Monday, March 5, 2012

Hawaii's Senate Passes SB 2089

Waikiki, photo by Lauren Grell

On Tuesday March 6, 2012, the Hawaii Senate passed bill SB 2089, the controversial measure relating to transient accommodations. The bill now moves to the House and if passed there, will be sent by July to Governor Abercrombie for his signature.

Hawaii SB 2089 Takes Aim at Off-Island Vacation Rental Owners

photo by Chloe C.
Without supporting evidence, the Senate believes "there are a sizeable number of owners who do not pay their required transient accommodations taxes and general excise taxes" and that "enforcement efforts may also be hampered" when an owner of a vacation rental lives off-island. Bill SB2089 HD1 assumes nonresident owners do not comply with tax requirements, but no studies were included to prove this assumption. The last audit performed by the Tax Department for the Hawaii Tourism Authority concluded on April 3, 2007 that "in general, those that rent transient accommodations are tax compliant" and the Department didn't believe there was substantial non-compliance with tax obligations.

Tellingly, the Hawaii Tourism Authority is not in agreement with the legislation, providing input February 2, 2012 that "Chapter 237D already provides for penalties for engaging or continuing in the business without registering as required by the law." Their suggestion is to provide consumer education rather than implement the drastic methods of SB 2089.

Such education could easily be transmitted by giving Notices to interested parties outlining State law for transient accommodations, including the collection and payment of General Excise and Transient Accommodations taxes, emergency contact information for visitors and other pertinent data. Notices could include a Department of Taxation web page where all requirements and the means to comply are described, and every escrow could be required to give the Notices to buyers. This simple solution would result in every owner of Hawaiian real estate knowing the laws about General Excise Taxes, Transient Accommodations Taxes and State Tax Returns.

The flawed bill also requires nonresident owners to hire property managers, imposing red tape not required of those blessed to actually live in Hawaii. The Attorney General of Hawaii weighed in against SB 2089, stating that the Commerce Clause, the Equal Protection Clause, and the Privileges and Immunities Clause of the United States Constitution "generally prohibit discrimination against nonresidents or discrimination in favor of  'in state' residents."

Vacation Rentals By Owner in Hawaii

The amended bill indicates an assumption that professional real estate managers are necessary for consumer protections, dismissing the testimony of hundreds of vacation rental owners regarding the poor service and high fees demanded by these same managers. Many owners operate successfully using a team of housekeepers, repairmen and local folks to meet the need at a fraction of the cost.

The bill requires advertisements to include a local contact, but visitors may be confused by this insertion, as it applies only after they have arrived in Hawaii. Nonresident owners of condominium hotel units would be even further restricted by a requirement to employ only a condominium hotel operator to manage their units. Thus, one subsection of nonresident owners would be treated differently from the rest, and unnecessarily limited in their freedom to choose a local manager.

An exemption is proposed for property owners who obtain an annual tax clearance from the Department of Taxation, but the bill does not establish the criteria for receiving the tax clearance. The Tax Department would most likely be buried under requests and unable to process them all, causing delays and noncompliance. The Tax Department typically takes up to two months to provide tax identification numbers, so one can reasonably expect to see this added burden cause even more delays.

One of the requirements for the exemption involves filing Federal Form 990, but the form is labeled "Return of Organization Exempt From Income Tax." The legislature needs to clarify this and what the "certain nongovernmental entities" are which would impose themselves between the Department of Taxation and taxpayers. Also, the fines for non-compliance of any part of the bill are not laid out. Proponents suggested $1,000 per day, a punishment that surely doesn't fit the crime.

Napili Coast of Kauai; photo by Cassi Klipsch
SB 2089 and HB 1707 
Real estate property managers are a special interest group obviously looking for preferential treatment through SB 2089. Not one has been able to provide support for their numbers in the tens of millions of dollars of lost tax revenue to Hawaii from supposed "deadbeat" owners, yet they have the ear of the State Legislature. Interestingly, Don Brattin, a vacation rental homeowner, included in his testimony on a similar bill in the House a copy of an e-mail he managed to acquire written by Pat Sullivan, a Lahaina real estate property manager and ardent supporter of the bills. Sullivan's e-mail reveals the true motive of the measure's supporters, and it is copied here:   

"From: Pat Sullivan
Sent: Thursday, January 26, 2012 1:56 PM
To: [Recipients are void to protect them]
Subject: FW: Housing Committee Result - Bill HB 1706

"I didn’t have time yesterday to provide written testimony but they passed the initial Bill with a complete affirmative vote from the House...The Bill will require all mainland owners who rent their homes or condos out to have a licensed Realtor on way the State can make sure everyone is paying their GET and TAT... yee hahhhh...lll! But don’t tell anyone yet...let the Bill get passed! !...then we can  get some $$$...unless they find a cheap Broker who will represent them for cheap..."

SB 2089 and its companion bill in the House clearly discriminate on the basis of residency and will take away the most basic of individual property rights in favor of a few real estate property managers. Both bills deserve to be soundly defeated.

photo by Beth Woods

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