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How Uber’s tax calculation may have cost drivers hundreds of millions

  • In May, Uber admitted to taking excessive commissions out of the fares of its New York drivers, who are independent contractors, and promised to make amends.
  • Increasing evidence, however, suggests that the company may have shortchanged the drivers by far greater sums than it acknowledged.
An Uber SUV waits for a client in Manhattan a day after it was announced that Uber co-founder Travis Kalanick will take a leave of absence as chief executive on June 14, 2017 in New York City.
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An Uber SUV waits for a client in Manhattan a day after it was announced that Uber co-founder Travis Kalanick will take a leave of absence as chief executive on June 14, 2017 in New York City.

Amid the turmoil at Uber that resulted in Travis Kalanick's stepping down as chief executive, the company announced a series of changes in late June aimed at improving its drivers' work experience, including a new tipping option in its passenger app.

But even as Uber makes a concerted effort to win over drivers, it has not acknowledged all the ways it may have squeezed them in New York State.

In May, Uber admitted to taking excessive commissions out of the fares of its New York drivers, who are independent contractors, and promised to make amends. Increasing evidence, however, suggests that the company may have shortchanged the drivers by far greater sums than it acknowledged.

The following are signs that the ride-hailing service improperly deducted what could amount to hundreds of millions of dollars from drivers' earnings to pay taxes that, under New York State law, are technically due from passengers:

• Uber receipts from other states reflect a tax accounting at odds with the company's justification for deducting sales tax from the fares received by its New York drivers.

• Language from Uber's recent contracts indicates that the company should not have taken the taxes from those fares.

Uber has insisted there was nothing improper in its handling of the taxes. Here is a look at the law and the evidence on the question — including the way a major competitor, Lyft, deals with the same issue.

How is Uber deducting the sales tax?

Under New York State law and regulations, passengers must pay:

An 8.875 percent sales tax on each trip they take using a ride-hailing service like Uber in New York City.

• A 2.5 percent surcharge for a state workers' compensation fund.

The receipts of Uber drivers suggest that until Uber changed its contract in May, this money typically came out of drivers' earnings. Take, for example, a recent Uber trip in Brooklyn.

How does Uber explain this?

The subtraction of taxes from the fare a driver receives does not in itself demonstrate that drivers were paying the tax. Uber officials argue that the $19.16 metered fare already included the tax — the same way a $1 slice of pizza includes tax — and that it was therefore proper for Uber to collect the tax by subtracting it from the fare that drivers receive and remitting it to the government.

In 2015, Uber began reflecting this approach on its passenger receipts as well, so that a passenger would see that the fare paid included sales tax and the workers' compensation surcharge. (In a quirk of Uber's system, the sales tax shown has sometimes been calculated on a passenger fare generated before the ride that doesn't necessarily match the metered fare — as appears to have happened in this case.)

What's the problem with Uber's explanation?

In practice, the way a company displays a tax on its receipts doesn't demonstrate one way or another whether a driver or a passenger actually pays the tax.

To determine who's really paying in a case like this, one must determine whether the price the company charges passengers truly includes the tax. If it doesn't, then the passenger isn't paying the tax — the driver is, regardless of what the passenger receipt indicates.

There is growing evidence that Uber's fares in New York were not tax-inclusive.

The receipt from this trip from Reno to Carson City shows a $1.36 "transportation recovery charge" — that is, the tax — added on top of the $42.67 fare. Both were paid by the passenger.

This stands in stark contrast to the way Uber has operated in New York, where the company would typically have deducted the tax from the $42.67 fare the driver received, and the passenger would not have had to pay an additional amount for taxes.

Receipts from Rhode Island, another state with a sales tax, showed that Uber added the tax on top of the fare the driver received there.

Uber declined to comment for this article. The sales tax issue is being litigated as part of a lawsuit against Uber filed by the New York Taxi Workers Alliance, a driver's advocacy group.

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Another test: how Uber accounts for trips on which there is no sales tax.

New York levies the tax only on trips that begin and end in the state; a trip that begins in New York and ends in Connecticut, for example, would not be subject to the tax. Yet Uber calculated the overall fare using the same base fare and the same time and distance rate on those trips, suggesting that the tax was not included.

Compare two trips using Uber's black car service from August 2016, one beginning and ending in New York, and the other from New York to Connecticut. The two trips included the same fare components:

• A base fare of $7.

• $3.75 per mile.

• 65 cents per minute.

But Uber deducted no sales tax from the latter trip.

Aug. 14, 2016

Roslyn, N.Y., to Manhattan

• Total = $179.10

Uber deducted $13.91 in sales tax and $3.93 for the workers' compensation surcharge from the total fare.

Aug. 3, 2016

New York to Old Greenwich, Conn.

• Total = $180.48

Uber deducted no sales tax. (It deducted $4.30 for the workers' compensation surcharge because that is still assessed on interstate trips.)

Taken together, the two receipts suggest that Uber's base fare and its rates for time and distance did not have a tax baked into them. Otherwise, why would Uber have used the same rates when there was no tax to be assessed?

When asked about this, Uber has said that tax was in fact included in both fares, and drivers simply received a windfall payment on trips that ended in another state because no tax was removed from the fare.

What does Uber's contract say?

Uber's nationwide contract is perhaps the strongest indication that the company improperly made drivers rather than passengers bear the burden of the sales tax mandated by New York State.

Before Uber updated it in late May, the contract appeared to give Uber permission to remove only its commission (known as the service fee) from the fare its drivers receive, stating that "Uber agrees to remit, or cause to be remitted, to customer on at least a weekly basis: (a) the fare less the applicable service fee." ("Customer" is the term Uber typically uses in its contract to refer to drivers; passengers are referred to as "users.")

