A bill moving through the Honolulu City Council would carve out a new property tax category for homeowners who operate bed-and-breakfast establishments.

Call it a “setting the table” bill.

The city is slated to begin issuing up to 1,700 new permits for “hosted” bed-and-breakfast operations starting October 2020 under the wide-ranging vacation rental ordinance that was approved by the Council and signed by Mayor Kirk Caldwell in June.

All those obtaining permits would be placed in the new “Bed and Breakfast Home” property tax category, along with about 38 B&Bs now operating legally through nonconforming use permits issued through 1989.

Bill 55, which won first-reading approval from the Council on Wednesday and will likely be taken up by the Budget Committee on Oct. 23, does not establish what the rate for the new category would be. Tax rates for each category are determined by ordinance by the Council each June.

But it’s likely the rate will fall somewhere between that of the standard residential category (currently $3.50 for every $1,000 of assessed value) and the hotel-resort category (which rose by $1 to $13.90 per $1,000 for this year).

If passed, the new category would be in effect starting with the tax year that begins July 1.

The bill also makes clear that those operating transient vacation units, or whole-home vacation rentals that have no host, would be taxed at the hotel- resort rate. The new ordinance does not allow any new TVU permits to be issued, but the 770 operating under nonconforming use permits would need to pay the hotel-resort rate.

Gary Kurokawa, Caldwell’s chief of staff, said the administration wants to have the new category in place before the new permits are issued.

Currently, those with nonconforming use certificates and operating in residential districts are supposed to be paying the standard residential or Residential A rates, Kurokawa said. Those Residential A rates are $4.50 per $1,000 for the first $999,999 of value and, starting this year, $10.50 for every $1,000 above $999,999.

The Residential A tax category, which some refer to as the investment property class, are those assessed at $1 million or more but without home exemptions.

Those with nonconforming use certificates and operating in hotel-resort districts are already supposed to be paying at the hotel-resort rate, Kurokawa said.

“It’s the underlying zoning that determines how it gets classified,” Kurokawa said. “This bill takes away that and puts everyone on a level playing field with all the same type of uses.”

Under city law a property cannot be rented or leased for a period of less than 30 days unless specifically permitted to do so. But spurred by popular online vacation rental hosting platforms such as Airbnb, HomeAway and VRBO, the popularity of B&Bs and other short-term vacation rentals has exploded since the city stopped issuing permits in 1989. Estimates of the number of illegal vacation rentals range from about 5,000 to more than 20,000.

The new ordinance seeks to reduce the number of illegal rentals by ramping up enforcement. The key component is that it makes it illegal to advertise an illegal rental by any means, including the online platforms, by requiring the operator to include in the ad either the NUC or permit number.

Under the ordinance, only those with homeowner exemptions — available exclusively to owner-occupants who live in their homes — would be eligible to obtain a new B&B permit.

The Department of Planning and Permitting has yet to establish rules for the distribution of the newly allowed B&B permits.

An FAQ page on the new law found on the DPP’s website said the city is considering a preregistration process. To be eligible, an applicant must be a “natural person” instead of a business or organization. The ordinance says the initial registration fee will be $1,000; annual renewals, $2,000. Renewals may be rejected if there are noise or other nuisance complaints.

The ordinance allows up to 0.5% of the number of dwelling units in seven of the city’s eight regional development plans to be used as B&Bs. The North Shore Sustainable Communities Plan specifically prohibits B&Bs.

If the number of applicants exceeds the allowable number of B&Bs, a lottery system will be used to determine who obtains the permits.

Kurokawa said the Department of Budget and Fiscal Services, which is tasked with property tax collections, won’t be conducting enforcement action against those operating illegally and not paying at the B&B rate. However, he said, it’s DPP’s job to enforce the vacation rental ordinance, which includes identifying violators and fining those who fail to comply.

There are other businesses, such as accounting, that one can operate out of a residence legally. They pay at either the standard residential or Residential A rate.