Hawaii Department of Taxation and TVU Legislation

photo by Hailey Jones

The Hawaii Legislature's recent rash of bills aimed against the Bed & Breakfast and Transient Vacation Rental (TVU) industry has roots in the dysfunction of Hawaii's Department of Taxation. Proponents of HB1707, SB2089, SB2079 and HB2078 claim that many nonresident vacation rental homeowners are not forthcoming with their General Excise (GE) and hotel-type Transient Accommodations (TA) taxes, so the legislation is necessary. Opponents argue that the Department of Taxation should simply enforce current tax laws and operate like the IRS.

First, a little history. In 2007 there was speculation that many private owners of Hawaiian vacation rentals were shirking their responsibility as taxpayers, so the Department of Taxation (DoTax) conducted an audit on the industry. They wanted to see if there was any merit in the accusations, but came to the conclusion that the majority of the establishments were tax compliant and that there was no significant fraud.

Since 2007 there hasn't been any new investigation on the subject, but speculation has remained, particularly among property managers whose businesses have suffered by the growing competition from owner-managed vacation rentals. The estimates of tax fraud have been in the tens of million of dollars, but the claims lack documented evidence and appear to be conjecture.

Hawaii Department of Taxation Audit

The State of Hawaii routinely asks their State Auditor to conduct audits on various government agencies, and in 2010, one was done on the Department of Taxation. Unfortunately, the result was sixty-two pages outlining the incompetence of this important agency, describing acute management conflicts in a dysfunctional work environment. There were so many internal conflicts, the Governor’s Office was forced to intervene in 2008. 

The DoTax had contracted with an Information Technology (IT) vendor to develop and install a new computer system, but ten years and $87 million later, the project still wasn't complete. Unbelievably, the DoTax leaders had allowed the vendor, a Canadian firm, to become entrenched in their IT infrastructure under managers with no IT background or formal project management training. The DoTax couldn't synergize data from different computerized tax systems or the new IT system.

State Auditor Marion Higa further discovered the DoTax lacked controls over tax payments, assessed real properties inequitably, and inefficiently examined returns and returned refunds. She noted that the U.S. Internal Revenue Service had conducted a safeguard review of Hawaii's DoTax, and had raised concerns about computer security. Her conclusion in December 2010 was that the DoTax and its IT infrastructure faced a precarious future. With the typically slow pace that government takes to right a ship, it is doubtful that by April 2012 much progress has been made. It would be a tremendous security risk for property owners to display their registration numbers on internet ads, as the Legislature hopes to require by law.

Vacation Rental Home Industry and the DoTax

The Legislature received the State Auditor's findings over a year ago, but very little has been done to remedy the DoTax. Instead of addressing their dysfunctionality, bills like HB1707, SB2089, SB2079 and HB2078 are crafted, which would shove the burden of tax collection onto third parties.

photo by Ashley Ingram

In an e-mail to this author dated April 11, 2012, Senator Rosalyn H. Baker, sponsor of the problematic legislation, wrote that the "Department of Taxation has thoroughly refuted the assertions that TVU owners were tax compliant. There is no security risk to disclosing a registration # [on internet ads]. DoTax clearly understands privacy and confidentiality issues and has systems in place to take care of same."

However, the evidence compiled in the December 2010 audit contradicts Baker's statements. The Senators and Representatives of Hawaii need to overhaul the DoTax before they address issues of tax fraud. Until the DoTax works out its IT and internal problems, it will have trouble conducting a legitimate investigation of the vacation rental home industry.

Sources:
www.state.hi.us/auditor

http://www.capitol.hawaii.gov/

Read more: Hawaii State Legislature Passes House Bill 2078