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High court rules in favor of county on timeshare taxes

Ruling: Lawsuit should not have been heard in Circuit Court

The Hawaii Supreme Court issued a ruling in favor of Maui County in a seven-year-old lawsuit over the county’s timeshare property tax classification, a decision which removes the risk of the county paying $34 million or more in damages.

The court said in its decision June 19 that the case brought by taxpayers that challenges their real property timeshare tax assessments should not have been decided in 2nd Circuit Court because it “lacked subject matter jurisdiction” over the matter. The case should have been handled by the state Tax Appeal Court.

“We therefore vacate the orders and judgment giving rise to this interlocutory appeal and remand this case to the Circuit Court for further proceedings consistent with this opinion,” wrote the high court.

In March 2018, 2nd Circuit Court Judge Peter Cahill issued an order saying the timeshare property tax classification established by the county in 2004 and taking effect in 2006 was illegal. He ruled that the tax rate for the classification from 2005 to the present was “invalid and void.” The county appealed.

According to minutes from a court hearing in June 2018, Cahill said that if the county lost its appeal the damages could go higher than $34 million.

The case was brought to the news media and public’s attention prior to the general election in 2018 by individuals and political groups seeking a change in county government. One of the groups, Maui Miracle, was concerned about the potential financial fallout if the county lost its appeal.

Cahill’s ruling came in 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 named the county and the County Council as defendants and focused on the establishment of the timeshare property tax category. The category has seen some of the highest property tax rates over the years.

Currently, the tax rate for timeshares is $14.40 per $1,000 valuation. By contrast, owner-occupied dwellings have the lowest rates between $2.51 and $2.61 per $1,000 valuation, depending on the value of the dwelling.

The mayor and council at the time sought to establish the timeshare class and rates to eliminate the tax disparities in the visitor industry between hotels and timeshares, according to court documents.

In his 2018 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.

The county argued that the associations bypassed the normal appeals processes for property taxes and headed straight to 2nd Circuit Court. The county also argued that all appeals for tax refunds are the “exclusive and special jurisdiction” of the Tax Appeal Court on Oahu. 

The case was appealed by the county to the state Intermediate Court of Appeals. The state Supreme Court decided to take the case from the Intermediate Court of Appeals before it ruled.

In its ruling, the high court said timeshare taxpayers were required to follow the County Code and file an appeal with the county’s Board of Review and Tax Appeals Court. But with the taxpayers going to 2nd Circuit Court instead of the Board of Review and Tax Appeal Court, the court ruled that the plaintiffs interfered with the assessment and collection of taxes, county attorneys said.

With the Supreme Court vacating all orders and judgments and returning the case back to 2nd Circuit Court to comply with its ruling, the case should be dismissed, county attorneys said.

Because appeals from real property assessments need to occur within 30 days after the issuing of assessments, it now is too late for the timeshares owners to appeal the assessments and taxes, county attorneys said.

“The mayor and the Finance Department appreciate the Supreme Court’s reasoning and ruling,” said Deputy Corporation Counsel Brian Bilberry, who handled the case for the county. “The court again expressly recognized, as provided in the Hawaii State Constitution, that ‘all functions, powers and duties relating to the taxation of real property shall be exercised exclusively by the counties.’ ”

Attorneys for the plaintiffs did not respond to requests for comments this week.

As a result of the Supreme Court’s ruling, the county Corporation Counsel’s office is “reviewing legal options and considering whether the county may have any further recourse” regarding $10.7 million in refunds the county was ordered by Cahill to make to the plaintiffs, Bilberry said.

Cahill ordered the refunds in 2017, which county attorneys said this week were paid pending the appeal. But now the Supreme Court has voided the orders and vacated the judgment, county attorneys said.

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

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