WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of December 16, 2018 The County Strikes Back (Part 4) By Tom Yamachika, President We continue with our series about a timeshare association suing Maui County seeking to invalidate its “Time Share” property classification, with the county then striking back. This week, we look at whether the property classification challenged was valid. The circuit judge on Maui’s conclusion was that it wasn’t. He concluded that under section 3.48.305 of the Maui County Code, the “County may consider only the actual use of real property when creating a real property tax classification; it has no authority under the MCC to consider anything else.” That code section, however, says that land and buildings are classified upon consideration of the real property’s highest and best use, and then lists some exceptions. It also says that condominium units are classified upon consideration of actual use, and then lists definitions, one of which a definition of the Time Share classification. First, we need to notice that actual use and highest and best use are completely different. Highest and best use primarily depends on zoning and has nothing to do with the current owner is currently doing with the property, which is actual use. So, someone running a farm in the middle of an industrial district would have a “highest and best use” as commercial property but “actual use” as agricultural property. Next, the tax code is riddled with classifications, credits, and exemptions that have nothing to do with actual use. I group all three of these devices together because they all assign financial consequences – an owner or renter pays more tax or less tax – depending on whether certain conditions are met. All counties have such devices that depend on use, and they also have those that don’t. For example, all four counties exempt “kuleana land,” which depends on whether its owner is a lineal descendant of the persons who received original title from the Kingdom of Hawaii. All four counties exempt property owned by disabled veterans, persons affected with leprosy, and persons with impaired sight or hearing or totally disabled, which are not uses of the property but medical conditions of its owner. Of these, the latter three exemptions were carried over from when the State was administering the property tax, before the 1978 Constitutional Convention. This is significant because when the Convention recommended, and the voters approved, transferring the property tax power to the counties, there were constitutional provisions that required all counties to keep the basic structure, rates, and exemptions then in place for eleven years. Those exemptions, therefore, were specifically approved in our constitution – and they didn’t depend on property use. If it were held that differences in real property tax liability must depend only on property to use to be valid, what would happen with the exemptions, credits, and credits on all four counties? And what would happen with the “Residential A” property classification here in Honolulu, which kicks in if a property doesn’t qualify for a homeowner’s exemption and is valued at $1 million or more? Homeowner classification is based on use, but valuation of a parcel clearly isn’t. Ultimately, of course, the higher courts will decide the validity of the Maui real property tax classification system. The job isn’t easy, and the arguments we’ve made here might turn out to be completely wrong. But they will give us things to think about while the parties are considering what to argue and while the courts will be mulling over this case.
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WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of December 9, 2018 The County Strikes Back (Part 3) By Tom Yamachika, President We continue with our series about a timeshare association suing the county, with the county then back assessing the association for $10 million. Here we examine: “Are back assessments of property tax legal?” In most of our counties, the ordinances say that the assessor is to make a tax assessment list each year by a certain time. The county then sends out bills to the property owners with the numbers off the list. Owners then either pay, or appeal. But what if your property isn’t on the list? This can happen very easily if you have just signed a lease for state lands. The state doesn’t have to pay real property tax because governments generally don’t tax each other, so there is no previous assessment of the land. A lessee of state lands, however, isn’t a government and therefore needs to pay real property tax. But let’s say, for whatever reason, the real property tax bill doesn’t come in the mail for a couple of years. The ordinances call that “omitted property,” and they say that the county can assess the current year, and any back years, whenever the county gets around to doing that. And when they do, if you want to appeal the assessment you need to do it within 30 days – which isn’t much time. If you go to the county and say that the assessment is unfair and illegal, you won’t get much sympathy. “You’ve received fire and police protection, trash pickup, and many other benefits that come with occupying that property,” they’ll say. “Didn’t you think it strange that you were receiving all these valuable benefits for free while everyone else in the county has to pay for them through their