Business leaders resist Hawaii tax proposals

Lawmakers are considering a package of tax increases and other tax changes in the final weeks of the legislative session that could raise more than $100 million a year to help balance the state budget, but those plans have aroused the ire of major players in the business community.

One real estate investor said it will cancel its plans to finance an expansion of the Ka Makana Alii Shopping Center in Kapolei if lawmakers pass a bill to abolish a tax break for real estate investment trusts, or REITs.

Meanwhile, representatives of Expedia Group and Airbnb warn that federal law prohibits them from complying with information disclosure provisions in another major tax bill. Those pronouncements might foretell lawsuits over Senate Bill 1292, which is designed to force vacation rental operators in Hawaii to pay their state excise and hotel room taxes.

Lawmakers acknowledge the proposed law could trigger litigation by vacation rental platforms, but they want that tax money. The fate of those and other tax bills will be decided in the final weeks of this year’s session, which is scheduled to adjourn May 2.

Vacation rental taxes

Senate Ways and Means Chairman Donovan Dela Cruz said there is a “puka,” or hole, in the state budget, and Gov. David Ige will have to accept some of the tax measures, such as the vacation rental bill, if he wants to avoid cutting state spending or imposing restrictions.

“It’s either he has to look at these revenue bills and seriously consider them and pass them, or he has to cut,” Dela Cruz said. Ige has already signed into law measures that will increase the tax on estates worth more than $10 million, and impose the state excise tax on more internet sales.

The weightiest of the tax bills this year is SB 1292, which would require vacation rental platforms such as Airbnb to collect taxes from transient rental operators on behalf of the state. State tax officials think that would raise an extra $52 million next fiscal year if it passes, and lawmakers hope to use that money to finance their own initiatives.

Ige vetoed a similar vacation rental tax bill in 2016, saying it would have shielded property owners who illegally operate vacation rentals in residential neighborhoods where the city and counties do not allow them.

The 2016 bill would have required the online platforms to collect state taxes on those illegal operations without revealing the locations of the rentals to the counties. Ige also said the bill would have aggravated the statewide shortage of affordable long-term rentals by encouraging more property owners to jump into the vacation rental market.

A study by the Hawaii Tourism Authority study identified more than 30,000 vacation units statewide that were being advertised in Hawaii on just four booking platforms — Airbnb, HomeAway, TripAdvisor and VRBO — and Airbnb has publicly admitted not all of its clients pay state taxes.

This year the House has proposed in SB 1292 to again require vacation rental platforms to collect taxes on behalf of the state and to disclose to the Tax Department the address of each rental, the rental operators’ names and other information. The state would keep that information confidential and not share it with the counties.

Expedia warned in written testimony earlier this month that the bill “includes provisions that violate law and that will not withstand judicial scrutiny.” House Tourism and International Affairs Committee Chairman Richard Onishi said the state Attorney General does not agree, “and so, they can litigate.”

Onishi believes vacation rental platforms can disclose information about their clients for state tax purposes, and already provide similar information to the IRS to aid in federal tax collections.

As for the counties, Onishi said they are now in a better position to enforce their own rules and laws governing vacation rentals than they were in 2016. That is why the House proposal would not require the vacation rental platforms such as Airbnb to disclose the names and locations of their rental operators to the counties.

The Senate, meanwhile, is proposing in HB 419 to require vacation rental platforms to accept bookings for only those properties that are on a county list of legal short-term rentals. The platforms would also be required to disclose to the state the address of each listing and the names of the rental operators.

But according to Expedia, the state would need a subpoena to obtain even the most basic information such as a client’s name and contact information. The company says the federal Stored Communications Act prohibits it from releasing “personal data” to the Tax Department or the counties.

Amanda Pedigo, Expedia’s vice president for government and corporate affairs, said the company is ready to begin collecting taxes on behalf of the state and wants to reach a global agreement with state and local authorities that allows vacation rentals to continue operating.

As part of that package, Expedia is willing to give local governments the permit numbers for its clients. If the city and counties determine any of those rentals are operating illegally, the platform would be willing to remove those listings, she said.

