Maui Real Property Cases

On August 29, 2022, Chun Kerr attorney, Winston Wong successfully argued before Judge Gary W.B. Chang of the Hawaii Tax Appeal Court that the County of Maui violated the Equal Protection Clauses of the United States and Hawaii Constitutions by classifying certain condominium properties as short-term rentals. The Court’s ruling that the classification was unconstitutional addressed appeals brought by three taxpayers against Maui County Ordinance 5160, which passed in 2020 and affected 2021 classifications. Maui County did not appeal the Court’s decision.

Maui County had long taxed condominiums based on the “actual use” of the property, which tied the tax rates to the intensity of the property’s use. For example, high-intensity commercial uses like “hotels” and “short-term rentals” had higher rates while lower intensity uses like “owner-occupied” and “non-owner occupied” received lower rates.

Ordinance 5160 prevented condominiums from qualifying for the lower “non-owner occupied” rates if they were zoned to allow transient accommodations and were not occupied by owners or rented to long-term tenants. Thus, these properties were taxed as short-term rentals even in cases where owners had never rented their units out to anyone.

Most owners adversely affected by Ordinance 5160, including the appealing taxpayers, were nonresidents who used their condominiums as part-time residences. These owners saw a nearly 50% increase in their previous year’s property taxes.

During the hearing, the County asserted that it had a legitimate interest in addressing “tax parity” and complaints of short-term rental property owners that their neighbors, who were not using their properties for commercial purposes, were receiving lower rates than the short-term rental owners. However, Judge Chang was not convinced that increasing the taxes of properties with low intensity use to match commercial use rates was rational, as the Hawaii Supreme Court previously upheld a Maui timeshare tax classification in Gardens at West Maui Vacation Club v. County of Maui by recognizing that intensive uses like time shares and hotel properties were rationally expected to pay more.

The Court also focused on Ordinance 5160’s application of these new rules solely to condominiums zoned to allow transient vacation use. Part-time residences in zoning that prohibited transient vacation use could still qualify for lower rates consistent with the actual use of the property. Judge Chang found that using zoning to apply these rules was not rationally related to any legitimate government purpose.