A state judge has rebuked Maui County attorneys and property tax officials for collecting $10.7 million in improper taxes from owners of a Kaanapali time-share because the owners challenged the county’s tax policy.

Circuit Judge Peter Cahill said in a written decision earlier this month that the county abused its taxation power to create a weapon against taxpayers who had sued to dispute the legality of a unique treatment of time-shares for property tax purposes.

In the decision, Cahill ordered the county to refund $10.7 million in taxes to the owners of 1,114 units in the Westin Kaanapali Ocean Resort Villas, plus interest and $83,325 in fees the owners paid to initially appeal the improper tax bills.

The owners also are expected to seek extra damages and recovery of roughly $400,000 in attorneys fees.

“This all never had to happen,” said Robert Klein, a local attorney and former Hawaii Supreme Court justice representing the time-share owners.

Klein said a poorly designed legal tactic by the county to retroactively “reassess” property taxes backfired. “They went way out there,” he said of the county. “Basically, (Cahill) said the reassessments were illegal.”

In a written statement, Maui County and its corporation counsel strongly disagreed with the findings and rulings of the court.

County attorney Pat Wong said in the statement that a “highly questionable” lawsuit filed in 2013 by the Ocean Resort Villas time-share owners challenging the county’s special tax rate for time-shares led county property tax assessors to uncover that they had undercharged the owners in 2006, 2007 and 2008 by $10.7 million, so the county tried to collect the correct amount.

Wong said the county will refund the $10.7 million along with interest and fees but will appeal the court ruling.

Maui County claims that backlogged property tax assessment rolls resulted in Ocean Resort Villas being billed about $8 million based on the land value and value of construction costs on two parcels that make up the time-share complex built between 2003 and 2006. This valuation method is typical for condominiums while they are being built, and the county usually switches to assessing the value of individual condo units when construction is finished.

That didn’t initially happen in the case of Ocean Resort Villas.

The county made the change for the time-share in 2009, and owners paid the higher assessments though they appealed the amount and settled with the county for 2009 and 2010 bills.

Then in 2013, Ocean Resort Villas owners, through two owner association boards, filed a lawsuit that alleged the county didn’t follow Hawaii open-meetings laws and that having a separate property tax rate for time-shares wasn’t fair. The suit alleged that the county owed the owners $30 million.

In 2015, one month before a scheduled trial date, the county filed a counterclaim seeking to recover a “tax windfall” from 2006, 2007 and 2008 — $10.7 million in underpayments — for Ocean Resort Villas. Circuit Judge Rhonda Loo dismissed the counterclaim in March 2016.

Two months later the county Real Property Assessment Division sent Ocean Resort Villas 1,114 “amended” tax assessments for the three years totaling an extra $10.7 million and gave owners 30 days to pay it. The notice also said, “For questions, call Maui County Department of Corporation Counsel.”

The time-share owners appealed the amended assessments to a county tax review board but had to first pay the $10.7 million and an appeal fee of $75 per owner, for a total of $83,325.

In January the board upheld the higher assessments, and the time-share owners further appealed to the state Tax Appeal Court in February, paying $100 for each of the 1,114 appeals. The Tax Court had yet to rule when Cahill issued his decision Aug. 8.

Cahill said no evidence was presented that the county would have issued the amended assessments in the normal course of real property tax functions.

“The county issued the amended assessments not as part of its routine assessment and taxation function, but, viewing the facts in the light most favorable to the county, abused (its) taxation power to create a weapon — a new $10-plus million tax obligation — against taxpayers with whom it was in litigation,” Cahill said in his order.

Issues over the validity of Maui County’s tax rate for time-share property have yet to be decided in the case.