Until 2014, the contract defined the fare as "the amount (including applicable taxes and fees) that the transportation company is entitled to charge the user for the ride, based on the recommended fares for the city."

This version appears consistent with Uber's tax-inclusive explanation — it is essentially the $1 pizza slice approach.

But in November 2014, Uber made two changes to its contract that, together, made its meaning more ambiguous. First, it added language saying that some jurisdictions might "require taxes to be imputed in the fare" — further supporting the tax-inclusive explanation. Second, it revised its definition of a fare to omit the parenthetical phrase "including applicable taxes and fees," suggesting that the company was rethinking whether the fare should always include taxes in jurisdictions that levy them.

The two changes seemed to be at odds. But when Uber revised its contract in December 2015, it appeared to resolve the ambiguity, replacing the "imputed" language with a reference to taxes "calculated on the fare." At this point, the contract defined the fare as including only a base fare and a time and distance component, with no mention of taxes.

Collectively, the changes made in November 2014 and December 2015 appeared to indicate that the fare did not include taxes, and that the only amount Uber could subtract from this fare was its commission. The contract appeared to preclude the subtraction of taxes. But in New York, Uber deducted taxes and the workers' compensation surcharge from the fares that drivers received.

In late May of this year, Uber changed its contract again, indicating that the driver fare would be calculated separately from what the passenger pays and that taxes only come out of the latter. The changes did not significantly increase the amount that drivers earn from each ride in most cases, because Uber also lowered drivers' metered rates, but the changes appeared to remove the basis for arguing that drivers were paying the taxes.

How much did Uber shortchange drivers if it improperly subtracted taxes from their earnings?

According to data from New York City's Taxi and Limousine Commission, Uber dispatched more than 125 million rides in the city from the beginning of 2015 to mid-March 2017. Assuming an average fare on those trips of at least $15, Uber would have deducted over $200 million for taxes and the workers' compensation fund surcharge from drivers during that time.

The assumption of an average fare in excess of $15 appears reasonable: Uber calculated that the average fare for its lowest-cost service, Uber X, was over $27 in September 2014; it has dropped prices by about 15 percent since then. Uber also has higher-cost services, like Uber Black and Uber SUV, which have substantially higher fares on average.

(The practice that Uber vowed to remedy, involving commissions, was a lesser issue. On a $20 fare that Uber said included roughly $2 in taxes, the company was taking its commission on the full $20; in late May, it conceded that it should have taken its commission on roughly $18, the amount net of taxes. What Uber does not concede is that it improperly took $2 out of the driver's pocket to cover taxes.)

Do Uber's competitors do the same thing?

Uber's largest competitor, Lyft, deducts 11.4 percent from the fares received by drivers in New York, which appears to largely cover the amounts owed for the sales tax and workers' compensation fund. But Lyft has written its contract to essentially allow this. Lyft's current contract refers drivers to a commission schedule in which the company takes a 20 to 25 percent commission but adds an 11.4 percent "administrative charge" in New York.

In a 2014 email to New York drivers announcing the additional charge, which appears to have been 10 percent initially, Lyft wrote: "NYC's regulations have different requirements than anywhere else, since they collect both an 8 percent local sales tax as well as a 2 percent fee for the Black Car Fund. To cover these costs, we will be adding 10 percent to Lyft's commission."

The increase in the commission to largely offset taxes suggests that drivers are effectively paying most of the sales tax, even if they don't do so directly. But Lyft says the law allows this as long as it imposes the charge transparently.

"Our driver agreement, which we've consistently abided by since entering the New York market in 2014, clearly lays out what commissions and fees apply to driving on the Lyft platform," said Adrian Durbin, a Lyft spokesman. "We do not collect sales tax from drivers."

Unlike Uber, Lyft deducts the additional 11.4 percent from what drivers receive even when there is no sales tax — as when a ride begins in New York and ends in Connecticut. This would appear to be a more egregious deduction, since it amounts to a transfer from the driver to Lyft's bottom line, with no tax rationale to support it. But Lyft denies that the 11.4 percent charge funds tax payments specifically, as opposed to offsetting a number of costs.

Finally, like Uber, Lyft has accounted for sales tax differently in other states than it does in New York. In some other states that levy a tax, Lyft has assessed the tax on top of the fare the driver receives, making clear that the passenger pays it, and raising questions about the accounting in New York.

What are city and state authorities doing?

Allan Fromberg, an official with the New York City Taxi and Limousine Commission, wrote in an email that the agency had been examining the way Uber deducts the state-mandated sales tax and workers' compensation surcharge from fares, as well as the way the company took its commission. Mr. Fromberg said the inquiry had been going on for weeks before Uber's acknowledgment in late May that it had erred in how it took its commission.

A representative of the New York State Department of Labor, when asked in May whether the department had looked into improper sales tax deductions or planned to do so, responded that the department "has not received any complaints on this issue."

Assemblyman Robert Rodriguez, who represents East Harlem, has written to the state attorney general and the state Department of Taxation and Finance calling for an investigation into Lyft's practice of deducting 11.4 percent from driver earnings on rides that begin in New York and end out of state.

When asked about the possibility that Uber and Lyft had improperly deducted sales tax on in-state rides, he said that, if true, "that's a much higher level of magnitude." He said that state and city regulators should look into the handling of taxes and that "if it hasn't been done correctly, they" — Uber and Lyft — "should fix it and make amends."