One of the bills that has come out of the recently concluded legislative session is SB 2699, which proposes to make “resort fees” subject to our Transient Accommodations Tax (TAT).

A “resort fee,” which also goes on your bill if you stay at a hotel, and not only in Hawaii but around the world, is to pay for other amenities such as use of the hotel’s weight room, or pool, or Wi-Fi internet service.

“Oh?” you might say.  “I thought those things were included in the room rate.”

That’s precisely the point, both for the hotels and the Tax Department.  The TAT is 10.25% of the gross room rate.  Our supreme court has said, “in determining tax liability it is fundamental that substance, rather than the form of the transaction, governs.  Actualities and consequences of a commercial transaction, rather than the method employed in doing business, are controlling factors in determining such liability.”  In re Kobayashi, 44 Haw. 584, 358 P.2d 539 (1961).  Thus, if a “resort fee” is actually a piece of the room charge, by any other name, then it’s taxable as a room charge.

One of the tests that the Department is now using to figure out if a resort fee is a room charge with another name is whether the charge is “mandatory.”  If the fee is not part of the room charge, then a guest staying at a hotel should be able to opt out of it.

Some of the bills that were going through the session, such as HB 2432 SD 1, would define a “resort fee” subject to the TAT as:  “any mandatory charge or surcharge imposed by an operator, owner, or representative thereof on a transient for the use of the transient accommodation’s property, services, or amenities.”  That definition doesn’t seem to be different from what the Department was already enforcing, so there wouldn’t be much harm in enacting that version.  That bill died.

SB 2699, the one that passed, defines a resort fee as “any charge or surcharge imposed by an operator, owner, or representative thereof to a transient for the use of the transient accommodation’s property, services, or amenities.”

Whoa there!  Wouldn’t that make pretty much anything on the hotel bill a resort fee?  Suppose you watch an in-room movie and get billed for it.  Isn’t that a charge for one of the hotel’s amenities, namely the in-room TV and movie system?  What about a charge for a meal?  If you were to eat in your room, or even in the hotel restaurant, for that matter, isn’t the meal charge for the hotel’s property (food), services (servers), and amenities (in your room, or in the hotel restaurant)?  This certainly was not the intent of the TAT when it was enacted, and it would be far different from most hotel room taxes across the country and internationally if the tax is applied in this manner.

Apparently, some lawmakers were unhappy that the TAT was not being applied to resort fees even if they were shown to be truly optional charges for things other than a transient room rental.  So, this bill lurches in the other direction. It’s a reactionary reaction.  Is this really what we want for our TAT system?

This November, voters throughout the State will be given the opportunity to vote on a constitutional amendment, brought forward by Senate Bill 2922, supposedly to fund primary school education.  The amendment would give the State Legislature the power to impose a real property tax surcharge on “investment real property.”

The amendment, if approved by the voters, does not define what investment real property is.  Nor does it contain any limitations on the taxing power.  Almost all the details are left up to the state legislature.  For constitutional provisions this is not uncommon, but if approved it would give the genie, namely the legislature, a lot more power over revenue raising than it previously had.

Last year, the teachers’ union, which was solidly behind the proposal this year, was actively pushing a proposal to do the same thing.  But the union was also advancing legislation to implement the surcharge, and that legislation had some numbers in it.  So, from that legislation we can try to figure out how much is at stake.

Last year’s bill, Senate Bill 686, proposed to surcharge both investment real estate and transient accommodations.  It proposed to tax the real estate, if valued at $_____ or more, at $7.50 per $1000 of property value.  (Yes, the amount was left blank in House Draft 1, the latest version of that bill.)  Testimony that the teachers’ union submitted to the House Finance Committee said, “By levying a surcharge on residential investment properties and visitor accommodations, we can raise over $500 million each year for education without placing an unfair financial burden on local residents.”  The union went on to explain the apparent targets of the bill: “Our state’s high cost of housing and renting is driven by real estate speculators using the islands as their personal Monopoly board.”

Let’s suppose that the intent is to tax single- or dual-family residential properties with values over $1 million.  Honolulu’s “Residential A” property category fits that description.  The latest report from the Honolulu property tax office shows that Residential A properties aggregated about $17.5 billion in value.  Applying a $7.50 surcharge to all of them would result in a tax take of about $131 million.  Even allowing for similar properties on other islands, it’s clear that the teachers won’t even get close to $500 million without either substantially modifying the threshold at which the surcharge applies to residential properties or applying the surcharge to billions of dollars’ worth of property other than that which now comprises Residential A.  After all, the constitutional language doesn’t even require that the surcharge apply only to residential realty.  It can apply to any investment real property.  What about shopping centers?  Rental housing?  Office buildings?

And even if that $500 million is raised, there are, sadly, no guarantees that any of it will end up in the classroom.  About $2 billion in general fund monies are now appropriated to the Department of Education.  If the real property surcharge pulls in hundreds of millions, there will be tremendous pressure on lawmakers to “repurpose” some of the $2 billion.  After all, there are lots of priority projects throughout the State, such as relief for the poor and the homeless, invasive species ravaging our ecosystem, university and airport facilities in dire need of repair, roads and bridges falling apart, and the list goes on.

Given all these pressures, what’s the genie going to do if let out of the bottle?  It may not simply launch a fusillade against evil real estate speculators.  Others may get caught in the firestorm.  And will there be a benefit to our keiki?  Maybe so, maybe not.  So, do we really want to open that bottle?

