Uber is using a tax 'loophole' to make its rides cheaper

The mass transit I took to Brooklyn the other night came in the form of a gray Toyota minivan.

It sure didn't seem like mass transit: my colleague and I filled the middle row, and for most of the rush-hour journey crawling over torn up Greenwich Village streets and then coasting across the Manhattan bridge, it was just the two of us and the driver and four empty seats.

Comfortable, but hardly efficient.

I was in an UberPool, the ride-hailing company's service that picks up passengers heading in the same direction, adding extra pickups and drop offs - and generally some small talk -but saving everyone on board money. It felt like a fancy way to get to a part of the city well served by subways.

But here's what made it remarkable: I had managed to pay for this ride using pretax deductions from my paycheck, just like someone taking the subway or bus might.

This tax break, which Uber has been offering riders for just over a month, saved me about $5 on this $18 ride. But in a city teeming with buses and subways and cars and taxis, I wondered how it was possible the IRS was happy with me paying for an Uber as a kind of deduction, especially when taxis and other cars don't get the same treatment.

The answer has a lot to do with what the IRS considers "transit," and explains why I rode in such a big vehicle with so many empty seats. And it's the story of Uber finding a way to take advantage of a law written pre-internet to gain another edge over the city's traditional taxis.

How is this allowed?

Taxi riders don't get tax breaks. Nor do people who drive to work, except for their parking.

Regular carpools also get no break.

But for years, workers have been able to use pretax dollars to pay for subways and buses, and to save on bicycles, but it's only been since August 30 that UberPool riders in New York City could do the same.

It came through a deal between Uber and WageWorks, a company that administers transit benefits for employers (including Business Insider).

The government allows workers to set aside up to $255 each month to pay commuting costs, and New Yorkers using a WageWorks debit card can use those dollars to pay for trains and mass transit passes.

A few months back, Uber and WageWorks started talking about ways to let WageWorks customers pay for Ubers. They realized that through a quirk in the law, they might be able to call UberPool a "transit pass," just like a MetroCard is for the subway. But there was a problem. Uber drivers use lots of different kinds of vehicles, but only some qualify as "transit."

IRS rules - for reasons that long predate anything like Uber - mandate that pretax dollars be used only in vehicles that can seat at least six passengers. Only some Ubers are big enough.

"They can't just take their regular Uber fleet and any of those cars for UberPool," Dan Neuberger, WageWorks' president of commuter services, told Business Insider.

So Uber worked out a complicated backend solution. If you hail an UberPool on a smartphone, the app checks what kind of credit card you're using. If it's a regular card, it will send whatever vehicle is closest. But if you select a WageWorks card, it will only send vehicles with six or more passenger seats, even though it's unlikely Uber will fill them.

That's why I ended up in such a big vehicle with so many empty seats.

The Uber 'loophole'

When UberPool first offered shared rides in 2014, the company promised that no ride would ever seat more than four passengers at a time.

As late as October 5, the UberPool website promoted the four passenger max, implying at least two seats will always be empty on rides with passengers using pretax dollars.

A day after I asked Uber about this, the company removed the reference to "4 co-riders total" from the UberPool site.

A spokesman said the company meant to remove that promise in May when it started marketing UberPool as a good option during commuting hours. He said Pool rides may now have up to six passengers, though that will happen "somewhat infrequently."

Indeed, some rides will have just one rider: not exactly a "pool," or mass transit.

Uber can do this because the law is vague on this point.

"They just found a loophole," Jason Pavluchuk, government affairs director at the Association for Commuter Transportation, told Business Insider.

There's no rule governing how many people must be in the car at any one time to qualify. There's no rule that says it even has to be used for commuting to work, even though that's clearly the intent of the law. It's perfectly legal to use UberPool pretax coming home drunk from a bar on the weekend. All Uber has to do is make sure the car it sends has at least six seats.

"The intent of the law is commuting to and from work, but there's nothing illegal about using their transit passes in other ways," Pavluchuk said.

Uber said it's providing a convenient way for people going in the same direction to share a journey, and that the pretax commuter benefits will make it more affordable.

"We are opening up carpooling to more people, which is what these provisions of the tax code were written to encourage," said Matt Wing, Uber's New York-based spokesman.

However, traditional carpooling - say four co-workers cramming into a station wagon - gets no tax breaks.

"UberPool is kind of implying it's like a carpool, but really it's being declared as a transit pass," Phil Winters, a director at the Center for Urban Transportation Research at the University of South Florida, told Business Insider.

The big question is why the transit pass rule is so broad, and "whether it's an oversight for not including the other part of the commuter highway vehicle requirements," Winters said. "On purpose or an omission?"

That's a real question because, strangely, the IRS rules talk about van commuting in two different places. To use pretax dollars for a "vanpool," meaning you transport workers to and from an office, you have to meet a lot of requirements. The van, which the government calls a "commuter highway vehicle," must be used at least 80% of the time for commuting and at least half the seats must be filled.

