County Auditor: Department of Finance was ill-prepared to begin collecting millions in TAT payments

Maui County’s Department of Finance was under-staffed and ill-prepared to collect transient accommodations tax money beginning in November 2021 when a state law allowing the county to tap millions of visitor-generated revenue went into effect, according to a report by the Office of the County Auditor.

It’s unclear how much money has gone uncollected. And, if taxpayers operating visitor accommodations don’t pay up within three years, then that money would be lost, instead of paying for badly needed public services in the wake of the August wildfire disaster.

The auditor’s report, titled an “Evaluation of the Assessment and Collection of Maui County Transient Accommodations Tax,” was presented Tuesday to the Maui County Council’s Budget, Finance and Economic Development Committee.

County Auditor Lance Taguchi told committee members that the Department of Finance was legally authorized to implement Maui County TAT collections as of Nov. 1, 2021, but “unfortunately, I don’t think the County was really prepared to properly administer the tax.”

To muddy waters further, there was confusion about whether the tax was “voluntary.”

Budget Committee Chair Yuki Lei Sugimura said she wanted to clear that up right away.

“We heard during other meetings that we had that the TAT tax was ‘voluntary,’ and it is not ‘voluntary,’ according to the statute,” she said.

Council Member Nohe Uʻu-Hodgins said she found it “interesting” that the tax could be thought of as “voluntary.”

“I’ve never known a tax to be voluntary, ever,” she said. “We all know that the things that are certain in life are death and taxes.”

The auditor’s report shows that, for fiscal year 2022, the county recognized over $56.9 million in Maui County TAT on its financial statements. But, as of June 30, 2022, only $40 million was deposited into the county’s treasury.

The Office of the County Auditor report says: “While the county deposited over $40 million in MCTAT revenue, the Director and Deputy Director of the County Department of Finance (“Management”) never established the groundwork required to successfully administer the MCTAT for the long term. The cause appears to be the misguided mindset of Management that MCTAT was a ‘voluntary tax.’ That mindset resulted in less-than-desirable outcomes.”

The report says those included:

• The county’s financial statements needed to be corrected by $16.7 million because management failed to estimate MCTAT due but not yet collected.
• After only a few months, the Deputy Director of Finance abandoned efforts to reconcile County and State records and, therefore, was unable to properly establish an accurate receivable list and issue collection letters.
• As of April 2023, the County Department of Finance’s MCTAT Section had a vacancy rate of 75%, having filled only two of eight positions.

The auditor’s office also found that more than $9.3 million of MCTAT was delinquent as of June 30, 2022, “and the County made little to no effort to collect it.”

“The lack of efforts to collect is rooted in Management’s failure to establish and maintain an accurate receivable list,” the report says. “We acknowledge the difficulties involved in administering a new tax, but there is no excuse for County government to levy a tax without fully knowing how much is due and who has or hasn’t paid.”

The report says: “Simply put, collection of delinquent MCTAT will be less likely the longer it is delinquent.”

Council Member Gabe Johnson said he was troubled by the auditor’s report.

“All the other counties in the state seem to be able to do this, but we’re not. That’s the part that’s really throwing me off,” he said. “Why don’t we just copy and paste some of the practices that they are using?”

Budget Director Maria Zielinski, appearing before the committee as acting Department of Finance director, called the situation a “perfect storm.”

“The taxes came out, and, of course, it makes sense the county’s not going to say, ‘No, we’re not ready,’ so I understand that staffing wasn’t there; the software… doesn’t sound like it was sufficient,” she said.

Zielinski said the situation needs to get cleared up quickly because there’s a lot of money at stake.

“As we all know funding is very important to the county any time, but particularly now, right?” she said.

She suggested retaining a certified public accounting firm quickly to start conducting a reconciliation. “This is what needs to be done,” she said.

Zielinski said she examined the TAT tax form for taxpayers to fill out and submit.

“And it’s really awful because the TAT to this day, you put Maui County, Hawaiʻi, Kauaʻi, all of those, and then at the very bottom you put what the tax has been, and it’s only showing 10.25%,” she said. “So the state is only talking about what they get because they collect that. The 3% that we get; we’re on our own, basically.”

Without clear direction for taxpayers, there’s confusion, and “I suspect there’s a lot of non-compliance, and people may be not even doing it intentionally because they just don’t know,” Zielinski said.

Department of Finance Director Scott Teruya was not present to defend his department Tuesday. He has been on paid administrative leave since Feb. 2 because of a “personnel matter.”

But, on Dec. 4, Teruya submitted a letter to the auditor’s office, acknowledging “various shortcomings” relating to his department’s implementation and administration of the TAT tax.

“Many of these shortcomings were the direct result of the short time period in which to implement the program, as well as a lack of staffing resources to administer this program,” he said. “Please note that the Deputy Director of Finance at the time the new tax took effect shouldered the burden of this implementation upon herself as there were no dedicated resources available to implement the new tax in short order.”

However, despite the shortcomings, the County was still able to collect more than $80 million in MCTAT in its first full fiscal year, Teruya said.

The County has been assessing penalties and interest since Dec. 1, 2022, for late payments and is in the process of hiring a Delinquent Tax Collector Assistant II in the department’s Compliance Unit for collection and enforcement purposes, he said.

The Department of Finance is seeking a software solution with a vendor and working on hiring additional staff to administer MCTAT tax collection efforts, he said.

“It is understood that the county has a statutory three-year time period to collect past due MCTAT, and a concentrated effort to collect delinquent taxes will be made as staffing increases,” Teruya said.

On Tuesday, Department of Personnel Services Director Cynthia Razo-Porter told council members that there are six current positions in the Department of Finance for TAT administration: four are filled, and two remain vacant while recruiting is ongoing. Also, the department is seeking to create two additional positions.

The Office of the County Auditor also reported that it was “denied access to complete, detailed MCTAT information.”

And, “as a result, we were unable to complete a portion of our work,” the report says. “An agreement made between the State Department of Taxation and the County Department of Finance restricted access to those detailed MCTAT information to only two County employees—the Director of Finance and Deputy Director of Finance.”

As a result, the Office of the County Auditor recommended that the department provide detailed MCTAT information to the Maui County Council. “It is our opinion that such reporting would increase transparency relating to the County’s taxation practices, as well as support the County’s zoning and affordable housing initiatives,” the report says.

Following up on the auditor’s recommendations, Budget Committee members voted unanimously Tuesday to recommend passage of Bill 7, drafted by Council Chair Alice Lee. The bill would require the Finance director to submit quarterly reports on transient accommodations tax administration to the County Council.

Meanwhile, in the state Legislature on Tuesday, Senate Bill 2831 passed over from the Senate to the House. The bill, drafted by Maui Sens. Angus McKelvey and Troy Hashimoto, would authorize the Hawaiʻi Department of Taxation to assist a county in levying, assessing, collecting and otherwise administering the county transient accommodations tax for six years beginning Jan. 1, 2025.