Where’s the aloha in the aloha state? According to off-island resident owners of vacation rentals, the State of Hawaii is putting their business in the cross-hairs.
The controversy in question centers on a slew of legislation calling for non-resident (read: off-island) vacation rental owners to hire rental agents to manage their businesses. Writing in the Vancouver Sun, Adam Leamy, owner of a rental in Maui, summed it up this way:
Four bills are advancing through the Hawaii legislature that target off-island…owners of vacation rental properties. Senate bills (HB2078, SB2089) and House bills (HB1706, HB1707) require off-island owners of vacation rental properties to turn over the management of their rental property to some form of on-island licensed real estate broker or salesperson, managing agent, rental agent, or condominium hotel operator. Curiously, local, on-island owners of vacation rental properties are exempted from the bills and their provisions.
This legislation has given rise to stormy opposition from off-island owners who self-manage their vacation rentals, and Leamy is one of them. Leamy lambastes the “me-first” policies that threaten NAFTA protections for cross-border investments in vacation rentals, such as his own.
Not only are Canadians like Leamy voicing legal concerns, hundreds if not thousands of people are arguing against the discriminatory nature of the bills as such. Attorney Gregory Kugle, representing the Hawaii Vacation Rental by Owners Association, has lodged complaints against the bills on grounds that they’re unconstitutional, in violation of the Commerce Clause. On homeowner forums, there is already talk about lawsuits should this legislation pass in its current form.
Marsha Vaughn, a Kihei condo owner living on the main Island, penned an article in Maui Now in which she expressed her sadness in the face of the legislative onslaught. “[T]he Hawaiian legislators ha[ve] created not one, not two but at least four different bills,” she writes, “[all] designed to force me to turn the management of the business I so lovingly created over to licensed property managers or real estate agents.”
The question “Why?” has produced answers. But detractors argue that even the answers are flawed and foolish. The stated reason why this legislation was borne has been that, as Vaughn says, “[S]ome …people cheat on their taxes.” Or rather, “Because the Department of Taxation can’t figure out how to find the people who do.” This latter point has added fuel to the fire. In targeting off-island owners, Hawaii has offended countless vacation rental owners who assert their good standing vis-a-vis current laws and their tax compliance. They feel under attack, angered by the accusatory nature of the legislation. “We Are Not Tax Cheats,” Vaughnn exclaims.
Indeed, the argument that non-residents are disproportionately tax evaders doesn’t carry much merit. Leamy explains:
Legislators say the measures ensure tax compliance, but the only evidence of non-compliance is anecdotal, and provided by the…licensed real estate brokers or salespersons, managing agents, rental agents, or condominium hotel operators. The state has no data to suggest this is the case, and in a classic case of “legislate first, get facts later,” says it will undertake to find out.
In fact, testimony by the Department of Taxation to the House Committee on Finance in 2007, addressing a Hawaii Tourism Association study of non-compliance vis-a-vis vacation rentals, stated that proposed regulations could backfire:
INCREASED SCRUTINY MAY DRIVE TAXPAYERS UNDERGROUND-The Department points out that after its last audit project with HTA, the Department concluded that, in general, those that rent transient accommodations are tax compliant. The Department fears that any increased scrutiny could potentially backfire and drive otherwise tax compliance individuals ‘underground.’ Taxpayers that are forced ‘underground’ can have a direct impact on collections.
Many local agencies were armed with detailed information on those rentals that were non-compliant at the time. Many feel that the problems could be addressed by the counties on the local level and that the legislation reveals a general failure in local and state government in Hawaii. That the state is cash-strapped is no excuse for current legislation, they say.
What has been shocking about these bills is that as soon as one is successfully deferred its contents reappear in an amended version of another bill, causing off-island owners to again rally against the new morphing of the bill. This was the case with HB 2089 that was deferred. The requirement for a licensed property manager to operate the rental was vociferously opposed until the bill’s deferment. Yet in an amendment to HB 2078 this clause was resurrected, reintroduced. In light of this, homeowners are more vigilant to any amendments that may affect them.
Behind the stated interest of securing rightful tax money for the State of Hawaii, there are surely hidden interests. In a previous article, I wrote that HB 2089 was revealed to be backed by the City and County of Honolulu Department of Planning and Permitting; Maui Hotel & Lodging Association; Condominium Rentals Hawaii; Poipu Beach Resort Association; West Hawaii Property Services, Inc.; Waikoloa Vacation Rental Management; and four individuals. Testimony in opposition, on the other hand, came from the Hawaii Vacation Rental Owners Association; The Travel Group; Trading Places International; Hanalei Bay Resort; Makana Mai Ka Lani; Hot Spot Tax Services; Sunshine & Rainbows, LLC; Humiston and Company, CPAs; and numerous individuals.
The current legislation, so similar to that early legislation, is lobbied for by roughly the same interests, with property management firms and hoteliers taking lead.
Overwhelming fear that these bills could cause homeowners to lose return on their investments – possibly have to sell their property or even risk foreclosure – is rife. Many would-be investors on Hawaiian vacation homes are holding off until this legislation is far behind us before going through with their plans.
The office of Senator Sam Slom, the lone dissenting vote on much of the legislation, evidently provided a list of amendments on HB 2078 that they expect to see introduced this Friday. They include the following:
1. removing the term “non- resident owners” and replacing it with language that conforms with the Landlord Tenant Code (521-43)
2. deleting the definition of non- resident owner
3. replacing the requirement that owners residing out of state or on another island must hire rental agents to manage their property with the requirement that they must designate an on- island agent
4. Defining the scope and duties of the designated agent to be consistent with chapters 467 and 521 of HRS, specifying that the agent cannot perform the duties of a real estate agent without a license, and clarifying that the agent will serve as a local point of contact.
5. Tying the fines under this section to existing fines for non- payment of taxes under the tax code
6. Requiring that immediate notification be given to the appropriate parties upon a change in contact information for the designated agent
7. Requiring that the GET and TAT tax numbers be listed on any advertisement for a transient accommodation
8. Deleting the tax clearance provision in subsection ( e )
9. Amending the findings and purposes section to reflect the changes to the bill
Although many homeowners still have reservations about displaying a registration ID or website where the ID can be found on all advertisements or solicitations, the general sentiment is that these amendments would be agreeable enough. Most homeowners seem eager to welcome the changes.
All this drama has resulted in some positives. In their opposition to the recent slew of legislature, off-island vacation rental owners have formed new bonds and strengthened old ones. A new NGO devoted to keeping abreast of developments in pending legislation affecting transient rentals has come into being. Its name is the Rental By Owner Awareness Association (http://rboaa.org). Many other allegiances were formed.
How do you feel about this legislation winding its way forward in Hawaii? Give us your thoughts. Tell us your stories. Share them below.