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Airbnb is facing off against New York’s Attorney General. Here’s why.

The Airbnb Inc. application is displayed on an Apple Inc. iPhone and iPad in this arranged photograph in Washington, D.C., U.S., on Friday, March 21, 2014.  (Andrew Harrer/Bloomberg)

Anyone who has ever rented a beach house on Airbnb or taken a ride with Uber has unwittingly stepped into a long brewing conflict over how the sharing economy fits in with local regulation -- often with regulators charging companies with disrupting local laws while earning massive profits by assisting in providing potentially illegal services.

In New York, that conflict is coming to a head for Airbnb. Since last fall when New York State Attorney General Eric Schneiderman's office subpoenaed information about the roughly 15,000 hosts renting out space in the city on the service in an effort to track down renters dodging lodging taxes or running illegal hotels. Airbnb moved to quash the subpoena -- arguing its too broad and would expose the confidential information -- leading to the oral arguments heard Tuesday in an Albany court room.

Here's everything you need to know:

Data on 15,000 people. That sounds like a lot?

Airbnb certainly thinks so, calling it a "government-sponsored fishing expedition" in an October blog post. It has since moved to quash the subpoena, which is what the hearing Tuesday was about. But at the heart of the issue is that Schneiderman's office alleges many of the people who rent out properties on Airbnb are in violation of local laws. In a court filing Monday, the New York State Attorney General's office alleged that as of Jan. 31, around two-thirds of New York City rentals  were illegal based on an analysis of listing scraped by a data extraction company Connotate.

Wait, so it's illegal to rent something out on Airbnb in New York? 

Under a New York "Illegal Hotel Law" updated in 2010, residential apartments in the city are generally forbidden from being sublet for less than 30 days without the resident present. However, Schneiderman's office found that roughly 64 percent of listings available in New York City were for entire apartments -- suggesting that the resident would not be present -- and just one listing was for more than 30 days.

The affidavit further claims that Airbnb had 19,522 listings in New York City but just 15,677 unique hosts, while 1,849 hosts had a total of 5,964 listings. That means that 12 percent of hosts were responsible for nearly a third of listings. Critics, including the Attorney General's office believe some of those listings represent potentially illegal hotel operations that drive up housing costs for local residents.

Is Airbnb doing anything about these allegedly illegal hotel-like operations using its service?

Airbnb public policy chief David Hantman said in a blog post yesterday that "87 percent of Airbnb hosts occasionally rent out only the property in which they actually live."

But, he said, the company will notify the owners of some 2,000 listings that were making the city "worse, not better." 

"While we are allowing these hosts to support their existing bookings, all are now prohibited from accepting new reservations and if you search for a place to stay in New York, you won’t find these listings," he wrote.

Hantman also said that all of the hosts with multiple listings identified by the Attorney General's office had been told their listings would be removed, and characterized the list as an "attempt to distract" from the the office's "vast data demand on regular New Yorkers."

But rental laws aren't Airbnb's only potential pitfall. Hosts may also not being paying the appropriate local taxes.

Local taxes?

Yes, like lodging or hotel taxes. Airbnb warns users that it's their responsibility to know how the local laws about renting out their homes. And it has started to partner with some cities including Portland and San Francisco to collect local taxes on behalf of hosts as part of its "Shared City" initiative. But it says local laws prevent it from doing so in New York City, and is petitioning the state government to consider changing the law, which it says would help bring in around $21 million in tax revenues.

That sounds like a lot of money...

An infographic posted by Airbnb last week says the tax revenue is enough for 420,000 textbooks or 2.9 million meals for elderly New Yorkers. But to give that figure some context, Schneiderman told the New York Times that the 40 highest-grossing Airbnb hosts in the city each took in at least $400,000 over the last three years. In that time period, he says, that group has collectively grossed more than $35 million.

Airbnb says its hosts and guests will pay an estimated $36.6 million in local sales tax in New York City in 2014, along with generating $768 million in economic activity. But not everyone thinks they have a positive impact on the city. In a statement, New York State Sen. Liz Krueger, who sponsored the 2010 "illegal Hotel Law" update, accused the company of profiting off of reducing affordable housing availability.

"Every apartment converted into an illegal hotel room is an apartment that's off the market for permanent residents -- exacerbating New York City's crisis-level housing shortage and increasing rents," she wrote. "At the same time, most New Yorkers, when they put their savings into a co-op or condo they can call home, or sign a rental lease, are signing up to live in residential apartment buildings -- not illegal, unregulated hotels with a constant stream of strangers coming in and out."

And New York and other big cities aren't the only ones concerned about Airbnb. As the Atlantic Cities notes, some smaller cities and towns are also struggling to respond to changes they attribute to the service and others like it.

But Krueger also brought up the elephant in the room: That Airbnb has managed to grow to a business reportedly valued at $10 billion despite being unable to resolve its regulatory status.

Wait, how much did you just say Airbnb is worth?

I repeat: $10 billion dollars. That was the  figure that emerged after Airbnb raised $475 million in funding last week. While Airbnb was started in 2008, it has since grown to be a well known, if not ubiquitous player in the vacation rental market.

While Schneiderman and other government officials try to determine whether the company is working within the law,  Airbnb has tried to play up the human element of the situation.

In a memo shared with the press today, Airbnb highlighted stories from New Yorkers who it says rely on Airbnb to make ends meet. One example was a New York City host named Kimberly who its says suffers from a chronic illness that prevents her from working a normal job. "My husband and I spent countless nights wondering if and when we would lose our home, or if we would have to stop treatment to keep a roof over our heads," it quotes her saying, but that Airbnb "saved" them.

So what happened Tuesday? 

Honestly, not too much. A judge in Albany heard oral arguments, but the court adjourned without ruling on Airbnb's motion to quash the subpoena. In a statement after things wrapped up, Airbnb's Hantman  again called the subpoena an over-broad fishing expedition. He also unfavorably compared New York's regulatory situation to some other tourist hotspots, writing "Paris, Amsterdam and Hamburg are embracing the sharing economy and New York shouldn’t be stuck playing catch-up.

Schneiderman's office did not immediately return a request for comment. But if you're following (or participating) in the sharing economy, expect to hear more about this case in coming weeks and months.

Update: New York Attorney General spokesperson Matt Mittenthal sent the following statement on today's arguments to the Post. “Despite all of AirBnb’s rhetoric, the company has never denied that substantial illegal activity is taking place on its site. To the contrary, AirBnb decided before our hearing to remove 2,000 listings posted by “bad actors”– hardly isolated cases. The Attorney General will continue to stand up for the law that protects building residents and tourists alike, and we await the judge’s decision.”