Hawaii missing out on $100M in taxes from illegal vacation rentals

HONOLULU (HawaiiNewsNow) - Hawaii's illegal vacation rental business is adding up to a lot of unpaid taxes.

According to experts, the illegal rentals translate into more than $100 million in uncollected transient accommodation taxes.

"There's a tremendous amount of uncollected tax dollars," said Rick Egged, president of the Waikiki Improvement Association. "I estimate the TAT alone is $100 million uncollected annually."

About one quarter of the state's total lodging inventory is made up by vacation rentals, most of which are operated without the proper government approvals, according to the Hawaii Tourism Authority.

Officials say it's not clear how many of the unpermitted rentals are paying taxes.

Earlier this week, Gov. David Ige indicated his intention to veto a bill that would have required sites like Airbnb or VRBO to collect and pay taxes on behalf of hosts who list their properties.

"We are very much concerned about what the unintended consequences of this measure would be," Ige said, during a news conference Monday.

The governor has until July 12 to reconsider, but he cited several concerns, specifically that it could hinder efforts to identify and cite the owners and operators of illegal vacation rentals.

Ige says too many people have raised concerns that the bill would shield hosts who are offering illegal vacation rentals. He and others prefer the state enforce a current law, passed just last year, requiring property owners to display their tax ID's on each listing.

"If that transient accommodation tax number isn't posted, they're in violation of the law," said state Sen. Laura Thielen, who strongly opposed House Bill 1850 in the last legislative session. "They can be fined daily fines and if they continue to not post, those fines will accelerate."

For years, lawmakers have sought to address the issues caused by short-term, illegal vacation rentals. Among them: That the rentals exacerbate the hot housing market and push out residents.

Many believe enforcing existing tax code would likely deter property owners from breaking the law.

"We desperately need more housing for local residents," Thielen said. "If you were just to look at legal vacation rentals and take the others off the market and put them into the housing inventory, we would probably have an additional five to 10,000 housing units right off the bat for local families to be able to rent over the long-term."

Experts say the number of vacation rental listings have skyrocketed in recent years, due in large part to online advertising.

On O'ahu alone, there are an estimated 3,700 illegal vacation rentals and only 830 "grandfathered" legal listings, which were around before the county outlawed the practice in 1986.

Of the 88,041 total lodging units in the state, 22,238 are individually-advertised units or vacation rentals, according to a 2014 study by the Hawaii Tourism Authority. It's impossible right now for the state to determine how many of those listings are paying their required taxes.

"What you set up is a situation where the properties in Waikiki, which are all paying their taxes, are at a competitive disadvantage," said Egged, who hopes the governor will reconsider his veto and instead sign the bill.

"We're not trying to put anybody out of business -- that's between the individual units and the county and we realize there's zoning issues involved -- but we believe that everybody should pay their fair share of taxes."

He added, "I don't believe that we will be able to -- through normal collection processes -- touch on this uncollected tax dollars. Whereas, if we set up a method for a lot of these companies who are doing this advertising to collect money for the state then the state will realize a substantial part of that lost income."

Thielen disagrees, and believes the legislation missed a crucial opportunity to create stricter oversight of an industry that has led to the creation of a large number of illegal vacation rentals.

"We need to make sure that if the fovernor vetoes this and that we come back next year and hold all of these internet providers responsible to some basic minimum standards because this is far too important," Thielen said.

The governor says the state is six weeks away from completing a tax modernization upgrade that will allow them to better screen residents and catch those who may be violating tax laws.

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