HB 2432, one of the bills actively being considered this session, proposes to hike the “transient occupancy tax,” or TOT, by an as-yet-unspecified amount.  This part of the bill is noteworthy for the factual support behind it.  Or, more particularly, the lack thereof.  It’s based on “the tax office said so, so it must be true.”

The TOT is like the transient accommodations tax or TAT, sometimes known as our hotel room tax.  It is paid on the occupancy of a timeshare unit.  (Isn’t it strange that we tax the owner of property for using the property that he or she owns?  That’s a debate for another day.)

The TOT is currently imposed at the same rate, 10.25%, as the TAT.  The TAT rate is applied against what a person pays to occupy a hotel room.  A timeshare owner doesn’t pay for occupancy, so the TOT is imposed on 50% of the average daily maintenance fee.  In 1998, when the TOT law was enacted, it was recognized that this amount was an estimate, a practical alternative to requiring taxpayers or the Department to prove up fair rental value.  So, the law said that if either the taxpayer or the Department of Taxation felt that a different value was warranted, the party could prove up the fair market rental value of the unit and the tax would be applied to that value instead.

In 2015, the Legislature considered HB 169 of 2015.  At the time, the TAT was at 9.25% of room price, and the TOT was at 7.25% of fair market rental value.  The bill wanted to jack up the 7.25% to 9.25% “to preserve equality with the TAT” although the percentages were applied to wildly different things.  In support of the bill, the Department testified: “[T]imeshares are afforded a discounted tax imposition in two ways.  First, timeshares are subject to a 7.25% tax rate, rather than the 9.25% tax rate.  Second, the rate is imposed on one-half of the daily maintenance fee paid by the owner of the unit, rather than on the full fair market value of the room.  One-half of daily maintenance fees in most cases is significantly below the true market value of any accommodation.”  The Department then proposed language to change the timeshare tax base from 50% to 100% of daily maintenance fees.

The Conference Committee found that the Department did not exercise its discretion to prove up a value different from 50% of daily maintenance fees in the 17 years since it gave the Department that discretion.  As a result, in 2015 the legislature cut out the provision allowing either party to prove up a different value.  It also jacked up the TOT rate to 9.25% to “promote fairness,” and the bill was signed into law.

That leads us to this year.  The Department has never explained why or how 50% of daily maintenance fees is inadequate.  Given that the Department never bothered to prove that the 50% was too low when it had the ability to do so, it’s probably fair to say that the Department has no factual evidence.  It’s apparently much easier for them to make broad and sweeping generalizations about the law to get it changed than to be bothered with actual facts.  The tax office said so, so it must be true.

Lawmakers, wake up!  It’s your duty to make laws after weighing facts and considering consequences.  But how can you weigh facts if there are no facts presented to you?  If you believe “the tax office said so, so it must be true,” then there is no check and balance, and we are all in serious trouble.

In last week’s article, I said we should look forward to lots of surprises as lawmakers press forward with our legislative session with techniques such as “Gut and Replace” to give our legislative bills content that doesn’t at all resemble what they previously looked like.  Here are some that we have seen so far:

HB 207, which started off as a bill to adjust the amounts of the low-income household renters’ credit for income tax, is now a bill to increase estate taxes for large taxable estates and increase conveyance taxes paid on the transfer of single-family residential investment properties with a value of at least $2 million.

HB 2432, which started off as a bill to impose transient accommodations taxes on “resort fees,” which some hotels charge, still has that content but was also stuffed with provisions increasing the tax rate on timeshare units, and then applying the tax to “intermediaries” such as Expedia or Priceline that sell Hawaii transient accommodations online.

SB 648, which started off as a bill to increase income tax credits for the poor and pay for them with an income tax hike, is now a bill that allocates additional transient accommodations tax revenues to our neighbor island counties.

At least with the above bills, the committees that gutted and replaced the bills’ contents were good enough to publish a “Proposed Draft” that people could read and testify about before it became the current version of the bill.

And then, there is HB 1652.  It started out as a housekeeping bill, to get rid of some special funds that weren’t being used, following a State Auditor’s report identifying those funds.  The bill remained a housekeeping bill until just recently, when the Senate did two things.  First, it added “auto-raid” provisions placing new dollar caps on fourteen different special funds, so that if the special fund has more money at the end of the State fiscal year the excess is dropped into the state general fund.  Then, it added a provision that increases by 40% the “central services skim,” a fee that the State sucks out of most special funds and plops into the general fund.  This fee is ostensibly for services that the State provides to the fund.  The fee is increased from 5% to 7% of the fund’s receipts.

We have written about the central services skim in articles published on August 7, 2017, and August 14, 2017.  At that time, we wondered about whether the 5% was based on verifiable data or was just another made-up number.  We also worried about whether the federal government, which pays a large chunk of the skimmed amount out of the Airport Fund, would push back given that a significant and growing number of special funds are legislatively exempted from the skim, and the Airport Fund isn’t.

Here, we have provisions being inserted into the legislative process with literally no notice.  No proposed draft with these provisions was published.  No testimony or other data justifying either the 5% skim or the 7% revised skim appears in the legislative record.  No one could tell lawmakers about possible ramifications, for example, “You better be careful because the 5% skim is grandfathered under the federal laws governing the airports but the 7% won’t be.”

The fourteen different constituencies behind each of the fourteen special funds being auto-raided, furthermore, might have had something to say about the raid provisions.  But we won’t know because they were never given the chance to testify.

Is Mighty Morphin Power Bills a way to make good laws in this State?