Unlocking the B&B, TVU conundrum

It may be the desire for revenue — desire by the government, not the homeowner — that finally forces Oahu to confront its regulatory problem with short-term rentals. These are the bed-and-breakfast units and the transient vacation units (TVUs) that have caused such conflict within many residential communities around the state.

House Bill 1471 was not among the measures to emerge when the Legislature adjourned Thursday. It was the second failed attempt by the state to collect tax revenue from vacation rentals statewide.

The bill sought to authorize online rental platforms such as Airbnb, Home Away and VRBO (Vacation Rental By Owner) to collect the state taxes owed on the transactions.

Hawaii is not the only jurisdiction to struggle with this issue. San Francisco recently reached a settlement with Airbnb on a similar proposal.

HB 1471 was introduced after the previous bill was vetoed last year by Gov. David Ige. The governor faulted the measure for giving a veneer of tax-paying legitimacy to operations that, at least in the City and County of Honolulu, are largely illegal under county land-use laws.

“I don’t think we should pass a bill that facilitates illegal activity,” Ige said at a news briefing on Thursday.

The House version basically would have made certifying legality a voluntary process. The Senate favored a mandate to gather specific information on rental rates as well as identifying data that would help with vetting the operation’s legality. Illicit listings would be taken down under the Senate proposal.

The House and Senate could not agree on language to close that breach, so the bill sits in conference committee until the 2018 Legislature convenes in January.

Meanwhile, both the city and the state are feeling the fiscal pressure and are searching for more funding sources. On the state side, Ige said he plans to work with platforms like Airbnb to come up with a memorandum of understanding — a voluntary agreement for collecting tax revenue for at least some of the units.

And the city also will be proposing its own way to make money from the rentals. City Councilman Ernie Martin said that in the next few weeks he plans to introduce a set of bills, including one that creates a separate property-tax classification for vacation rentals.

Back at the Capitol, lawmakers will hold the state bill until there’s a practical way online platforms can screen for legality of the businesses advertising there. And that will require a workable county scheme on Oahu to rein in its vacation rentals.

“This is another case where the city and state need to be in sync, but we’re not,” said state Sen. Glenn Wakai. He chairs the Senate’s Committee on Economic Development, Tourism, and Technology and was a chairman of the conference committee trying to hammer out differences with the House on this issue.

The city has a “crappy process” for regulating these properties, Wakai said, adding that until Honolulu fixes that process, HB 1471 essentially “puts the cart before the horse.”

“The city needs to gallop, to create the mechanism,” he said.

Since 1989, Honolulu has had on the books a moratorium against permitting additional B&Bs and TVUs. But because documenting violations makes enforcement so difficult — city officials must confirm a renter is staying for less than the legal minimum 30-day rental term — an underground market comprising thousands of illegal vacation rentals has developed.

Previous attempts to pass an ordinance setting limits and rules for operating these rentals have foundered on the rocky political terrain.

Residents who insisted on a total ban clashed with owners who said they want a way to make their operations legal, and others who said there’s just too much demand for these accommodations to ever stamp them out.

Martin, whose own North Shore district is among those peppered with illegal rentals, will be proposing bills that would, among other provisions:

>> Set limits on the numbers of rentals allowable in specific geographic areas and would define other requirements for a legalized unit, including both B&Bs and TVUs.

>> Establish that the applicant for permits must be the property owner or lessee.

>> Create a separate property-tax category for vacation rentals.

Mufi Hannemann, the former mayor who now is president and chief executive officer of the Hawaii Lodging & Tourism Association, supports this idea. Creating a separate revenue stream that would come from these businesses would help deter city and state government from trying to tap the transient accommodations tax — the TAT, also known as the hotel room tax — for funding, Hannemann said.

Kauai already has such a property-tax provision that yields about $25 million annually, he said.

“They are going to continue to attack the TAT,” he said. “When they’re short of money they’re going to continue saying, ‘Take it from the TAT.’”

In addition, Hannemann said the industry wants to see HB 1471, or some other legislation, emerge to enable rental operators to pay their share of the TAT.

That’s needed to level the playing field for the short-term rentals and the legitimate accommodations such as hotels, he added: The lack of tax payment keeps the B&B and TVU rates artificially low, out-competing conventional hotel destinations.

Another conference committee chairman was state Rep. Richard Onishi, who heads the House Committee on Tourism. The variations of this proposal kept changing as lawmakers learned that the online advertising platforms perform different functions in the bookings; they needed specific language to address the differences, he said.

It’s a complex issue, Onishi said. His home county of Hawaii island lacks an ordinance to rein in its rentals, and additional funding is needed for enforcement, about $1 million per county.

While the counties and the state puzzle out the legal framework for regulation and taxation, the governor believes a private agreement with individual rental brokerage companies, such as Airbnb, would help.

For its part, Airbnb would welcome such a pact “to capture tens of millions in new revenue each year,” said Matt Middlebrook, Airbnb’s public policy manager.

“While Hawaii is a unique community, we’ve reached similar agreements with nearly 300 communities around the world,” Middlebrook said in an email reply to a query from the Honolulu Star-Advertiser.

“Officials recognize that allowing platforms like Airbnb to collect and pay the taxes is a way to ensure that hosts are paying their fair share and a good step toward establishing fair and sensible home sharing rules,” he said.