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

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 island...ie...Bayer...vinson...~er~dt...~~j5 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

Sources:

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

http://www.homeaway.com/

Read more:

• The Case Against Hawaii's SB 2089
• The Case Against Hawaii's HB 1707
• Best Place to Own a Second Home in Hawaii

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.

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.

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 cpntestimony@capitol.hawaii.gov. 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.

Oahu

Sources:
                                                      
homeaway.com

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

Read more:

• Hawaii's Senate Committee Recommends Passage of SB 2089
• The Case Against HB 1707
• Hawaii Legislature Discussing Transient Vacation Rentals

The Case Against Hawaii's HB 1707

HB 1707 and Tourism in Hawaii

HB 1707 is legislation relating to Transient Accommodations, or vacation rental homes, currently being debated in the Hawaii House of Representatives. Its description states that it "requires nonresident owners of residential single family dwellings, apartments, or townhouses who rent their property as a transient accommodation for 30 days or less to rent the property through a licensed real estate broker or salesperson who must collect all applicable taxes for the rental of the property. Provides for penalty." Unbelievably, the penalty for not hiring a real estate property manager would be $1,000 a day!

HB 1707 and Hawaiian Vacation Rentals

Many owners of property in Hawaii don't live on the islands, and rent their places to tourists for income. This draconian legislation doesn't even appear to be legal as it would force them to hire realtors to pay their taxes for them, creating a para-government department of taxation enforcement manned by the real estate industry. There are already laws in place regarding the collection and remitting of GET and TAT taxes, so this bill is unnecessary.

The proponents of HB 1707 are mainly realtors, like Dan Monck of Exclusive Getaways, Rob Dalton and Kim Horton, all from the Big Island. Property managers like them typically charge owners a fee of 28% to 40% of their nightly rental rate, then add other fees like housecleaning and supplies. Unfortunately for them, vacation rental owners are getting technologically savvy, renting their places through vrbo.com and homeaway.com on the internet rather than use their services. What motivates them is the fact that Vacation Rentals By Owner and other similar business models are putting a downward pressure on their ability to charge their high fees. The rental property managers have everything to gain with this legislation, especially since they have been sorely hurt these past few years by the depressed housing market.

Rob Dalton had a blog about HB 1707 on activerain.com, but he stopped allowing any further comments after about a week in February, 2012 because his position was so shot full of holes by the comments readers left. While the page was up, he randomly pulled a vrbo.com listing in Waikiki and suggested that the individual advertising the listing was not paying his taxes since the ad didn't show the accurate tax percentage. To discover the truth, a reader of the blog called on the listing and made a fake inquiry, whereupon the vacation rental owner offered a price that included the accurate of amount of GE and TAT tax. Mr. Dalton was subsequently informed on his blog about his erroneous assumption the owner wasn't paying his TAT, and that the man's only crime was in not updating his ad.

In 2009, a leading property manager, Property Network in Kona, went out of business, closing their doors and skipping town with a substantial amount of money owed to owners, vendors and renters. This type of large scale failure has the chance of continuing regardless of licensing. When individuals are in charge of their own property units, the most that will happen is one unit will be a problem.

Hawaiian Transient Accommodations Tax

Every government has consequences for citizens' not paying taxes when they are due, interest and penalties on the overdue amounts. If there is willful fraud, a government agency will then pursue criminal action. At no level does any government agency require a citizen's salary or income to be received by a third party. 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 a non-compliance of that law, the crime is in not paying one's taxes.

The claims by the bill's proponents that Hawaii is missing out on lost tax revenue by tax-evading vacation rental homeowners is a ruse to get the law in place, but if tax collection was a true concern, the State of Hawaii could easily peruse their own files to determine who is renting to visitors and for how long. Visitors flying to Hawaii are handed a form provided by the State on airplanes, 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, this would be a simple remedy to implement.

If enacted, HB 1707 would discriminate between resident and nonresident owners and how they manage their units. There is no provision in the law to allow non-resident owners who have been operating legally to be exempt from complying with this new law. It would hurt property values as many out-of-State owners would most assuredly experience financial losses and be forced to sell or possibly lose their houses to foreclosure. The entire real estate market would be affected, costing Hawaii tens of millions of dollars. Hawaii can't afford a law forcing property owners to hire realtor managers and then relinquishing all their rights of management to them.

Many States like Arizona, Nevada, California and Florida are welcoming investors to help them emerge from the bloodbath of the mortgage meltdown and subsequent market collapse. Apparently the only individuals looking to limit the scope of ownership for investors in the United States are to be found in the State of Hawaii. These self-serving individuals and their political allies are doing great harm to Hawaii.

Sources:

activerain.com

Hawaii State Legilslature. HB 1707 HD2, February 22, 2012, http://www.capitol.hawaii.gov/.

homeaway.com

Jensen, Chelsea. Kona property management firm closes, leaving clients wondering where their money is, The Honolulu Advertiser, March 22, 2009.

Read more:

• The Case Against Hawaii's SB 2089
• Hawaii Legislature Discussing Transient Vacation Rentals