Saturday, February 25, 2012

The Case Against Hawaii's SB 2089

Napili Coast, Kauai

SB 2089 is the Senate version of the House of Representative's HB 1707 legislation relating to Transient Accommodations, or vacation rental homes, currently being debated by the Hawaii Legislature. Its description states that it "Requires any nonresident owner who operates a transient accommodation located in the nonresident owner's private residence, including an apartment, unit, or townhouse, to employ a property manager approved by the real estate commission." The Senate Committee on Commerce and Consumer Protection (CPN) will hold a public hearing on the bill Tuesday, February 28, 2012 at 10 a.m. at the State Capitol, 415 South Beretania Street, Honolulu, in conference room 229.

SB 2089 and Transient Vacation Units in Hawaii

Proponents of SB 2089 are mainly real estate property managers, and their stated reasons for pushing the bill are because they claim vacation rental owners don't have on-site supervision, consumer protections for guests, and above all, don't pay their Transient Accommodations Tax (TAT) or General Excise (GE) taxes. The property managers argue, without any evidence to support their numbers, that independent owner-operators deprive the State of millions of dollars in unpaid taxes. Regarding consumer protections, guests are encouraged by owners to purchase travel insurance or trip cancellation insurance, and most credit cards offer reimbursement in the event of a breach of contract. As for an on-site presence, independent owner-operators are on call twenty-four hours a day, seven days a week, but not all property managers provide round-the-clock staff for the units they oversee.

Waianae Mountains, Oahu
The true motivation behind the bill, though, is that real estate property managers are losing profits and market share to owners who choose to self-manage their rentals. The internet has encroached upon the profits of real estate property managers, but it has also had positive effects, lowering prices for consumers and distribution costs for businesses. Just as the Industrial Revolution over 150 years ago rendered blacksmiths obsolete, so the Information Age with its invention of the internet has revolutionized today's economy. Still, it is not the role of State legislators to interfere with competition in the marketplace.

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Successful businesses are competitive and responsive to new developments, including cataclysmic ones like the internet. If property managers in Hawaii struggle to compete with the market changes it has wrought, they should consider reducing their exorbitant 30 to 40% service fees. "Hawaii State legislators have no business interfering with the natural causes and effects of an efficient marketplace, particulary when it amounts to a restraint of trade to create a monopoly for a small minority," said one owner recently.

Many vacation rental owners prefer to manage their own businesses, offering a personal touch while respecting their visitors' private information. Mandating them to provide client lists to a management company invites unauthorized use of their data. A real estate management company could sell the customer's personal information or use it to direct them to rent other properties in the manager's portfolio. SB 2089 will devastate these small businesses and do a disservice to other properties in the neighborhoods because the quality of management will suffer. SB 2089 will not accomplish what it is supposedly intended for, but will violate personal property rights in favor of special treatment for property management firms. It goes so far as to force friends and family members to book their stays through a property manager, a violation of the most basic of individual property rights.

The Road to Hana, Maui

Taxes and Vacation Rentals by Owners

The argument that Hawaii may be missing out on lost tax revenue by tax-evading vacation rental homeowners is the only legitimate one, but SB 2089 and HB 1707 won't ensure the filing of tax returns. And at no level does any government agency require a citizen's salary or income to be received by a third party. This is not a government function the Legislature can unload on the backs of people in the real estate industry. Everyone is bound by law to pay taxes they owe, and if there is non-compliance, those same laws impose penalties of interest, fines, or for fraud, jail time. Hawaii already has laws that require any person receiving income for transient accommodations to collect TAT and GE taxes. If there is non-compliance of that law, the crime is in not paying one's taxes.

Rather than enact a problematic bill like SB 2089 into law, the Legislature must devise a way to discover if nonresident owners are paying all the appropriate taxes. Are there no creative thinkers in the Legislature that can solve this dilemma? Is there no common sense in the hallowed halls of government? In 1830, the Frenchman Alexis deTocqueville wrote in his book, Democracy in America, that the brightest minds in the United States were in business, not government. This certainly still holds true today, especially in Hawaii.

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The State could easily solve the tax problem by perusing their own files. Visitors flying to Hawaii are handed a form provided by the State on airplanes before they arrive, asking where they are staying and for the duration of their visit. Since the State already knows who owns each property and who is paying taxes, it could easily set aside a small clerical staff to compare the data. This would be a relatively simple remedy to implement. Another solution would be to require all TVU owners to submit an annual compliance report indicating that taxes have been paid.

Politics and Hawaiian Vacation Home Rentals

The Senate Committee on Commerce and Consumer Protection (CPN) will hold their hearing to discuss SB 2089 on Tuesday, February 28, 2012 at 10 a.m. at the State Capitol, 415 South Beretania Street, Honolulu, in conference room 229. Concerned citizens can submit testimony online or e-mail written testimony to Communication will be accepted up to twenty-four hours before the committee meets, which is by Monday, February 27 at 10 a.m. Opinions can still be sent after the deadline, but they will be stamped "Late Testimony."

In Honolulu, vacation rental owners have been crying out for years that archaic laws relevant to their industry need to be updated. No new permits for vacation rentals have been issued since 1989, yet the industry has significantly changed and grown since then. Legislators should be devoting their time to establishing a permit process with reasonable guidelines for all to abide by. The proposed legislation is clearly unconstitutional because it discriminates on the basis of residency and will take away the most basic of individual property rights. SB 2089 deserves to go down in flaming defeat.


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