County awaits appeal of timeshare tax ruling
Losing lawsuit could mean paying $34 million in tax refunds, hurt bond and credit ratings
A lawsuit that could cost Maui County $34 million in property tax refunds is now before the state Intermediate Court of Appeals, county officials confirmed last week.
The county is appealing a decision by 2nd Circuit Court Judge Peter Cahill, who in March issued an order saying the timeshare property tax classification established more than 10 years ago is illegal. He ruled that the tax rate for the classification from 2005 to the present is “invalid and void.”
Cahill’s ruling stems from a lawsuit filed in 2013 by the Ocean Resort Villas Vacation Owners Association and Ocean Resort Villas North Vacation Owners Association (both involve owners from the Westin Ka’anapali Ocean Resort Villas), along with association officials Vic H. Henry and Peter A. Bagatelos.
The lawsuit is against the county and the County Council over establishing the timeshare category, which has had the highest tax rate. Currently, the rate for timeshares is $15.41 per $1,000 of net taxable assessed valuation. It is followed by hotel and resort properties, which are taxed at $9.37. Homeowners pay the lowest at $2.85.
The county and the council sought to establish the timeshare class and rate to eliminate tax disparities in Maui’s visitor industry between hotels and timeshares, according to court documents.
In his March ruling, Cahill said that, under the Maui County Code, the county may create property tax classifications based only on differences in the use of real property. The code says there is no distinction in the actual use of hotels and timeshares, “because it defines that use in identical terms,” Cahill wrote.
He also noted that the only difference between a condominium classified as a hotel and a condominium classified as timeshare is the existence of a timeshare plan, which he says is “a distinction that is irrelevant to the property’s actual use.”
According to minutes from a court hearing on June 1, Cahill said that if the county loses the appeal the damages could go beyond $34 million.
He noted that the “$34 million is just the beginning of the tip of the iceberg here.”
According to court minutes, Deputy Corporation Counsel Brian Bilberry said at the hearing that the ramifications of the county losing the case could be devastating. The adverse ruling would damage the county’s bond and credit ratings and undermine Maui County’s tax code, he said.
The case was brought to the news media and public’s attention prior to the general election by individuals and political groups seeking a change in county government. This includes the Maui Miracle, which said in a news release it is devoted to preserving Maui’s economic and environmental sustainability by energizing voters. The individuals and groups question why the county did not make the issue more public and did not set aside funds to prepare for the possible fallout from an adverse ruling.
A written statement from the county said that because the timeshare owners did not “follow the law” and file timely tax appeals, the county has been prevented from placing the requested tax refunds into an account for property tax issues under litigation.
Instead, the associations bypassed the normal appeals process and headed straight to court, the county said.
Because of this, the county maintains that the ruling could be overturned. The ruling also could be reversed because Cahill has “no general subject matter jurisdiction over tax disputes.” And, by law, all appeals for tax refunds are the “exclusive and special jurisdiction” of the tax appeal court on Oahu, the statement added.
Council Chairman Mike White, who was not on the council when the timeshare category was established but sat on the council as the lawsuit progressed through 2nd Circuit Court, said that the reason the council did not set money aside to deal with possible fallout from the lawsuit is because “we do not feel the lawsuit has any merit.”
“We believe we will prevail on appeal.”
But when asked where the money would come from if the county were to lose its appeal, White said that “we are going to have to increase the taxes in other classifications.”
An emailed statement obtained from the timeshare association attorneys said the Westin Ka’anapali Ocean Resort Villas boards say their owners love Maui and its residents and are “committed to being positive contributors to the Maui community for years to come.”
“It is not now (nor has it ever been) our intention to place the county in a serious financial situation by taking legal action against it. We, like any taxpayer, merely sought to be taxed fairly and legally,” the statement said.
But association attorneys said they recognize that, because of the litigation, the county’s “financial exposure is now significant.”
“Given this, it is our sincere hope that we can settle our dispute amicably and without delay or further litigation, on terms that are financially feasible for the county and significantly mitigate its overall legal risks.”
When asked what is the criteria to create property tax categories, the county statement said it is based partly on use, but it’s not limited to actual use of property.
The county cites a Hawaii State Constitution amendment in 1978 that gives counties the functions, powers and duties relating to taxation of real property. The county’s powers include the formation of basic policies defining real property, setting the basis for assessment, determining the manner in which rates are set, setting exemptions and describing the appeal process.
When establishing property tax categories, the council has historically taken into consideration land use and economic policy, which was recognized by the 1978 Constitutional Convention members as a “vital function” for real property taxation, the county said.
The council looked to establish a class for timeshares when, around 2004, it became aware that timeshares were not paying a “comparable and fair” amount of property taxes to pay for infrastructural impacts on roads, sewers, drainage, water supply and maintenance of the island’s urban and recreational landscapes.
The council maintained there were tax loopholes timeshares were enjoying that offered an incentive for hotel conversions to timeshare. The council members believed that the growth of timeshares also threatened a reduction of hotel inventory on Maui, which “is part of the bread and butter of the local economy,” the county added.
White, who is also general manager of the Ka’anapali Beach Hotel, said that timeshares offer reduced services than regular hotels, so there are fewer employees at the timeshares than at hotels.
Hotels need to keep up with housekeeping, food service and other amenities daily. But timeshare occupants generally have their own kitchens, and housekeeping doesn’t normally service rooms every day, White explained.
White added that other differences between timeshares and hotels include that timeshares are run on a multiple ownership model.
And in the past, White said, he remembered that timeshares that were in the hotel and resort property tax category for many years believed that they should be taxed as residential properties. This also led to examining a separate category for the timeshares.
White said that years ago when he worked on Hawaii island, he knew a man who owned a hotel in Waikiki who went from selling prepaid vacations to converting his property to a timeshare.
The man told White that more money could be made by selling the rooms as a timeshare rather than a regular hotel room sale because he could avoid general excise and transient accommodations taxes.
“This is a financial model that significantly benefits the developers,” White said. “But (it) leaves the community with less jobs, less tax revenue and less overall income.”
It was only after public meetings and discussions that the council determined that the impacts of the growing timeshare industry warranted the creation of a separate category, the county said. The council also sent a representative to participate with a local task force to gather information about the impacts timeshare use was having on Maui.
The county statement pointed out that “the individual timeshare occupant pays a minimum” fee to a association to help cover the property taxes ultimately paid by the timeshare associations (not the member/owners).
For example, the county said an owner of a $52,000 to $75,000 timeshare interval at the Westin Ka’anapali Ocean Resort Villas is assessed by his or her timeshare association “a magnitude of around” $300 to $400 annually to help cover real property tax for that interval.
The county said it assesses condominium units for property tax purposes, but it does not assess individual timeshare intervals.
* Melissa Tanji can be reached at email@example.com.