Don’t Give Me Back Rent, I Want to Continue Hiding from Tax

by Tom Yamachika, President, Tax Foundation Hawaii

Developments during this COVID crisis have brought out tax scofflaws in some of the most unexpected ways.

The state has established a Rent Relief and Housing Assistance Program to help people affected by the pandemic make their rent or mortgage payments.

Affected people who are making less than 100% of Area Median Income (for a family of four, from $83,300 on the Big Island to $125,900 on Oahu) can apply for help, and if their application is approved the State will pay their landlords or lenders directly.

There is, however, a small catch. Some landlords are refusing the money. Which makes one wonder about what is going to happen to the tenant once the State’s moratorium on evictions expires at the end of the year.

Why are they refusing the money? In a Honolulu Star-Advertiser article, Gavin Thornton, the executive director of the Hawaii Appleseed Center for Law and Economic Justice and a member of the House Select Committee on COVID-19 Economic and Financial Preparedness, said:

[S]ome of the landlords are unwilling to participate in the program, unwilling to sign off to receive the payments — allegedly because they don’t have their GE [general excise tax] licenses. They’re not paying their taxes on that rental income. So that’s potentially a problem that could prevent tenants who otherwise are eligible for the program, not receiving those funds that they really need. So we’re hoping very much that those tenants somehow, some way, will ultimately be able to access those resources.

How much is being refused? According to the article, eight million dollars. With a back rent amount per application of between $4,400 and $6,000, we are talking about perhaps 1,500 to 1,700 landlords in this position.

I have no sympathy at all for those landlords who apparently want to continue flying under the radar. General Excise Tax has applied to rents from the very beginning. It’s clearly covered in documentation the Territorial tax department prepared in 1935. Even my father paid general excise tax on rental income back in the old days – at a time when I was too young for kindergarten and was in no position to tell him to do that. He figured out what the law was and followed it. Why haven’t these folks done the same thing?

My advice to these landlords is to come clean, now. There will be pain, which you deserve. But there will be more pain if you wait. Now that the Department of Taxation has figured out that there’s a swamp here, it won’t take them long for them to come back with the dredging equipment.

The same message applies to those who are receiving money from short-term vacation rentals. You need to pay tax like the rest of us. And by the way, the State is already aware of this swamp and has mobilized the dredgers. They have been pumping the vacation rental platforms and property management companies for information about who their clients are and how much they get paid. The State can, and did, subpoena the information so the companies don’t have a choice but to provide that information.

To recap: If you are in the swamp, please come clean. It isn’t fair for the rest of us who do follow the laws and pay taxes to be forced to make up for the tax you owe and haven’t paid. Then please accept the money the State is willing to pay you, which should help alleviate the financial pain of making up for the years you haven’t paid, and please don’t fault the tenant for applying for aid and incidentally exposing you in the process.

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KITV: Attorney to landlords: Don't reject rent relief payments to avoid paying taxes