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To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of December 2, 2018 The County Strikes Back (Part 2) By Tom Yamachika, President This week we begin a series on a long and hotly litigated property tax case from Maui. This case isn’t about wind turbines like we wrote about a couple of weeks ago. This one involves timeshares. Some timeshare projects in Kaanapali were unhappy when Maui County enacted in 2004 a new Time Share property classification, effective in 2006, that was much more expensive for impacted taxpayers. In 2013, the associations sued in Circuit Court on Maui asking for the court to declare that the Time Share classification was invalid. Maui’s eagle-eyed attorneys and tax assessors then noticed something interesting. For the years 2006, 2007, and 2008, they had assessed the master projects, such as the land and buildings on the whole condominium project, as opposed to individual time share interests (typically, ownership of a certain unit for a week per year). And the property was assessed using cost data, which is typically used for projects being constructed, rather than market data. The county, claiming it had a right to charge tax on “omitted property” that wasn’t taxed before, then set up a counterclaim in the lawsuit for $10 million in additional property tax owed for 2006, 2007, and 2008. The timeshares moved to have the counterclaim tossed out. “There’s a process for assessing tax and you didn’t follow it,” they said, and the judge agreed. “We’ll fix that,” the county said, and issued “amended property tax assessments” to every timeshare unit owner in the projects, in order to give those owners some credit for the tax that had been paid on the master parcels. (But wait. Isn’t there something weird about issuing “amended” assessments on what they claim is “omitted property” that hasn’t been assessed before?) The total of the 1,111 amended assessments was $10 million, due and payable in 30 days. The timeshares somehow scraped up the money to pay the assessments and appealed all the amended assessments. The filing fees for the appeals totaled more than $80,000. The timeshares had to raise their $10 million through special assessments, which, unlike maintenance fees charged by non-timeshare condominium associations, are GET taxable. Another $300K+ was sent down the tubes. Now, Maui isn’t that big of an island. Word of the massive assessments got out, and let’s just say that other people were concerned. “You don’t have to worry,” county officials said, in effect. “We only assessed these folks retroactively because they were making a huge and questionable claim against the county and they didn’t pay their fair share of tax in prior years.” Which easily could be read as, “These suckers had the nerve to sue us. So, we are going to pound the stuffing out of them. Government-fearing citizens need not be afraid.” This was way too much for the trial judge. He ruled that the supplemental assessments were all void because the county didn’t follow proper assessment procedure and that it wasn’t lawful for the county to reach back for so many years. The judge found that the county retaliated against the timeshares for suing them, which violated many of the timeshares’ constitutional rights. Thus, the timeshares were entitled to damages and attorneys’ fees under federal civil rights law. And, for good measure, the judge ruled the Time Share property tax classification on Maui invalid since inception, which would give the suing timeshares the right to a $30 million refund of overpaid tax as well. Maui County appealed the decision, and the case now sits in the Intermediate Court of Appeals. In the next few weeks, we will be taking a close look at some of the issues, including the validity of the assessments, the validity of the Time Share classification, and even whether the case belongs in the right court.
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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 November 25, 2018 The County Strikes Back (part 1) By Tom Yamachika, President This week we begin a series on a long and hotly litigated property tax case from Maui. This case isn’t about wind turbines like we wrote about a couple of weeks ago. This one involves timeshares. Some timeshare projects in Kaanapali were unhappy when Maui County enacted in 2004 a new Time Share property classification, effective in 2006, that was much more expensive for impacted taxpayers. In 2013, the associations sued in Circuit Court on Maui asking for the court to declare that the Time Share classification was invalid. Maui’s eagle-eyed attorneys and tax assessors then noticed something interesting. For the years 2006, 2007, and 2008, they had assessed the master projects, such as the land and buildings on the whole condominium project, as opposed to individual time share interests (typically, ownership of a certain unit for a week per year). And the property was assessed using cost data, which is typically used for projects being constructed, rather than market data. The county, claiming it had a right to charge tax on “omitted property” that wasn’t taxed before, then set up a counterclaim in the lawsuit for $10 million in additional property tax owed for 2006, 2007, and 2008. The timeshares moved to have the counterclaim tossed out. “There’s a process for assessing tax and you didn’t follow it,” they said, and the judge agreed. “We’ll fix that,” the county said, and issued “amended property tax assessments” to every timeshare unit owner in the projects, in order to give those owners some credit for the tax that had been paid on the master parcels. (But wait. Isn’t there