Chun Kerr Secures Equal Protection Victory in Maui Property Tax Case

On August 29, 2022, Chun Kerr’s state and local tax team successfully obtained a ruling from 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 Maui County Ordinance 5160, which passed in 2020 and affected classifications of condominiums in the 2021 tax year. Maui County did not appeal the Court’s decision.

Maui County had long taxed condominiums based on the “actual use” of condominium units, 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 a condominium unit from qualifying for the lower “non-owner occupied” rate if the property was 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 the actual use of the property was not as a short-term rental. Owners of condominium units that were affected by Ordinance 5160 often 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 “tax parity” and that Ordinance 5160 was meant to address complaints by short-term rental property owners that their neighbors, who were not using their properties as short-term rentals, were receiving lower rates. However, Judge Chang was not convinced that increasing the taxes of properties with low intensity uses to match properties with more intensive commercial use rates was rational, particularly because 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 than low intensity uses.

The Court also focused on Ordinance 5160’s departure from classification based on actual use solely for 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 to some, but not all condominiums, was not rationally related to any legitimate government purpose.