The IRS is examining Airbnb’s 2013 and 2016 income and has already proposed additional tax liability of at least $1.35 billion for 2013, the short-term rental company warned investors in its S-1 filing documents published on Monday.
Airbnb revealed the tax investigation in the “risk factors” section of its filing, which goes over any potential risks that investors may want to know about. According to the filing, the tax agency sent a Draft Notice of Proposed Adjustment in September that said the 2013 tax bill alone could cost an additional $1.35 billion, plus penalties and interest, which exceeds the company’s tax liability reserves by $1 billion. The S-1 states that the 2013 tax examination is related to “the valuation of our international intellectual property which was sold in a subsidiary in 2013.”
While the details are unclear, it’s worth noting that a common tactic among technology companies is to create a company with the sole purpose of holding intellectual property. In one prominent example, Uber managed to secure a $6.1 billion tax deduction on future profits after the company moved its intellectual property from a company that only existed on paper in Bermuda to a Dutch entity controlled by another subsidiary in Singapore.
Airbnb states that it disagrees with the proposed adjustment and will fight it with the agency and in court if necessary. No further information is offered in the S-1 about the IRS’ 2016 income examination of the company, and Airbnb did not immediately respond to Motherboard’s request for comment.
These S-1 documents also offer the first look at how coronavirus has impacted the short term rental company’s financials and the firm is quick to remind investors that COVID-19 has “materially adversely affected our recent operating and financial results and is continuing to materially adversely impact our long-term operating and financial results.” For the first nine months of this year ending September 30, Airbnb reported a loss of $696.8 million on $2.5 billion in revenue (down 32 percent from the same period last year).
Still, there is reason to suspect that even before the pandemic, the company’s best days were already behind it. Indeed, Airbnb warns investors that it has never been profitable and may never be.
Take Airbnb’s growth. In one section titled “A Resilient Model”, the S-1 proudly states that Airbnb has “experienced rapid growth since our founding” and points to 2019, where revenues increased 32 percent from the previous year. It’s only in the Risk Factors section, however, that Airbnb admits revenue growth has been slowing every year since 2015 (the earliest year offered in the S-1) from 80 percent to 55 percent then 43 percent, and finally 32 percent. The S-1 states, “We have experienced significant revenue growth in the past’ however, our revenue growth has slowed in recent periods and there is no assurance that historic growth rates will return.”
Airbnb’s attempts to expand into other business lines also seem to have failed. Airbnb Experiences—tourists paired with local guides through Airbnb—is estimated in the S-1 to have a total addressable market of $1.4 trillion. Despite claiming such a large potential market, Airbnb obfuscates the numbers around this business. Its key metric for success lumps normal bookings and experiences together as “Nights and Experiences Booked.” In the fine print explaining this combined metric, the S-1 notes that “substantially all of the bookings on our platform to date have come from nights.”
As Airbnb puts it in the section on risks: “Our efforts to create new offerings and initiatives are costly, and if we are unable to successfully pursue such offerings and initiatives, we may fail to grow, and our business, results of operations, and financial condition would be materially adversely affected.”
Airbnb explains that it focuses on “unpaid channels such as SEO” to drive traffic to Experiences, and blames Google for souring its fortunes there. “We believe that our SEO results have been adversely affected by the launch of Google Travel and Google Vacation Rental Ads which reduce the prominence of our platform in organic search results for travel related terms and placement on Google,” the S-1 states.
Airbnb has spent significantly on sales and marketing in the past, as the S-1 filing reveals. However, the company has “suspended substantially all performance marketing efforts in response to the COVID-19 pandemic.”
On top of this, Airbnb notes that its “substantial level of indebtedness” could hurt it in the future. It owes nearly $2 billion, which could force it to start using a “substantial portion” of its cash flow just to pay down debt.