Tax evasion: Hawaiian hotels and resorts style?

Are the most-known resorts on the tourism and holiday islands of Hawaii part of a major tax evasion scheme? Popular hotel brands that are charging exorbitant resort fees include Hilton, Starwood, Hyatt, Turtle Bay Resort, among others.

Mallory Fujitani, spokesperson for the Hawaii Department of Taxation, confirmed via an exclusive correspondence with eTN today that “resort fees by hotels are subject to the Transient Accommodation Tax (TAT).”

According to Hawaii’s Dept. of Taxation, all participating resorts in Hawaii tax this mandatory nightly accommodation fee at the General Excise Tax rate of 4.712%, but do not add the required 9.25% Transient Accommodation Tax , that must be charged on room nights.

Ms. Fujitani, however, could not say if the Compliance Department at the State Tax Department is going to pursue legal actions against the offending resorts to collect these outstanding taxes.

A bill, titled SB 1201, was introduced on January 23, 2013 to the House and Senate and passed over to the 2014 legislator session to “clarify the department’s position.” Until SB 1201 is passed, an “enforcement to collect TAT on resort fees is unlikely.”

Ms. Fujitani added that the purpose of the SB 1202 Bill “was to clarify this situation.”

The Department of Taxation said it strongly supported this bill and offered the following information. “On February 4, 2013 the Department of Taxation related their clarification in regards to resort fees to the Honorable Brickwood Galuteira, Chair and members of the Senate Committee on Tourism and Hawaiian Affairs.

“On March 18, 2013 the Hawaii Department of Taxation addressed the Honorable Tom Brower, chair and member of the House Committee on tourism.

“SB 1201 clarifies that resort fees and other surcharges imposed on guests at hotel or other transient accommodation are subject to the transient accommodation tax.

“To the extend mandatory resort fees are paid by a person in exchange for being furnished a transient accommodation, those mandatory resort fees constitute gross rental proceeds and are subject tot the TAT. Merely stating mandatory resort fees as a separate line item on a bill is not sufficient to demonstrate that resort fees are not charged in exchange for furnishing of the transient accommodation, or whether they were paid as part of a wholly separate transaction.”

In other words, a mandatory resort fee is a fee that the guest cannot opt out of. Mandatory resort fees are subject to TAT because the guest would not be allowed the use of the transient accommodation without paying the mandatory resort fee.

For example, if Internet services is part of a mandatory resort fee imposed on a guest, the resort fee is subject to TAT. Conversely, if the transient accommodation offers Internet service to guests as an optional service for a separate fee, and the guest voluntarily agrees to pay the fee in order to receive the service, the fee would not be subject to TAT.

The key difference in these two examples is that the first example consists of mandatory fees which must be paid in order to use the transient accommodation and the second example consists of a charge that the guest may incur of the guest’s own volition, the guest would be allowed the use of the transient accommodation regardless of whether he or she orders the internet service or not.

The Department of Taxation estimates there were approximately 42.7 million of mandatory resort fees charged in Hawaii in 2010. Based on this, it is estimated the TAT on mandatory resort fees is approximately $4 million annually.

eTN position is that there is plenty more to collect, possibly several hundred million dollars that could help in addressing some of Hawaii’s problems, such as the homeless issue in Waikiki, improve roads as well as add funding to marketing promotions for the Hawaii Tourism Authority. Or as the City and County of Honolulu puts it, “Improve urgently-needed city services in Waikiki and other areas on the island of Oahu.”

eTN estimated that in the case of the Hilton Hawaiian Village, keeping the tax on collected resort fees of US$30.00 constitutes a tax liability of $2.77 per room per night. With 3,000 hotel rooms and 360 nights a year, this adds up to almost $3 million a year for one hotel alone.

eTN contacted Starwood, Hilton, Marriott, Hyatt and Turtle Bay Resort for comments. We have received three responses. One from Hyatt that they do not want to respond. The second response was from the Director of Brand Public Relations for Hilton Worldwide, Jacqueline Toppings, who said: “Resort charges allow us to continue offering the added-value amenities and services that our guests value. For that reason, these charges are mandatory for all guests unless otherwise noted. We collect required taxes on resort charges consistent with the laws in the jurisdictions where we operate.”

Starwood Hawaii spokesperson Stephanie Dowling said: “Starwood Hawaii collects taxes on resort charges consistent with State of Hawaii tax law. Currently, our resorts collect General Excise Taxes on all resort charges. We are currently compliant according to the law and as always, we will wait for official direction from the State of Hawaii on whether we begin to collect additional taxes on our resort charges in the future.”

For his part, Mike McCartney, head of the Hawaii Tourism Authority (HTA), told eTN he had “no comment.” This is surprising, since the Hawaii Tourism Authority is the government agency that is in charge of the travel and tourism industry in Hawaii and its staff is paid by taxpayers’ money.

George Szigeti, President and CEO of the Hawaii Lodging Tourism Association (HLTA), had no comments.

John Monahan, President and Chief Executive Officer of the Hawai‘i Visitors and Convention Bureau (HVCB), said he is no a tax expert and did not want to comment.

A spokesperson for the City and County of Honolulu said the City and County wants to collect every dollar on TAT taxes.

Why are these taxes important to the State of Hawaii?

All resort that participate in the mandatory resort fee scam are headquartered outside the State of Hawaii. The collective business these hotels do in the state gives them almost a monopoly in dictating tourism policies and are often those benefiting from promotions, public partnerships, and promotional funds.

However, hotels not based in Hawaii are sending their profits to their home state or country, so Hawaii can only rely on a minimum of tax revenue. This may explain why in times of tourism booms, the islands still has the worst road system in the United States, has one of the worst homeless problems, and is why people work often for minimum wage and are still unable to afford their own place of residence and very often work two or three jobs.

eTN found out Hawaii-based hotels and resorts seemed to have a better sense of community conscience and Aloha. Outrigger Hotels is not charging resort fees, and their management feels such fees are unfair, even though it makes it more difficult for them to compete.

When eTN spoke with Barry Wallace, Executive Vice President of Hospitality Services for the Outrigger® Enterprises Group, he said: “We have a difficult time competing with guys like the Hilton. For example, we have a room special of US$159 a night with breakfast, but Hilton may have a special of US$149, with breakfast and a US$30 mandatory resort fee per night being added on later. A guest booking the hotel would usually not see the difference and thinks the Hilton is less expensive when, in fact, the Hilton may be 60% more at the end when the final bill is presented to the guest.”

Ben Rafter, President and CEO of the Hawaii-based Aqua Resort, repeats Outrigger’s statement. He added in an interview with eTN: “We believe in guests being happy and leaving with a positive taste so they come back and refer us to their friends. We call it the ‘Aqua Experience.’

We believe in not charging for Internet; charging for our managers Cocktail and other additional amenities. It enhance this positive guest experience. We hope this gets our guests to come back again and again and to refer their friends and family to stay with Aqua Hotels” Ben did not want to elaborate on the potential tax liability for Hawaii resorts not paying TAT on this fee, but said he finds these fees questionable.

eTN reached out to the GM of the Marriott Waikiki resort for an interview, but repeat phone calls were not returned. Aston hotels and also the Turtle Bay Resort had nothing to say and did not return repeat phone calls.

The Halekulani Hotel and Trump Hotels do not charge resort fees. eTN was unable to get a statements from them. Surprisingly calls were not returned. Both resorts are considered top rated hotels in Waikiki. It would have been interesting to find out why they did not believe in charging resort fees.