The County Strikes Back (part 1)

by Tom Yamachika, President, Tax Foundation Hawaii

This week we begin a series on a long and hotly litigated property tax case from Maui. This case isn’t about wind turbines like we wrote about a couple of weeks ago. This one involves timeshares.

Some timeshare projects in Kaanapali were unhappy when Maui County enacted in 2004 a new Time Share property classification, effective in 2006, that was much more expensive for impacted taxpayers. In 2013, the associations sued in Circuit Court on Maui asking for the court to declare that the Time Share classification was invalid.

Maui’s eagle-eyed attorneys and tax assessors then noticed something interesting. For the years 2006, 2007, and 2008, they had assessed the master projects, such as the land and buildings on the whole condominium project, as opposed to individual time share interests (typically, ownership of a certain unit for a week per year). And the property was assessed using cost data, which is typically used for projects being constructed, rather than market data. The county, claiming it had a right to charge tax on “omitted property” that wasn’t taxed before, then set up a counterclaim in the lawsuit for $10 million in additional property tax owed for 2006, 2007, and 2008.

The timeshares moved to have the counterclaim tossed out. “There’s a process for assessing tax and you didn’t follow it,” they said, and the judge agreed. “We’ll fix that,” the county said, and issued “amended property tax assessments” to every timeshare unit owner in the projects, in order to give those owners some credit for the tax that had been paid on the master parcels. (But wait. Isn’t there something weird about issuing “amended” assessments on what they claim is “omitted property” that hasn’t been assessed before?) The total of the 1,111 amended assessments was $10 million, due and payable in 30 days.

The timeshares somehow scraped up the money to pay the assessments and appealed all the amended assessments. The filing fees for the appeals totaled more than $80,000. The timeshares had to raise their $10 million through special assessments, which, unlike maintenance fees charged by non-timeshare condominium associations, are GET taxable. Another $300K+ was sent down the tubes.

Now, Maui isn’t that big of an island. Word of the massive assessments got out, and let’s just say that other people were concerned. “You don’t have to worry,” county officials said, in effect. “We only assessed these folks retroactively because they were making a huge and questionable claim against the county and they didn’t pay their fair share of tax in prior years.” Which easily could be read as, “These suckers had the nerve to sue us. So, we are going to pound the stuffing out of them. Government-fearing citizens need not be afraid.”

This was way too much for the trial judge. He ruled that the supplemental assessments were all void because the county didn’t follow proper assessment procedure and that it wasn’t lawful for the county to reach back for so many years. The judge found that the county retaliated against the timeshares for suing them, which violated many of the timeshares’ constitutional rights. Thus, the timeshares were entitled to damages and attorneys’ fees under federal civil rights law. And, for good measure, the judge ruled the Time Share property tax classification on Maui invalid since inception, which would give the suing timeshares the right to a $30 million refund of overpaid tax as well. Maui County appealed the decision, and the case now sits in the Intermediate Court of Appeals.

In the next few weeks, we will be taking a close look at some of the issues, including the validity of the assessments, the validity of the Time Share classification, and even whether the case belongs in the right court.

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LINK: Ocean Resort Villas v. County of Maui — The Documents