But if you pay for the van using a "transit pass," nothing matters other than the number of seats. That's what applies to Uber and WageWorks.

It was originally for 'transit'

Ironically, the tax law benefiting Uber was originally written to get cars off the road.

Long before Uber, and years before even dial up internet, Larry Filler was on a mission to make transit competitive with driving. In the 1980s, as the head of TransitCenter, he became the father of TransitChek, the program that provides tax-free fare cards to workers. Before TransitChek, the only people who got a tax break were those who paid for parking at work.

His "focus originally was on transit, pure and simple," Filler told Business Insider. "And then it became very well used in New York and it was felt that it should be part of the tax code."

Inspired by his work in New York, Congress in 1992 passed a bill allowing workers to use tax-free dollars on mass transit, parking, and also vanpools. (Later, they added biking.)

"The primary purpose was to try to equalize the incentive between parking and driving and using transit," Filler said. "But we did add vanpooling because we saw that as another alternative to driving alone."

The idea was that vans would be used in cities where there weren't many other options. Seattle, for instance, is particularly into vanpools. But back then, no one anticipated anything like Uber.

Who benefits?

For most of my UberPool ride, it seemed like we'd be the only passengers. But once we crossed into Brooklyn, the driver took a turn in the wrong direction and we picked up Cassie Magzamen near the Brooklyn Navy Yard. It's a neighborhood with only one subway: the dreaded G train, New York's only line that avoids Manhattan.

So to make up the transit gap, Magzamen uses UberPool about three times a week.

She never thought of it as mass transit like a subway, but after considering the idea, realized, "it's becoming mass transit for me, unfortunately."

Magzamen is a freelancer. She didn't know about the tax break, and she doesn't qualify for it. And after a few moments, her views changed. In her mind, it's not in the same category as the subway. She was unsure whether workers should be able to deduct it from their wages. "Is that moral?" she said. "I don't think so."

"I think they're a direct challenge to our public transportation system," Lucius Riccio, a transportation expert at Columbia University, told Business Insider. He was referring to Uber, as well as competitors like Lyft, and Via, another carpool service. "I do think they're adding more big vehicles to an already congested area."

Riccio's argument is that while it can benefit riders in fringe areas like Magzamen's, they're often used heavily in areas that are already have public transit alternatives.

UberPool, for instance, offers $5 rides within most parts of Manhattan during commuting hours. Add in the tax break, and it becomes only marginally more expensive than taking the subway in that area. (The company said it targeted riders on the congested 4-5-6 line for cheap rides.) It's a lot more expensive to use UberPool in the outer boroughs, as my $18 fare brought home.

But commuting is not a zero-sum game. Some riders could take an UberPool to a closer subway stop, for instance. That could be a boon to some.

Sarah Kaufman, the assistant director for technology programming at the NYU Rudin Center for Transportation, calls services like UberPool, Lyft, and Via "the next generation of public transit," because they're more dynamic and customizable than, say, buses.

And there's a class question here. While UberPool tends to transport wealthier smartphone-toting New Yorkers, she said so-called "dollar vans" already transport 100,000 New Yorkers a day. They're a kind of shadow transit system operating in neighborhoods not well served by public transit. Riders pay $2 cash and often use them to get to better subway stops. But even though these vans meet the same IRS criteria as UberPool, these passengers are unlikely to get the tax break.

"Dollar vans can't take credit cards," she said. "There's no receipt." It's a gray market.

She said the people who need these kinds of options - and the tax break - are most often the lowest income New Yorkers.

What's next?

For now, only WageWorks customers in New York can use pretax dollars to pay for UberPools.

Dan Neuberger of WageWorks said the company hopes to expand the UberPool benefit across the country "once all the kinks are worked out," he said. Interest in the program has been "significant," though he declined to provide specific figures.

And he said the company is happy to work with any other rideshare company, such as Lyft or Via, if those companies can prove they can comply with the law and send big enough vehicles.

Adrian Durbin, a spokesman for Lyft, declined to comment on UberPool or whether Lyft plans a similar pretax service.

Of course, being first to take advantage of this tax break is the kind of savvy that has helped Uber become the most valuable tech startup in the world, currently pegged at about $66 billion.

For a city like New York, the question is whether services like UberPool will improve commutes for everyone - perhaps helping people get to a transit stop, or reducing subway crowding - or whether it will create another class of transportation that continues to clog streets.

Uber is pitching pretax pooled rides as a kind of solution.

"This furthers our goal of getting more people in fewer cars, while making New Yorkers' daily commute more affordable and efficient," Wing, the spokesman, said.

But if it turns out that it's competing with subways and buses, transportation advocates could lobby Congress to rewrite the IRS rules.

As for my ride, it took 45 minutes to get from Manhattan to Brooklyn, a few minutes longer than I'd expect from the subway. For me at least, it's not about to replace my crowded ride underground.