A driver displaying Lyft and Uber stickers on his front windshield drops off a customer in downtown Los Angeles.

In any major U.S. city today, hailing a ride straight from a cell phone, booking a short-term stay in a complete stranger’s house for vacation, or even soliciting help through an app to install new bookshelves doesn’t seem so out of the ordinary. Companies such as Uber Technologies Inc., Lyft Inc., Airbnb Inc., and TaskRabbit Inc.—all part of the so-called gig economy—are online and app-based service broker platforms that anecdotally seem to be an increasingly critical component of life in the big city. These companies and the people they hire via individual contracts may not yet be a large part of the workforce, but their ascent raises a plethora of questions and concerns about the compensation of their workers, racial discrimination and bias, and antitrust compliance. Most recently, researchers and policymakers alike wonder how these companies fit into the current tax system.

A new report from the Institute on Taxation and Economic Policy unpacks part of this question, looking at what the gig economy means for individuals’ state and local taxes. With a focus on Uber (a transportation network company) and Airbnb (a rental marketplace), the report surveys ways in which gig companies and their workers fit (or don’t fit) into three key state and local revenue sources, including some with important revenue implications.

The first revenue source discussed in the report is the consumption tax, which includes sales, lodging, and gross receipt taxes. Currently, similar to most other service businesses, Uber and other transportation network companies are exempt from sales taxes in many states. But in certain states where tax codes have been adjusted to require taxis to pay sales or gross receipts taxes, companies such as Uber and Lyft express disagreement with the law, asserting that these taxes do not apply to them or their drivers. In contrast, Airbnb has been encouraged to expand its state- and (sometimes) local-level tax collection practices of sales and lodging taxes, but so far has only done so in 18 states.

The second revenue source is the income tax. Under Uber’s business model, drivers are contractors, which makes them “small business owners for tax purposes,” according to the report. As a result, drivers are responsible for paying their own payroll taxes (Social Security and Medicare), in addition to paying their federal, state, and local income taxes in a timely manner. While rental income from Airbnb is included in the income tax base, a previously little-known tax break exempts hosts from paying taxes on rental income—if the property was rented for two weeks or less. Despite being a major company, Airbnb is effectively accessing exemptions available to nanoscale landlords.

The third and final channel that the report discusses is the property tax, which only applies to rental platforms. Given the considerable variation in property tax laws for different types of properties within localities, hosts under companies such as Airbnb can take advantage of property tax reductions or homestead exemptions.

Across these three channels, it is clear that state and local tax systems struggle to appropriately incorporate the gig economy. And, unfortunately, the result is significant tax revenue losses in some cases. A study by AllTheRooms.com, for example, finds that roughly $260 million in state and local tax revenues from Airbnb were lost in 2016 relative to what would have been collected.

To better incorporate the gig economy into the current tax framework, policymakers should re-evaluate existing tax systems with particular attention to how these firms fit in. This review would include, for example, comparing similar services provided by gig companies and traditional companies to ensure that they face the same taxes. Another possibility would be to recapture individual tax incentives such as the exclusion of rental income at the firm level when their use by gig companies is inconsistent with the original motivation. As the gig economy and its workforce grows, it becomes vital to consider how to tax it.