TAXWatch: ‘Piling On’ to Transient Vacation Rentals

Piling on, for those of you who aren’t football fans, happens when a player or group of players jump on top of a runner who already has been tackled, just to make sure the runner is not going anywhere.  The tackling team can get no advantage from piling on, and injuries can and often do result from the pile-up, so piling on is against the rules at nearly every level of competition.

The Honolulu City Council considered on Dec. 4, and passed, a bill (Bill 55) that would drastically hoist the real property tax rate on owners of bed and breakfast homes.  The bill is now on Mayor Caldwell’s desk for consideration. We have received quite a few inquiries about this bill.

The bill would classify bed and breakfast homes and other transient vacation rental units as “hotel and resort” for property tax purposes.  Most homes are classified as “residential” which is taxed at $3.50 per $1,000 of net taxable value. The “hotel and resort” classification is taxed at $13.90, nearly four times as much.  

The bill, furthermore, appears to apply the classification for the whole year, and it doesn’t seem to matter how much of the year the unit was actually rented.

For a home valued at $750,000, then, renting out a room or two for part of the year could cost the host family an additional $7,800 or so in property tax for the year (750 x (13.90-3.50) = 7800.)  That’s $650 a month whether the unit is rented or not, which could be a very tough nut to crack. Many of the testifiers on the bill have bemoaned this consequence.

And let’s not forget Bill 89 of 2018, now known as Ordinance 2019-18, which we have written about before.  It is now illegal to operate a transient rental unit, or a bed and breakfast home, unless you have a “nonconforming use certificate” that grandfathers you in or you are in a resort zoned area.  (Bill 55 doesn’t affect the tax classification of such grandfathered properties.) If you are running a bed and breakfast home and you are not in one of these grandfathered categories, you need to be registered or face the possibility of being slapped with massive fines (up to $10,000 per day).  And registration won’t even be available to anyone until at least October 2020 while the City gets its act together.  But, of course, there is no exception to the registration requirement for “the City needs to get its act together,” so if you are running such a business you need to shut down.

All these consequences are set to befall homeowners who live on their property (this is one of the requirements of a bed and breakfast home) and try to earn a little extra money to make ends meet, at least according to the testimony on file.  

Maybe instead of trying to make life intolerable for those homeowners trying to conduct a legal business, they should be going after the scofflaws.  Whether or not this bill becomes law, there will be folks who will choose to operate under the radar. They won’t pay transient accommodations taxes.  They won’t pay GET. They probably won’t even tell the authorities that they are conducting this business. Honolulu City Council, what are we doing to catch these bad actors and bring them to justice?

Instead, the Council is doggedly pushing ahead with this bill.  

Fweeeee!  Penalty flag!  “You chumps really piled on there.  Well, that’s going to cost you fifteen yards!”

(It’s the Hawaii State Tax Watch Doggie in a referee’s uniform?  And how did he manage to blow that whistle?)

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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.