By Gerry Shih
SAN FRANCISCO (Reuters) - Online home-rental service AirBnB must pay a 14 percent tax on rentals booked in San Francisco, the city's treasurer said in a ruling with potentially costly ramifications for the high-flying startup.
The meteoric growth of the four-year-old website, which allows hosts worldwide to list to offer anything from furnished homes to spare couches, has given it a recent valuation of $1 billion -- according to its latest round of funding -- and threatened to upend the traditional hospitality industry.
But it has repeatedly run afoul of authorities in cities like New York and San Francisco that levy taxes on -- or prohibit outright -- short-term rentals, raising questions about how it will navigate local regulations as it continues to grow.
Since 1961, hotels in San Francisco, one of the world's leading tourist destinations, have paid a "transient occupancy tax" -- currently set at 14 percent of the booking's value.
San Francisco treasurer Jose Cinder's Tuesday ruling that the tax also applies to AirBnb and its hosts could lead to rate hikes for the website's customers and hurt business.
"Any space that is rented is included under the tax," said Greg Kato, a spokesman for Cisneros. "All we have done is to offer clarity on what everyone's obligations are."
Internet players big and small are increasingly drawing the attention of tax officials. Amazon.com Inc fought for years before submitting to sales taxes in multiple U.S. states.
In a statement, AirBnB called the ruling "disappointing."
"Legacy laws, like San Francisco's 1961 Transient Occupancy Tax, were written long before the Internet or any of these activities were conceived," the company said.
"Innovative new models that allow San Franciscans to generate additional income should be addressed by innovative laws and policies — not stifled by 50-year old regulations."
The controversy has been keenly felt in San Francisco, a city with some of the world's highest housing prices.
Last week, a hearing held by Cisneros on the issue drew dozens of AirBnb hosts who said the service provided much-needed extra income, as well as customers who relied on the site to travel affordably.
But the hearing also drew critics, including tenants' rights activists who argued that the service nudges up rents in the city by diminishing the supply of available rooms.
According to Census data, there are some San Francisco neighborhoods with more homes listed as short-term vacation units than there are available for rent, the Bay Citizen reported last year.
The controversy has drawn in Ed Lee, the tech-friendly mayor of San Francisco who has vigorously backed AirBnb and has drawn criticism for his stance. The startup's investors include Ron Conway, the prominent angel investor who steered hundreds of thousands of dollars into Lee's election campaign last November.
Rental services like AirBnb, Lee said at a panel discussion on Tuesday, help San Francisco "utilize our strengths as a great tourist city" and makes staying in the city affordable for "more folks to experience the wonders of our city."
"The mayor's job is to go bat for the city, and not one particular interest that's politically supportive of him in the November elections," said Aaron Peskin, the chairman of the San Francisco Democratic Party.
AirBnb's travails reflect the growing pains of the hot startup sector known as the "collaborative economy," in which individuals offer services that compete against established industries, including hospitality and transportation.
Uber, the livery service backed by venture firms like Benchmark Capital, has been threatened by transportation authorities in San Francisco and Washington, who say drivers who sign up to carry passengers booked by Uber are operating illegally as unlicensed taxi drivers.
With bookings now occurring in more than 19,000 cities worldwide, AirBnb has in recent months focused on navigating U.S. regulatory hurdles that could stifle the company's growth.
In September 2011, AirBnb hired Molly Turner to head its public policy efforts. In San Francisco, the company has employed a top local lobbyist, Alex Tourk, and relied on influential financial backers like Conway to sway city policy.
"We want to have ongoing policy discussions in all jurisdictions," said AirBnb spokeswoman Kim Rubey. "We think there are ways to support this burgeoning economy."
(Editing by Phil Berlowitz)