State tax crackdown garners millions in unpaid Hawaii vacation rental taxes

The state Department of Taxation already has collected $4.1 million this year from vacation rental owners who owed back taxes, and through continued stepped- up enforcement expects to easily hit $12 million by year’s end.

The state has deployed 13 tax investigators to go after vacation rental tax violations, and they’re on a roll.

Issac Choy, director of the state Department of Taxation, said this year’s figures are on top of the $6.2 million that the department collected in 2020 from vacation rental owners or operators that owed transient accommodations taxes, general excise taxes, penalties and interest.

Choy said the department is working its way thorough the various vacation rental platforms, which have become increasingly cooperative in sharing tax informa­- tion with the state. On just one platform alone, the state found 5,100 out of 7,300 hosts had not been paying GET or TAT taxes, he said.

Choy would not identify the platform, but said the state has been sending out letters and making contact with the thousands of people that haven’t been paying their share of state taxes.

“It’s alarming to see that the numbers are so high,” he said.

Choy said the state’s efforts to track the platform started in 2019 and didn’t abate during the pandemic, which has led to a recent rise in vacation rental use.

“Statistically, I think more people are using vacation rentals instead of hotels. Because of the pandemic, they would prefer to be in a private setting with their families instead of going to a hotel where they have to wear a mask,” he said. “I think the trend is going toward vacation rentals until the pandemic is a little bit more under control; then the normal numbers would come up.”

To be sure, vacation rental occupancy statewide topped Hawaii hotels in March, continuing a six-month trend that emerged in October after Safe Travels Hawaii allowed some visitors to bypass the state’s COVID-­related travel quarantine.

The average unit occupancy at a vacation rental in Hawaii in March was more than 62%, compared with just 43% for Hawaii hotels, according to a Hawaii Tourism Authority report that utilized Transparent Intelligence data. March was the most recent month for which data was available.

Choy said he hopes when word gets out that the department is “aggressively” going after vacation rentals that more people become tax-compliant.

Besides the back taxes and interest, Choy said violators face severe civil penalties, which start at $500 a day for the first violation and move up to $1,000 a day for the second violation. The penalty for frequent violators is $5,000 a day.

He said one county taxpayer already had to pay the state $400,000.

“This was for a single-family dwelling on the North Shore. That’s a lot and that’s for many years,” Choy said.

He said few people have availed themselves of the state’s voluntary disclosure program, but he hopes more reach out rather than risk getting caught.

“If you come in voluntarily, the state is very generous in abating penalties,” he said. “People who have used our voluntary disclosure program are pretty happy, if not really happy, that they did voluntarily come forward. They are our neighbors, too, and we are here to work with them.”

The state Legislature has supported the state tax department’s drive to ensure tax equity. In 2018 it allocated additional revenue to the Tax Administration Special Fund to create a Special Enforcement Section, the group within Choy’s department that is actively investigating transient accommodation owners.

The issue also has caught the eye of Gov. David Ige, who told the Honolulu Star-Advertiser that he is concerned about the spread of illegal vacation rentals and wants to make sure that those that are operating are legal and paying their fair share.

Ige said the state has been stepping up short-term rental enforcement efforts, which it has wanted to do for some time.

“As you know, we’ve actually gone to court to be able to subpoena information from these companies,” he said. “At first we were not successful, and then we were finally successful in getting some of the federal tax information. We are trying to work to identify illegal vacation rentals and then examining what taxes that they’ve been paying.”

Ige said the state wanted to ensure vacation rentals were paying taxes and not negatively affecting communities.

“We’ve been hearing more and more from the community about too much tourism, and I do believe that before the invention of short-term vacation rentals, we had a de facto cap just based on the number of hotels,” Ige said. “Vacation rentals means every single residential property is potentially a hotel room, which means that we have virtually unlimited supply, which has led to the growing numbers of visitors.”

He said the spread of illegal vacation rentals is especially concerning as Hawaii looks to recover its economy after the pandemic.

“We are seeing improvement in the Safe Travels program. We are seeing increasing arrivals. We are averaging 20,000 or so,” he said. “But we are noticing that many of them are not going to hotels; they are going to vacation rentals. That doesn’t help us reopen hotels and get people back to work; that’s the other reason that it’s important we clamp down on the illegal vacation rentals.”

Oahu, which has the most restrictive short-term rental zoning in the state, also is trying to crack down on vacation rental violations.

Eugene Takahashi, second deputy director for the city Department of Planning and Permitting, said the pandemic has affected enforcement as “owners and tenants are reluctant to allow inspections because of possible exposure to the virus.”

Takahashi said the department also has unfilled positions.

“We have 18 inspectors involved in vacation rental enforcement, but this is not their only task,” Takahashi said. “They have other responsibilities, such as building inspections. We have four vacancies that we hope to fill.”

Still, statistics from the department show that DPP issued more notices of violation during the pandemic than it did the year before. In 2020 the city issued 325 notices of violation, compared with 264 in 2019.

In 2020, 59% of the notices of violation were corrected; however, 51 became notices of order. The city assessed more than $3.4 million worth of fines, of which $31,000 was paid.

In 2019, 64% of short-term rental notices of violation were corrected, with 42 advancing to notices of order. In 2019 the city assessed $136,200 in fines, of which $2,100 was paid.

This year the city has issued 42 notices of violation and nine notices of order. Takahashi said none of the incidents have been corrected so far.

DPP has asked the state tax department to share tax information so that the city can more easily identify vacation rentals that are operating outside of zoning laws.

“TAT information could help if the short-term rental unit information is provided. If the information is available, we would be able to narrow down the location of a possible illegal STR (short-term rental),” Takahashi said. “A transient accommodations taxpayer’s mailing address may not be the same as the rental unit’s address and won’t be very helpful in our enforcement. It is not clear at this time what information will be provided by (the state Department of Taxation).”

In the past, the state tax department has refused to share any tax information with Oahu and the other counties. However, Choy said that he is open to working together to increase compliance and fairness among taxpayers.

“Right now this is confidential tax information,” Choy said. “The counties have reached out to us, and we are trying to work around the confidentiality. We all live in this state together, so if we can all work together, that would be kind of a good thing for us.”