The Hawaii Department of Taxation says that it may not be able to legally enforce a law that was expected to bring in tens of millions of dollars annually in unpaid taxes from vacation and home-sharing rentals throughout the state. Some experts have estimated that the state is losing more than $100 million annually in unpaid transient accommodations taxes.

Act 204, signed by Gov. David Ige last year, is also aimed at reining in the proliferation of illegal vacation rentals, aided by online websites such as Airbnb and VRBO, which critics say is contributing to the loss of affordable rentals for local residents at a time when the state is struggling with record-high levels of homelessness.

Act 204 requires that owners and operators of short-term rentals register their properties with the state and post their tax identification numbers on their advertisements. Otherwise, they, as well as the advertising platforms, can face fines of up to $5,000 a day.

But the tax department now says the law could violate the federal Communications Decency Act, preventing it from issuing citations, which it intended to begin doing in November. The department says it’s unclear whether the state can hold the online companies legally accountable for what their users post.

Act 204 is currently being reviewed by the attorney general and tax department, said Mallory Fujitani, a spokeswoman for the latter. If legal research indicates that the department isn’t able to fine operators and online advertising platforms, she said the department will instead ask them to voluntarily comply with the law’s intent.

Rental explosion

Hawaii is not alone in its struggle to regulate the explosion of short-term rentals that are being advertised online. New York, Los Angeles and San Francisco have also been contending with how to stem the conversion of residential housing into tourist accommodations, which has been tightening housing markets and in some cases changing the residential fabric of neighborhoods.

San Francisco, like Honolulu and other parts of the state, is grappling with a housing crisis. It passed a law similar to Hawaii’s Act 204 in June, which requires that Airbnb ensure that its hosts are complying with the city’s registration process for offering up short-term rentals.

Airbnb subsequently sued the city of San Francisco over its ordinance, a lawsuit that the Hawaii tax department says it’s monitoring as it debates whether to move forward on enforcing Act 204.

Alison Schumer, Airbnb’s public affairs manager, said in a statement that the company has similar legal concerns about Hawaii’s law.

“We continue to explore our legal options in Hawaii given the current regulatory landscape and are committed to finding a way to help our user community to pay their fair share of taxes,” she said.

A consortium of dozens of internet giants, including Google, Airbnb and Paypal, has also registered its opposition to the Hawaii law.

Former Hawaii Attorney General David Louie, who is representing the Internet Association, said most of the members aren’t directly affected by Hawaii’s law, but nonetheless like to ensure that their interests are generally protected.

In a letter to Ige last month, he laid out the association’s legal arguments against Act 204 — specifically, that it conflicts with Section 230 of the Communications Decency Act, which prevents online platforms from being held accountable for user content.

“If the state of Hawaii were to seek to enforce Act 204 against a platform like Airbnb, such challenge would be pre-empted by federal law,” he wrote.

Louie said the state could theoretically move forward on fining operators and owners that post the ads without registration numbers, but that it wasn’t very realistic.

“The state would be left with a requirement to investigate every single individual operator to determine compliance, a virtually impossible task,” he wrote.

Sen. Laura Thielen (D, Hawaii Kai-Waimanalo-Kailua), who introduced Act 204 and is also an attorney, disagrees. She said that there is “no way” that the law violates the Communications Decency Act.

“Act 204 is content-neutral and its purpose is to ensure businesses are (complying) with state laws,” she said by email.

She also questioned why the department was bringing up these issues only now.

“I’m astounded that the tax department is raising this concern two years after this act was passed and a year after they drafted rules with (attorney general) review to implement that act,” she said.

Thielen said that Act 204 merely modernizes a long-standing legal requirement in Hawaii that businesses provide their tax license at their place of business.

“Many businesses no longer have a bricks-and-mortar office where customers go. Instead they operate primarily online,” she said. “Accordingly, Act 204 simply requires the tax license number to be posted on online sales. The act specifically recognizes that online operations may have multiple webpages, so it simply requires the license posting at the point of sale.”

Airbnb ‘protected’

Attorneys for the city of San Francisco have made similar arguments in the lawsuit filed by Airbnb.

However, Jim Dempsey, executive director of the Berkeley Center for Law and Technology, told the Honolulu Star-Advertiser that the law appears to be on the side of Airbnb and other such internet platforms in the situations involving Hawaii and San Francisco.

“I think that Airbnb falls under the protected side of the line here pretty clearly,” he said. “Section 230 of the Communications Decency Act was intended to protect from liability innovative companies that serve as online intermediaries or online platforms for individuals to post content and make connections.”

Dempsey said that even if Hawaii can’t fine companies such as Airbnb, it should be able to move forward on enforcing the law against owners and operators of short-term rentals who post the ads. However, he noted that it would be “far easier to go after Airbnb.”

The latest round of political and legal squabbling over Hawaii’s illegal vacation rentals comes after Ige vetoed a separate measure last month, known as the “Airbnb bill,” because of the company’s aggressive lobbying in favor of it.

That bill would have allowed companies like Airbnb to act as tax collection agents for the state, which could have helped bring in millions in unpaid taxes for the state. However, opponents of House Bill 1850 said it would have also allowed illegal vacation rental operators to hide behind Airbnb’s tax identification number, undermining parts of Act 204.

In vetoing the measure last month, Ige said the bill would have encouraged the illegal vacation rental market “at a time when affordable rental housing is in such short supply in our communities and homelessness remains to be a critical concern statewide.”