Transient Vacation Rentals

by Tom Yamachika, President, Tax Foundation Hawaii

One of the bills now moving through our legislature is drawing an unusually visceral reaction from supporters, antagonists, and the public at large.

The bill concerns transient vacation rentals, sometimes known as TVRs. A person, perhaps wanting to make a little extra money, goes into business by making his or her house, or a part of it, available to tourists. This type of business includes vacation rentals as well as bed-and-breakfast places.

TVR hosts tend to be small and can’t justify the national advertising that larger hotels can afford. So a new type of business, which we call transient accommodation brokers, has emerged to help the hosts. The brokers maintain national and international websites to help hosts find guests, and vice versa. The brokers also handle the money side of the TVR transaction: the guest pays the broker, the broker pays the host, and the broker keeps an agreed percentage of both payments – part agreed upon with the guest, and part agreed upon with the host.

TVR activity, of course, is a business and the dollars earned in that business are subject to Hawaii state taxes. Specifically, our General Excise Tax (GET) and Transient Accommodations Tax (TAT) both apply, so those hosts that are in this business need to register appropriately and pay these taxes. But alas, not everyone does. So the legislative bill proposes to allow the broker to register with the Department of Taxation and to remit the GET and TAT to the State on behalf of the hosts. Once registered, any time a host earns money on the broker’s platform, the broker will pay the taxes and will pay over the balance to the host. The concept is similar to withholding, with which those of us who receive a paycheck are quite familiar: we work for an employer, the employer pays us our wages, but the employer deducts some taxes and pays them to the Department of Taxation and IRS.

The issue that has erupted at many of the hearings on this bill concerns county-level restrictions on property use. Some TVR activity violates county zoning laws. Some counties see withholding as described in this bill as a way to enable hosts to hide illegal activities from county law enforcement. Some people have gone further. They blame TVR hosts for wrecking the sanctity of neighborhoods with an unending stream of tourists or for yanking housing units off the market in the name of greed resulting in stratospheric housing prices that are yet another crippling blow to hardworking families struggling to make ends meet. Moreover, they turn to the brokers and demand that the brokers stop encouraging and facilitating such illegal, anti-societal, and morally depraved activity.

But hold on. Do we really want a withholding agent to be our brother’s keeper? Do we think it is right to ask our employers to call up our banks and credit card companies to see if we are current on our mortgage and paying our bills on time? If we aren’t timely or break the law, should we blame our employers for facilitating illegal or immoral activity by paying us our wages (after the tax authorities have, of course, gotten their share) rather than making sure that those monies are applied to payment of our debts?

At some point, we need to recognize that TVR hosts, like most employees, are adults. They have chosen to go into business, and they are responsible for running their business and all that it entails. They, as the property owners, are answerable to the counties for the use or misuse of those properties. Certainly, the brokers need to be aware of and compliant with laws that pertain to their business if they are going to be doing business here. But it seems a bit much to ask the brokers to be policemen for the counties when the counties, for whatever reason, can’t or won’t enforce their own zoning laws.