Ige said in an interview last week that “we want to make sure again that people are paying taxes owed, but we also do want to make sure that we capture sufficient information so we can determine whether they are compliant with county land use and zoning regulations.”

He said he has not studied the latest House and Senate proposals, and needs to see the final bill before he decides whether he will allow it to become law. As for the claims that Expedia and Airbnb cannot legally disclose information about their clients, he said, “Well, we’ll find out.”

Real estate investment

Another tax bill that has riled up some business interests is Senate Bill 301, which would require real estate investment trusts, or REITs, to pay state corporate income taxes.

REITs were created under federal law to allow small investors to buy into major commercial projects such as office buildings and retail centers. The trusts have made major investments in Hawaii, including in developments such as Ala Moana Center, the International Market Place and Ka Makana Alii Shopping Center.

Under current law REITs are required to pay out at least 90 percent of their taxable income as dividends to their shareholders each year. Hawaii and 48 other states allow REITs to deduct those dividends for tax purposes, which means REITs are able to avoid paying state corporate income taxes on their earnings.

A study by the state Department of Business, Economic Development and Tourism in 2016 concluded that the value of REIT- owned assets in Hawaii was approaching $8 billion in 2014, and the tax deduction allowed those REITs to avoid paying state corporate income taxes on more than $720 million in revenue that year.

The study calculated the state missed out on $36 million in corporate income taxes in 2014 because of the tax break, and critics of the tax break believe REITs have vastly increased their holdings in Hawaii since then.

However, the state Tax Department told lawmakers this year that abolishing the REIT tax break would net the state only about $9 million a year in additional corporate income taxes because the trusts would quickly adopt new strategies to reduce their tax burdens.

The REITs, meanwhile, have warned that abolishing their state tax deduction for dividends would have a chilling effect on investment in the state, and some critics of the bill believe the state would actually lose money.

OPTrust, one of Canada’s largest pension funds, invested in the first phase of Ka Makana Alii Shopping Center on Hawaiian homelands in Kapolei but told lawmakers in written testimony last month that it “would be forced to direct its investment capital elsewhere” if the dividend deduction is abolished in Hawaii.

Dara Bernstein, senior vice resident of an advocacy organization for REITs called Nareit, said the state would be risking millions of dollars in new investment and hundreds of jobs by eliminating the dividend deduction.

“These existing and potential jobs belong to real people,” she told lawmakers in written testimony. “Is it fair to risk significant job loss by enacting this proposal?”

But House Finance Chairwoman Sylvia Luke said there is “momentum” this year behind the push to abolish the state tax deduction for dividends, and she questioned whether loss of the dividend deduction would abruptly cause REITs to reorganize their business models or pull out of the state altogether.

“Hawaii is not part of the 48 contiguous states, so we might have different issues,” she said. “For instance, a REIT is not going to get up and move to Alabama next door, or Texas.”

“I do think there’s a lot of proliferation of REITs in Hawaii, so it is a tax fairness issue,” Luke said.

The bills deal with taxing vacation rentals and REITs will now go to House-Senate conference committees for further consideration.

PENDING AND PASSED BILLS

Some tax bills and the potential tax haul:

BILL / DESCRIPTION / FY 2021 / FY 2022

PENDING

SB 1292 Collect taxes on Airbnb-type vacation rentals $52.3 million $53.9 million

SB 162 Charge Hawaii residents and visitors the same car rental tax $8.1 million $8.4 million*

SB 301 Eliminate state dividend deduction for REITs $9.2 million $9.5 million

PASSED AND SENT TO GOV. DAVID IGE

SB 1361 Increase tax on estates greater than $10 million $4.7 million $5 million (Act 3)

SB 380 Tax mandatory resort fees paid by all guests $11.4 million $11.9 million (pending)

SB 396 Impose state excise tax on additional online sales $9.8 million $10.1 million (Act 2)

* House lawmakers are considering a new draft that would further increase the car rental tax.