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Sticking The Tax To Time Shares

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By Lowell L. Kalapa

Last year Maui did it and now it appears that the City & County of Honolulu wants to follow suit by slapping time share units with a much higher real property tax rate by creating a brand new category called time shares.

It appears that the reasoning behind this move is that the transient accommodations tax, or TAT, is determined on the basis of the “fair market value” which for time share units is defined as “an amount equal to one-half the gross daily maintenance fees that are paid by the owner.” This was the best approximation lawmakers could come up with when they passed the amendment to the TAT law that levies the tax on time share units. 

Advocates of the separate category for time shares argue that as a result of basing the TAT on maintenance charges it produces substantially less in TAT revenue than the tax would if applied to a regular rental of a hotel room. Thus, time share units are perceived as not paying their “fair share” of the cost of the impact they make on the county’s facilities and services.

However, imposing a higher real property tax rate on this particular type of transient accommodation has some hidden problems that are not readily perceptible at the out set. For example, if the time share is rented out as a hotel room, the TAT is calculated on the gross income of the rental and not on the maintenance fees charged to the owner. Because the room is categorized as a time share for real property assessment purposes, the higher rate is levied regardless of the fact that for some of the weeks some of the time share units may actually be rented out as regular hotel rentals.

Segregating time share units into a separate category from other transient accommodations raises another problem and that is where there is a mix of regular hotel rooms for rent and time share units within the same facility. Will the property be placed in the hotel/resort category or will it be placed in the time share category?

What this new category does do is to set a precedent by segregating types of transient accommodations into distinct sub categories. While time shares have been around for a long time, there are other types of transient accommodations beginning to make an appearance on the landscape and one has to wonder what the county councils will do when they become major forces in the visitor industry. For example, in Honolulu the debut of condo-hotel rooms is beginning to grab the attention of buyers across the state and across the nation. This is where former hotel rooms are being sold to investors to be used either for long-term occupancy or to be rented through a pool of rentals as a hotel room. Will the county councils create yet another category for this new type of transient accommodation?

It appears that the efforts of the county councils to squeeze more revenues out of these types of accommodations are misdirected. If one stops to think about time shares, it is an accommodation that has been purchased for use by the owner for a short period of time. However, that new owner of the time share no longer has to be convinced to come to Hawaii for a vacation. Thus, there is no need to market Hawaii to the time share owner as he or she has bought a stake in Hawaii and plans to return time and again.

If one remembers that part of the TAT collections goes for the marketing and promotion of Hawaii as a visitor destination, there is no need to use the TAT paid by that time share owner to market Hawaii to him. Based on that rationale, then one can argue that all of the TAT collected from a time share should go directly to the counties to off set the cost of maintaining public facilities used by that time share owner. 

And since time share units can be identified by county, tax collectors, as well as managers of time share units, know exactly how much is collected on time share units in that county. Thus, allocations of the TAT collected on time shares can be accurately allocated to a particular county.

More importantly, county officials should think carefully about the implications of singling out this one type of transient accommodation for a much higher tax rate. If the higher rate discourages the growth of this particular segment of the industry, Hawaii may be losing a stabilizing force in the visitor industry. Given that a time share owner has made a commitment to return again and again to the Islands, it insures the continued prosperity of the state economy. Instead of hoping and wishing that visitors come to Hawaii from year to year, Hawaii is guaranteed that either the owner or another time share owner will fill that unit.

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