something weird about issuing “amended” assessments on what they claim is “omitted property” that hasn’t been assessed before?) The total of the 1,111 amended assessments was $10 million, due and payable in 30 days. The timeshares somehow scraped up the money to pay the assessments and appealed all the amended assessments. The filing fees for the appeals totaled more than $80,000. The timeshares had to raise their $10 million through special assessments, which, unlike maintenance fees charged by non-timeshare condominium associations, are GET taxable. Another $300K+ was sent down the tubes. Now, Maui isn’t that big of an island. Word of the massive assessments got out, and let’s just say that other people were concerned. “You don’t have to worry,” county officials said, in effect. “We only assessed these folks retroactively because they were making a huge and questionable claim against the county and they didn’t pay their fair share of tax in prior years.” Which easily could be read as, “These suckers had the nerve to sue us. So, we are going to pound the stuffing out of them. Government-fearing citizens need not be afraid.” This was way too much for the trial judge. He ruled that the supplemental assessments were all void because the county didn’t follow proper assessment procedure and that it wasn’t lawful for the county to reach back for so many years. The judge found that the county retaliated against the timeshares for suing them, which violated many of the timeshares’ constitutional rights. Thus, the timeshares were entitled to damages and attorneys’ fees under federal civil rights law. And, for good measure, the judge ruled the Time Share property tax classification on Maui invalid since inception, which would give the suing timeshares the right to a $30 million refund of overpaid tax as well. Maui County appealed the decision, and the case now sits in the Intermediate Court of Appeals. In the next few weeks, we will be taking a close look at some of the issues, including the validity of the assessments, the validity of the Time Share classification, and even whether the case belongs in the right court. 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 November 18, 2018 Walden versus OHA’s LLCs By Tom Yamachika, President About half a year ago, we wrote about some limited liability companies formed by our Office of Hawaiian Affairs (OHA). These companies received cash and property, including 1,600+ acres of land in Waimea Valley, from OHA. The question we raised at the time is whether the LLCs can credibly claim that they don’t have to follow laws that apply to the rest of government, such as the open records laws. Since then, a gentleman named Andrew Walden, who runs Hawaii Free Press, decided he would strike a blow for public transparency and asked the LLC to fork over some records, like their check registers. The LLCs, predictably, told him to take a long walk off a short pier. So, he sued. The LLCs said that they are all independent companies, and that they all had obtained 501(c)(3) tax-exempt status from the IRS. Yes, the LLCs are managed by the top people at OHA’s executive team, but they do so as volunteers, they said. They pointed to a Hawaii Supreme Court case involving ‘Olelo, the public broadcasting corporation that was formed by the Department of Commerce and Consumer Affairs, and argue very strongly that if ‘Olelo is not considered a government unit for purposes of the open records laws, then the LLCs should be considered independent of government as well. When you look at the governing documents for the LLCs, however, independence from OHA is not what you see. The managers of each LLC are not individuals whom the LLCs can change as they see fit; they are the holders of specified management positions within OHA. The position, not the individual, is key. Thus, the managers of the LLC will always be OHA management, and will always be state employees. If there are any changes to be made in the governing documents, then the sole member of the LLC, which is either OHA or another LLC whose sole member is OHA, needs to sign off on the change. And then, let’s not forget the ultimate power: for each LLC, only the sole member possesses the authority to terminate the LLC’s existence. If an entity is terminated, its net assets (namely, what’s left after the entity’s debts are paid) are not distributed to random charities, but go up the chain to the member that had given the termination order. Indeed, the aroma of government control is so thick that even the IRS ruled that one of the LLCs, specifically Hi’ilei Aloha LLC, was an arm or instrumentality of a government. IRS said, in effect, “Most tax-exempt organizations making a certain amount of gross receipts need to file annual tax returns, like the IRS Form 990, but government organizations like you don’t have to file returns.” If the IRS ruled that one of the LLCs is a government instrumentality, we argued in our friend of the court filing, all three of the LLCs should be regarded as such because they are similarly controlled. A couple of days after the Foundation filed, the Civil Beat Law Center for the Public Interest, which has done an extensive amount of work relating to Hawaii’s open records laws, jumped into the fray as well. The Center pointed out that there are huge differences between ‘Olelo and the LLCs. ‘Olelo, for example, is run by a 15-member independent board of directors while the LLCs are run by 3 managers all of whom are OHA managers and who are necessarily state employees. Now the matter is with the First Circuit Court in Honolulu. We will be reporting on case developments in this space. |
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