It’s ready for the governor’s pen, but it’s probably more accurate to think of Senate Bill 519 as a work in progress, rather than a done deal.
Assuming Gov. David Ige signs it into law, the measure will represent the state’s first effort to exert any control over the vacation rentals that have proliferated across the islands. The question: How well will it work?
The issue is especially stormy on Oahu. The Honolulu City Council declared a moratorium on issuing nonconforming use certificates for vacation rentals in 1989. Subsequent efforts to legalize more of them have been controversial (see Page E4 for a list of the latest regulatory proposals).
The state legislation has nothing to do with the location of the rentals — the core of the opposition against them — and everything to do with the state’s determination to get the tax revenue that’s due.
Among other things, SB 519, which would take effect at the start of 2016, would require rental owners to post a tax identification number in any advertising they do, as well as on their premises. This is the number that the state Department of Taxation assigns for collecting both the required general excise tax and the transient accommodations tax (TAT). The assumption is that requiring advertising to include the numbers will help the state track them.
But even within its limited scope, observers are wondering how effective it can be. One is Larry Bartley, executive director of the Kailua-based organization Save Our Oahu Neighborhoods, which has favored keeping vacation rentals on Oahu within current limits.
Bartley said he’s convinced the new law will be tough to enforce.
"The problem is that with the nature of the Internet, you can have a website in Uruguay or Botswana, and it would be impossible to trace the ads to the owner of the rental," he said. "Suppose they don’t have the number in the ad. The state can always fine someone, but proving that property owner is the one who put that website up will be pretty hard."
SB 519 was introduced by state Sen. Laura Thielen, spurred in part by the Hawaii Tourism Authority study issued late last year that estimated more than 22,000 vacation rentals were operating statewide. The driving concern of this legislation was to bring in more of the tax revenue to help offset the impact of these visitors, Thielen said.
"There is a state interest in making sure that people who are renting for short-term rentals are paying their transient accommodation tax and their general excise tax," Thielen said.
The bill gained passage this session, but a proposal to more fully regulate vacation rentals on a statewide basis did not. House Bill 825 attempted to establish a new chapter of state regulation for the Department of Commerce and Consumer Affairs to administer. That bill would have required vacation rentals to be licensed by the DCCA; agency officials testified that a "sunrise" study would be needed before it could be given that new responsibility.
Jon Okudara, a lobbyist for the visitor industry who worked on the drafting of the bill, said that agency is where, under the law, duty for regulation belongs.
The bill passed the House but stalled in the Senate. State Sen. Rosalyn Baker chairs the Consumer Protection Committee that was on its first stop, and she disagreed completely with Okudara on jurisdiction.
Baker said she saw DCCA as a bad fit for handling what should be a county duty. The agency generally administers licensing requirements for professions, and the primary concern here is about land use, she said: Vacation rentals are largely located in residential-zoned areas, which raises potential conflicts with neighbors.
"For the life of me I couldn’t figure out why some kind of DCCA registration would have made a difference," Baker said. "If they’re in the wrong place, that’s a county issue.
"It’s not the kind of regulation that DCCA does," she added. "That’s a county function, a development function."
Attention then turned toward the Senate bill, which was seen as a way to level the playing field among visitor accommodations, at least where tax liability was concerned.
State Rep. Tom Brower chairs the House Tourism Committee. The Senate bill, he said, is a "first step, to identify who has a vacation rental," adding that the Department of Taxation will report back to the Legislature annually, so any needed revisions to the law can be addressed.
"DOTAX can make whatever rules they want, internally," he said. "They’re going to have people applying, and they have to take that information and integrate it into their system."
The Taxation Department initially protested elements of the bill including its definition of the term "transient," which conflicted with an existing definition in law that clearly excludes renters of a primary residence.
Amendments to the bill were made, officials said, so the department lifted its objections. Department spokeswoman Mallory Fujitani said that there will be guidance about requirements that will be released before the Jan. 1 effective date of the law.
