TAXWatch: The Tax Office Said So, So It Must Be True

HB 2432, one of the bills actively being considered this session, proposes to hike the “transient occupancy tax,” or TOT, by an as-yet-unspecified amount.  This part of the bill is noteworthy for the factual support behind it.  Or, more particularly, the lack thereof.  It’s based on “the tax office said so, so it must be true.”

The TOT is like the transient accommodations tax or TAT, sometimes known as our hotel room tax.  It is paid on the occupancy of a timeshare unit.  (Isn’t it strange that we tax the owner of property for using the property that he or she owns?  That’s a debate for another day.)

The TOT is currently imposed at the same rate, 10.25%, as the TAT.  The TAT rate is applied against what a person pays to occupy a hotel room.  A timeshare owner doesn’t pay for occupancy, so the TOT is imposed on 50% of the average daily maintenance fee.  In 1998, when the TOT law was enacted, it was recognized that this amount was an estimate, a practical alternative to requiring taxpayers or the Department to prove up fair rental value.  So, the law said that if either the taxpayer or the Department of Taxation felt that a different value was warranted, the party could prove up the fair market rental value of the unit and the tax would be applied to that value instead.

In 2015, the Legislature considered HB 169 of 2015.  At the time, the TAT was at 9.25% of room price, and the TOT was at 7.25% of fair market rental value.  The bill wanted to jack up the 7.25% to 9.25% “to preserve equality with the TAT” although the percentages were applied to wildly different things.  In support of the bill, the Department testified: “[T]imeshares are afforded a discounted tax imposition in two ways.  First, timeshares are subject to a 7.25% tax rate, rather than the 9.25% tax rate.  Second, the rate is imposed on one-half of the daily maintenance fee paid by the owner of the unit, rather than on the full fair market value of the room.  One-half of daily maintenance fees in most cases is significantly below the true market value of any accommodation.”  The Department then proposed language to change the timeshare tax base from 50% to 100% of daily maintenance fees.

The Conference Committee found that the Department did not exercise its discretion to prove up a value different from 50% of daily maintenance fees in the 17 years since it gave the Department that discretion.  As a result, in 2015 the legislature cut out the provision allowing either party to prove up a different value.  It also jacked up the TOT rate to 9.25% to “promote fairness,” and the bill was signed into law.

That leads us to this year.  The Department has never explained why or how 50% of daily maintenance fees is inadequate.  Given that the Department never bothered to prove that the 50% was too low when it had the ability to do so, it’s probably fair to say that the Department has no factual evidence.  It’s apparently much easier for them to make broad and sweeping generalizations about the law to get it changed than to be bothered with actual facts.  The tax office said so, so it must be true.

Lawmakers, wake up!  It’s your duty to make laws after weighing facts and considering consequences.  But how can you weigh facts if there are no facts presented to you?  If you believe “the tax office said so, so it must be true,” then there is no check and balance, and we are all in serious trouble.

Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.

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