property taxes?” As it turns out, there is a court case holding that this type of assessment, called an omitted property assessment, is perfectly legal. In our Maui case, however, the facts were quite different. The plaintiffs were time share associations. The county had assessed the property – but they didn’t assess the intervals or the condominium units, they assessed the master parcel. The county sent the bills to the associations, and the associations paid the assessments in full. “Oho!” the county said. “We didn’t assess the intervals, which are the units of property that are being bought and sold. They are therefore omitted property, and we get to assess them whenever we want!” So, the county back assessed the interval owners, and they assessed a lot more tax because the method they used to assess the master parcel was based on its cost while the method they used to assess the intervals was based on market value. But then they needed to figure out what to do about the payments that already had been made on the property. And they decided to credit each of the interval owners for a proportionate part of the payments that were previously made. Fair, perhaps; but it was also an admission that tax previously had been paid on the property assessed, so the county had no business calling it omitted property. “[I]f the County can retroactively assess already-assessed real property to change the valuation and impose additional taxes, even many years later as it argues it can here,” the Maui judge wrote, “property owners can never have confidence that they have satisfied their tax obligation for any previous years. Potential buyers can never have confidence that a purchased property will not later be burdened by a hefty ‘amended assessment’ for some year long before their purchase.” Well said, Judge; now we’ll see how well his judgment fares in the appellate courts. WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of September 3, 2018 How Long Does It Take To Have A Home On Kauai? By Tom Yamachika, President Today, we focus on Kauai real property tax, thanks to an alert reader who has given us a horrifying account of something so commonplace as buying a home there. How long do you think it takes between buying a home on Kauai and having the “home exemption” effective for real property tax there? Did you guess 21 months? That’s right, the better part of two years. Suppose a couple getting on in years, tired of the hustle and bustle in New York, or San Francisco, or Silicon Valley, decides to move to Kauai. They buy a house there and move in October 2017. To have a home exemption recognized for real property tax purposes in Kauai, an application for the exemption needs to be in by September 30th. Darn! The deadline has already passed. So, the form, when filed, will be in the batch due on September 30, 2018. Exemptions applied for in that batch will be effective for the next succeeding fiscal year, and that year would begin on July 1, 2019. From October 2017 to July 2019 is twenty-one months. What difference does that make? The most favorable property tax classification on Kauai is “Homestead,” currently with a tax rate of $3.05 per $1,000 of net taxable value. To get that classification, a home exemption must be in place. And, a home that doesn’t qualify for a home exemption and is valued at $2 million or more is classified as “Residential Investor” with a tax rate of $8.05. That’s right, it would be more than two and a half times the property tax of a homestead. (And if the property is valued at less than $2 million, the classification is “Residential” with a tax rate of $6.05, which is a little better but it’s still almost double the rate of Homestead property.) But wait, there’s more! If the property tax surcharge amendment passes on the November ballot, the State will be authorized to tax that property even more, as it will now fall into the same classification as homes held by evil, nasty, foreign real estate speculators. Although it’s unclear what kinds of “investment real property” would be subject to the surcharge, Residential Investor property would surely be included. We don’t know how much the surcharge is going to be, but in the 2017 legislative session the number that appeared in proposed implementing legislation was $7.50. The $7.50 would be added to the $8.05, making the total tab $15.55, or $31,100 per year on a $2 million property, as opposed to $6,100 that would be due under the Homestead classification. If we don’t count the state surcharge, the 21 months result in the County of Kauai pocketing $17,500 in extra tax from the elderly couple who have occupied the Kauai house as their home since they bought it. If the state surcharge were in effect, the $17,500 taken would mushroom to $43,750. Hawaii is supposed to have the lowest property taxes in the nation, but this couple certainly wouldn’t be feeling the love in their situation. And that doesn’t even include the Conveyance Tax that was paid to the State back in October 2017 when the property changed hands. The rate of tax on a $2 million property is $6.00 per $1,000, so another $12,000 needed to be paid by someone. All these tax shenanigans are enough to drive folks straight to the airport where they can move to somewhere else with a much better cost of living. Better watch out, because some of our folks are doing just that! |
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