a fire extinguisher. This is optional to add in the room / house. For hotels this needs to be alright, otherwise they cannot welcome guests. Besides this point, it takes way more time for people to start with their hotel business while people that begin with Airbnb can make instant money.

At the moment there are no exact rules for Airbnb hosts if they should pay tourist tax and how they should pay this to the municipality. At the moment there are some addresses in Groningen that do pay this tax (83 addresses), but not all of them are yet doing this. Maybe in the future this can be implemented in the Airbnb system as that all the tourists that are making use of the facilities will pay for these benefits.

The hotels are obviously paying income and value added tax as this is required from the tax

authorities, if hotels do not pay these taxes there will be huge fines and eventually their business can be closed. From the interviews we can conclude that not everyone on Airbnb is paying income tax and value added tax. Reasons for not paying this is that the tax authorities will have a lot of

difficulties to find out how much, people earned with renting their room, where the people actually live (as the exact address is hidden by Airbnb) and the offer of rooms varies day-by-day. When all the regulations are taken into account then we can conclude that there are cost differences between hotels and Airbnb.

As derived from the interviews we can say that the Airbnb hosts are okay with the regulations that Airbnb has to meet. Two interviewees told that they have nothing to do with music rights and beverages and hotels probably earn extra money with that service. For the hygiene and fire safety the persons admitted that the rules are not equal and should be more equalized in the future. In my opinion, Airbnb and municipalities should make stricter rules regarding the safety of the guests. They should oblige every Airbnb to have a smoke alarm and / or a fire extinguisher. People from the enforcement of the municipality should work together with Airbnb to get information about the addresses of hosts to check if the listing fulfils the regulation. Also for the tourist, income and value added tax all the institutions should make stricter rules to align everything. Next to making stricter rules Airbnb should be more clearer in what hosts have to pay to respectively municipality and tax authorities and to which regulations they have to meet.

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24 are going to work together, stricter rules can be set and the enforcement of the regulations can be checked more easily and more often.

To answer the main research question: Do the existing regulations lead to, cost differences and thus to, unfair competition between hotel and people sharing their accommodation via Airbnb? We can conclude that, at this moment, it creates unfair competition. This is partly because it is not clearly stated what Airbnb hosts have to pay, the local government does not recognize the problem that Airbnb is creating and the enforcement level is low.

The institutions are looking for possibilities to come up with stricter rules to make it more equal in the future.

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25

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28

Appendix 1: Interview guide

Interview Airbnb Host

1.

H

ow did you hear of Airbnb?

2. Did you first start hosting or traveling? 3. Why are you an Airbnb host?

4. How is the price of your home(s) determined?

5. Do you check profiles of the persons that want to rent your home? What do you take into consideration before deciding hosting someone?

6. How do you communicate with the guests before their stay? 7. Have you had trouble, by hosting people?

8. A) Do you think that Airbnb is already peeking in Groningen? B) Do you think Airbnb will grow in the coming years?

9. Do you think there is fair competition between hotels and Airbnb on legislation? ** 10. Do you think there is fair competition between hotels and Airbnb on taxes? ***

Interview hotel managers

11. What is your opinion on Airbnb and the shared economy in general?

12. Do you think Airbnb is impacting the hotel industry in Groningen? Are they competing in the same field?

13. A) Do you think that Airbnb is already peeking in Groningen? Or will it be more popular in the coming years?

14. Do you think Airbnb is an advantage to the economy? *

15. Do you think there is fair competition between hotels and Airbnb on legislation? ** 16. Do you think there is fair competition between hotels and Airbnb on taxes? ***

17. Should the municipality of Groningen come up with stricter rules for Airbnb? If yes, what kind of rules?

Questions 1-7,9,10:

(Ikkala, T., & Lampinen, A. (2015, February). Monetizing network hospitality: Hospitality and

sociability in the context of Airbnb. In Proceedings of the 18th ACM conference on computer

supported cooperative work & social computing (pp. 1033-1044). ACM.)

Questions 8, 11-15:

Ward, A., & Linehan, M. An Investigation into the Impact of Airbnb on Hotel Accommodation in the Cork City Area. Tourism and Hospitality Research in Ireland, 95.

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29 ** ‘We have just come through the process of Fáilte Ireland inspections for their new classification system. The inspectors pick holes in things and you have to spend money to make changes and to get approval.’ (General Manager, E, Cork City centre, 4 star hotel).

***‘In addition to not having any regulations or quality control there is also a lack of local

governance. Not having local governance or regulations in place is a worry.’ (General Manager, H, Cork City centre, 4 star hotel).

From a former interview in Ireland, about the competition and the differences between Airbnb and hotels, the concern about legislation and taxes constantly came back. Given that there are currently no quality control mechanisms in place for Airbnb, at least not on a parity with the rest of the Irish hospitality industry, it was strongly felt by many of those interviewed that this could result in

negative experiences for visitors to Ireland and, thus, could potentially tarnish the reputation of Irish tourism internationally.

‘Here in Ireland we have a reputation of doing things well…if all of a sudden we are going [sic] unregulated it is going to have an impact.’ (GeneralManager, D, suburban, 4 star hotel). Respondents also noted the difficulty experienced by hotels in making profits, as margins in hotels

are constantly being eroded with rising costs of rates and insurance, as well as health and safety requirements. All interviewees spoke about the ‘very good profit’ those operating Airbnb are gaining: ‘Why should someone down the road putting someone up for €50 or €60 a night make a profit of €45

while I put someone up for double that and I am still only clearing €10 [sic].’ (General Manager, C, suburban, 4 star hotel).

‘Virtually anybody can open an Airbnb and, in a lot of cases, they have no standards and no regulations. We could be competing with Joe Blogs next door who is willing to charge very little, and I