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TAXWatch: The County Strikes Back (Part 4)

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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About Tom Yamachika

Tom Yamachika
Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.

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