County hotel tax programs focus on collection, education as revenues surpass previous state system
About two years ago, state lawmakers diverted the transient accommodations tax away from the counties and into the state’s general fund.
To make up for it, a law was enacted last year to allow counties to establish their own 3% TAT program targeting short-term rentals and hotels to sit on top of the state’s 10.25% tax.
All four of Hawaiʻi's counties adopted ordinances to tax at a maximum of 3% on gross rental incomes from establishments like vacation rentals, hotels and timeshares. Now the tax revenues are higher than what the counties would have been allotted by the state.
For the next fiscal year, Maui Mayor Michael Victorino said projections are about two and a half times what they used to be.
“Right now, we estimated $60 million,” Victorino said last week. Before, the county was receiving about $23.5 million, or about 22.8%, of the $103 million TAT distribution.
Exceeding revenue projections has been a trend across the islands.
The County of Kauaʻi enacted its ordinance first, starting the tax on Oct. 1, 2021. Since then, Kauaʻi has received about $10.6 million as of May 20. That outpaces the $9 million the county had originally anticipated for the current fiscal year.
But the process of collecting and enforcing the tax has come with its own set of issues.
“(Paying the tax is) on voluntary compliance, so you don't know how much the taxpayer owes until they report it to you, right?” Kauaʻi Finance Director Reiko Matsuyama said.
And instead of the twice a year deadlines like real property tax, Matsuyama said some TAT taxpayers now have monthly deadlines.
“So every month we're getting in 2,000 payments, let's say, and we don't know how much each of them necessarily owe,” Matsuyama said.
Part of that confusion is because most taxpayers have been filing with the state for years. When they go to pay the familiar state tax, they must now then go to another web portal and pay their county tax.
After each TAT deadline, the state Department of Taxation provides the counties with a list of who filed with the state and how much they’ve paid.
County finance directors and TAT administrators reported that the state has largely been very helpful in sharing this information and helping them to set up their own programs, but the process of comparing county calculations to state numbers can still be tedious.
“There's this lag effect, it's not real-time information, we're getting it like 10 days later,” City and County of Honolulu Deputy Director of Budget and Fiscal Services Carrie Castle explained. “The process of validating (the tax)… we are not able to do that until we get the information from the state.”
For fiscal year 2022, Honolulu estimated about $30 million in revenue from the about 7,000 eligible taxpayers from the tax that went into effect on Dec. 14, 2021.
In the next fiscal year, they’re projecting about $84 million. When the state was administering the program, about $45 million was brought in.
Since establishing the tax, each county has had to hire additional personnel, or create entirely new departments, to monitor the program.
One example of that is Steven Hunt’s new duties. As Hawaiʻi County's internal control manager, he's under the Finance Department's Internal Control and TAT Division.
Hawaiʻi County, which started its TAT program in January, has four positions slated just for TAT, and so do Honolulu and Maui.
Hunt said one of the most time-consuming parts has been wading through contracts on whether or not certain bookings may be exempt from the tax.
“Eventually, all these pre-bookings are going to work themselves out of the system and will then only have new bookings, which will all be subject to the 3%,” Hunt said. “So, some of this manual process that we're going through now, although it is very time consuming, I think will be short-lived. And then I think we'll have to look at the staffing to see if we're appropriate at that point.”
During this upstart period, the TAT teams have been mostly focused on collection and education.
“It's new for not just the counties, but also the taxpayer. We get a number of taxpayer inquiries, it's sort of like peaks and valleys,” Castle said. “There's just this heightened number of taxpayer inquiries that the team has to attend to. So, whether it's via phone call or via emails, there is a lot of responding to taxpayers' inquiries, time spent there, more so than right now, anyway, (on) compliance and enforcement.”
Outreach continues to be a priority.
“We're really trying to help the taxpayers understand,” she continued. “The large hoteliers, they get it, but there's thousands of much smaller TAT taxpayers.”
For the most part, counties are putting all the money in their general fund accounts.
For the first two years on Oʻahu, 58% of it will go to the general fund and about a third will go to the Honolulu rail, and then the last 8.34% into a special account of the general fund used to mitigate the impacts of visitors on public facilities and natural resources.