The daily fines for citations are set at $500 for a first violation, $1,000 for a second and $5,000 after that.
Websites such as Airbnb and Vacation Rental by Owner (VRBO) would fall in the category of "transient accommodations broker" under the law, which would hold them accountable to the regulations. However, they may not have been as closely involved with the development of the law as they would have liked.
Matt Curtis is director of government relations for HomeAway, the parent company for online portals including VRBO and vacationrentals.com. Curtis said the goal of the company is "to come back and work with the state and local government" on future regulations that emerge, to ensure that they’re fair and clear to vacation rental owners.
But the websites can accommodate the advertising requirements of the law, he said.
"HomeAway has space in the listing where people can feature any language they choose," he said. "There’s more than ample space on our listing site for a property owner to list something like that (a tax number)."
Curtis expressed the same concern about enforceability as some of the critics of SB 519. But Thielen, who formerly headed the state Department of Land and Natural Resources, believes the scale of increasing fines can work. DLNR implemented something similar in its enforcement division, she said, adding that the fear of being hit with the whopping top tier of penalties resulted in voluntary compliance of up to 90 percent in some areas.
Some within the vacation rental industry concur with that projection. Neal Halstead, a Maui rental owner who is president of the Rental by Owner Awareness Association, said he believes the fines for violations are "quite significant," and that should deter noncompliance.
One of the primary concerns of owners was that the ads not be required to include the address of the rental, he said, for security reasons; Halstead said he was relieved to see that was not part of the bill.
The database that the Tax Department develops will help with tax enforcement, but identifying information is considered private and cannot be released to the counties to locate vacation rentals that are illegal. However, Thielen said, SB 519 provides a template for the City Council to pass a similar advertising requirement for its own enforcement purposes.
The state needs to collect its tax revenues, she said, but that doesn’t excuse people from operating illegally.
"I feel people need to follow the law," she said. "If they are dissatisfied with the number of rentals that are permitted, they need to work to change that.
"It is not fair that so many people are illegally renting homes as vacation rentals, because they are taking those off the market for long-term renters. They’re driving up property values.
"And they’re catering to a visitor industry that is earning less and less in taxes," Thielen said. "It’s creating these huge impacts on our neighborhoods."
The basic debate on Oahu — whether or not city government should officially sanction more vacation rentals than the ones grandfathered in decades ago — is not over, said Susan Cummings, a Kailua resident who has long opposed expanding the number of legal units.
"The law is the law," Cummings said. "Why don’t they just follow it? These things are illegal. That’s all I have to say about it."
City Council targets rentals for regulation, revenue
The controversy over vacation rentals on Oahu has been swirling since 1986, when community opposition to them drove the City Council to make them illegal from that point forward. The ones in existence before 1986 were grandfathered in, and in 1989 each received a “nonconforming use” certificate. No more of those have been issued since 1989.
The result was the proliferation of underground short-term rentals, a trend quantified by the Hawaii Tourism Authority in December with a report estimating that 22,000 vacation rentals — roughly a quarter of all transient accommodations — existed statewide.
Attempts to address this problem have risen and fallen. Here are the principal bills currently before the City Council:
>> Bill 22 would establish an enforcement mechanism similar to what’s in Senate Bill 519. It would require transient vacation units to include its nonconforming use certificate number as well as location in any advertisement.
>> Bill 35 would create a “transient accommodations” class of real property for tax purposes. This tax class would apply whether or not the rental is operating legally under city zoning laws.
This round of legislation seems focused on tax revenues and enforcement of existing limits rather than making more units potentially legal. Whether or not the number eventually expands is debatable, although the industry argues that the law of supply and demand makes it inevitable.
“This is a way people want to travel,” said Matt Curtis of the rental network HomeAway. “When you’re traveling with your family, and you want to stay a longer time, that’s when you start looking for a vacation home.”
