The Maui County Council gave first reading approval Friday to two bills that would affect property tax classifications for short-term rentals, which some fear could lead to higher taxes.

Second reading approvals are required for both bills to be sent to Mayor Alan Arakawa.

One measure establishes a new property tax category for short-term rentals. Currently, short-term rental permit holders fall in the commercial classification.

Others facing reclassification to the new category include short-term rentals in hotel-zoned areas and condominium units where short-term rentals are allowed. Those owners currently fall in the hotel and resort classification.

The second measure would assess condominium units at their “highest and best use,” which is usually reflected in the property’s zoning. Condo units are currently assessed on actual use.

Maui County Real Property Tax Administrator Scott Teruya said that the establishment of a short-term rental category is aimed at cleaning up the County Code and to establish a fair category. Short-term rentals are not commercial entities, like a McDonald’s, nor are they hotels.

But those who run short-term permitted rentals said Friday that they do not want to be lumped into a category with condominium units allowed to do short-term rentals by zoning that do not need to obtain special permits, which are costly and impose stringent requirements.

If the new tax category translates into higher rates, permitted short-term rental owners said it would penalize those who have followed the law while illegal short-term rental owners continue to get away with lower tax rates.

Council Member Riki Hokama, who chairs the Budget and Finance Committee which recommended passage of the bill, said that he applauds those short-term rental owners who have followed county rules. He understands that the county needs to do more to nab illegal operators.

However, he pointed out that short-term permit holders need the permit because their vacation rental activity does not fit the zoning for their area. In addition, short-term rentals have an effect on long-term rentals, especially for residents.

“It’s like a commercial genocide of our own, when the local people are not the beneficiaries,” Hokama said.

The council voted 6 to 2 on the bill, with Council Chairman Mike White and Council Member Kelly King voting no. Council Member Don Guzman was excused.

White said that the county and the state have not done their jobs to control illegal short-term rentals.

“There is not a legal playing field,” he said.

King was concerned about how the bill could push short-term rental owners to operate illegally. Some testifiers said that having a new category with possible higher tax rates could lead to people violating the law.

The measure did not set the rates for the new category. That will be done during the budget process in the spring.

On the condo assessment bill, the council voted 7 to 1 to approve, with King dissenting and Guzman absent.

The proposed change could affect units being placed into the proposed short-term rental classification because many condo units are built on hotel-zoned land, are grandfathered in for short-term rental purposes or have received conditional permits to operate short-term rentals, Teruya has said.

Like the short-term rental bill, those who use their units as their primary residence can claim the homeowners exemption and will not be affected. The condo bill does have an option for unit owners who run long-term rentals to continue to be placed under the apartment classification.

Hokama proposed an amendment to the bill Friday to allow people wanting to dedicate units for long-term rentals to be able to do so until Dec. 31 for the upcoming fiscal year that begins July 1. It was approved by the council.

Teruya has said that assessment by highest and best use would bring this classification in conformance with all other property classes.

Those testifying against the bill had issues with long-term dedication and how it could make it difficult to keep their long-term rentals affordable.

Tom Croly, who is part of the Maui Vacation Rental Association but was speaking on behalf of himself, said that while there is a provision to allow those that rent long term to be placed in the apartment tax category, it could be “very punitive.”

“It will hurt people who are renting long term right now,” he said.

In the bill, a property owner has to register a lease with the state Bureau of Conveyances, petition the director of finance for dedicated use, forfeit any right to change the use for 10 years and agree to retroactive penalties fines and taxes as a lien on the property.

“There aren’t many people who are going to go through this hoop,” Croly said.

In an unrelated matter, the council also adopted a resolution to urge Mayor Alan Arakawa to issue a request for proposals to sell 55 county-owned lots in the Fairways at Maui Lani subdivision in Kahului at a discounted price of $8 million. 

A selling price of $9.8 million by public auction initially was proposed for the lots acquired in August 2011 for $11.8 million as a part of a settlement with developer VP & PK LLC in disputes over fill and grade heights for the homes more then a decade ago. 

Under the request for proposals, there will be development restrictions. The developer must sell single-family homes to those with very low and low income (25 house-lot packages for $290,450) and with below-moderate income (25 house-lot packages for $372,050) based on federal Housing and Urban Development income criteria. Four lots are designated for roadway development and one is designated for drainage.

* Melissa Tanji can be reached at mtanji@mauinews.com.