America’s transportation market has changed dramatically over the last decade. From being able to call a cab anywhere to renting scooters to avoid using cars altogether, Americans have more options to get around than ever before. In a robust, competitive transportation market, these new options fit right in.

Yet the competition is far from perfect. It’s been a century since the automobile was invented, meaning generations of lawmakers have had the opportunity to pass legislation to tax and regulate all kinds of transportation companies, ranging from truckers to rental car firms. Yet for the latter, existing regulatory regimes struggle to accommodate new types of firms entering the industry.

Today’s lawmakers are facing new pressures to clarify whether and how existing rental car taxes apply to new peer-to-peer entrants. They should seize the opportunity to do just that.

Most states have some form of surtax on rental car transactions, with the highest being 10 percent or more. Some also allow counties or localities to tax rental car transactions as well. But in a changing marketplace where online rental platform companies have earned market share, it’s becoming unclear what constitutes a “rental car.” This definition matters for both consumers and companies renting cars, as it determines which taxes apply to the transaction and which regulations — including consumer protections — apply to the rental company.

There are three potential responses to this development. The first would be to accept (or codify into law) the status quo, with rental car surtaxes only applying to legacy rental car firms or new entrants that follow a similar structure. This would enshrine a two-tier rental car market that gives better tax treatment to individuals and firms that own fleets of cars listed on platform websites than to fixed-location legacy firms.

A second option would be to reconcile tax treatment of the rental car industry with the idea that taxes should be applied based not on the internal organization of the rental firm, but on how the cars are used. Doing so could open the door for allowing some kind of business expensing for those renting cars on peer-to-peer networks, which would level the field between legacy and peer-to-peer rental firms.

The third, and most complete, response would be to wind down rental car taxes entirely. The economic justification for rental car surtaxes rests on the notion that car renters are typically tourists and business travelers who do not pay local taxes and thus “free ride” on local road infrastructure. More cynically, the justification could be seen as an effort to tax out-of-state visitors to pay for services used by local residents. But the rental car market began decentralizing decades ago and is no longer dominated by tourists and business travelers. Thus, the rise of peer-to-peer rental firms only dilutes this justification further.

In a changing rental market that no longer consists of a handful of car lots centered around airports and train stations, the line between rental car transactions and other for-hire vehicle transactions has blurred. Only state policymakers can bring clarity by deciding how rental cars are to be taxed and regulated in their jurisdictions.

While reducing or eliminating rental car taxes would be the ideal solution, if that’s not achievable, lawmakers should reform rental car taxes to focus on the use and service at issue. Coupling this measure with solutions that allow individual car owners to expense or get a tax credit for the use of their cars on rental car platforms could create a win-win for all.

Image credit:  IJzendoorn