Paying taxes doesn’t make vacation rentals legal, state attorneys say

The state’s top attorneys say a contentious bill approved by this year’s Legislature and sitting on Gov. David Ige’s desk does not legalize thousands of vacation rentals in noncompliance with county laws or bar the counties from enforcing its laws against the owners of such units.

But Honolulu Mayor Kirk Caldwell said Thursday that he still will urge Ige to veto the bill because it does not contain provisions that assist the city in its enforcement of vacation rentals as spelled out in two bills approved Monday by the Honolulu City Council that are awaiting his action.

Ige, who has until Monday to declare his intention to veto any bills passed by this year’s Legislature, told the Honolulu Star-Advertiser that he and his staff are still researching the impacts of Senate Bill 1292. The bill requires vacation rental hosting platforms such as Airbnb, VRBO and HomeAway to collect taxes owed by the operators of the rentals advertising on their sites.

At the center of the debate is the proliferation of transient vacation rentals, rentals of less than 30 days, in residential neighborhoods. On Oahu the city stopped permitting new vacation rentals in 1989. Department of Planning and Permitting officials say there are now only 816 legal short-term rentals left, outside of resort districts where they are allowed without permits, and an estimated 8,000 to 10,000 nonpermitted units outside of resort zones, where they are legal.

Supporters of vacation rentals say the state and counties need to embrace the increasingly popular style of travel or risk millions in lost revenue and the elimination of thousands of jobs. Opponents say vacation rentals have ruined the character of their neighborhoods, have robbed the state of badly needed housing stock and stripped jobs away from the traditional hotel-resort industry.

The five-page letter authored by Deputy Attorney General Dawn Apuna and approved by Attorney General Clare Connors was delivered to Senate Ways and Means Chairman Donovan Dela Cruz (Wahiawa-Whitmore-Mililani Mauka) this week in response to questions he raised about the state bill.

The legislative measure generated large opposition, including from those bothered that it would allow the platforms to collect taxes for the state without disclosing to the counties the names of vacation rental owners, the locations of the rentals or other information, thus providing cover for illegal operations to continue.

But Dela Cruz warned senators that rejecting the bill would cost state coffers an estimated $46 million in revenue that already has been programmed into the state budget.

It was approved by the House with only one “no” vote but narrowly survived a final Senate vote, 13-12.

“SB 1292 does not legalize (transient vacation rentals) that are not in compliance with county ordinances,” the attorney general’s letter said. “SB 1292 does not change or affect the counties’ authority to regulate TVRs, including the authority to enact laws that make certain vacation rentals illegal.”

Taxes are owed on income from both legal and illegal activities, but “such payment does not bring them into compliance with county ordinances that require a certificate or permit to operate,” the letter said.

Additionally, “the collection of taxes from illegal TVR operations under SB 1292 would not prohibit enforcement of county laws against illegal TVRs,” the letter said. “Nothing in this bill expressly preempts the county ordinances.”

The Council passed Bill 85 (2018) and Bill 89 (2018), which would provide tougher enforcement tools for DPP and impose stricter fines on violators. Bill 89 also permits up to 1,715 new vacation rentals, but only “hosted” operations.

Caldwell has given strong indications he will sign Bill 89 next week, but declined to confirm that Thursday.

Both Ige and Caldwell spoke to the Star-Advertiser before seeing the letter.

Ige said he wants to see how the city legislation would affect the bill that’s before him. “I’m wanting to make sure that we can do a better job of regulating short-term vacation rentals in our community.”

He added, “I know there is some concern about the bill and whether it would preempt county action, so we’re just trying to go through it and make sure.”

Ige told members of the Hawaii Society of Business Professionals at the Ala Moana Hotel on Thursday that he vetoed a bill similar to SB 1292 in 2016 “because I felt that it would hide and shield and facilitate more illegal rentals and keep them out of view because the platform would insert itself in between. And so I’m encouraged by the City Council taking action on both of those measures to do a better job of regulating vacation rentals.”

The governor said the illegal rentals are having an impact on the availability of housing in Hawaii. “It doesn’t take a rocket scientist to figure out that as people are acquiring properties for the business of running a short-term rental, that it takes inventory out of our community.”

Caldwell said he is again urging Ige to veto the bill because there’s no specific information requiring the state to share the tax information it receives from platform companies with the counties.

The Senate bill requires the platform companies to report the names, addresses, tax ID numbers and other information of operators. The bill also says “all returns and other information provided by a tax collection agent shall be confidential, and disclosure thereof shall be prohibited.”

The state attorneys’ advisory letter did not address the issue specifically.

The state and county should be sharing information, he said. “We know who’s paying real property tax, and we know who’s getting a homeowner exemption or doesn’t,” he said. “We have information on ownership. The state has information on income generated from real property. And if we blend the two together, it helps us crack down on illegal activity in the vacation rental industry.”

Caldwell said he does not believe the act of paying taxes makes a business legal. “Al Capone went to prison for tax evasion, not for bootlegging or murdering people,” he said.

Honolulu Star-Advertiser reporter Kevin Dayton contributed to this report.