Maui County wrestles with collecting transient accommodations taxes

Maui County’s Department of Finance has made some progress by fully staffing a section devoted to managing and collecting payments of transient accommodations taxes that began in November 2021.

However, the department has not yet acquired computer software needed as a long-term solution to what auditor N&K CPAs Inc. determined as a “material weakness” among findings of an annual comprehensive financial audit completed in March.

The audit was discussed Tuesday during a meeting of the Maui County Council Budget, Finance and Economic Development Committee, chaired by Council Member Yuki Lei Sugimura.

Acting Department of Finance Director Marcy Martin said the department’s TAT Section is fully staffed with four full-time employees and a manager. They have office space at the Maui County Service Center and are “settled in” with necessary security protocols in place for their confidential work, she said.

Meanwhile, the department is in the process of creating a request for proposals to procure computer software to meet operational needs and address the audit’s finding of a material weakness, she said.

When asked by Sugimura about a deadline to get the software request for proposals fulfilled, Martin said the county has not yet issued the request yet, but “it’s a top priority.”

Sugimura asked: “Are you going after all the taxes that is due to us, and not only those that mailed checks in?”

Martin said: “I do not have that information right now, but I ask that you please put this request in writing so that we can respond properly and timely.”

The N&K audit says, on Page 23, that a misstatement was identified related to the Maui County transient accommodations tax that was corrected by management. This involved “an adjustment to General Fund deferred inflows of resources, transient accommodations tax revenues and transient accommodations tax receivables of approximately $6.8 million, $6.8 million and $13.6 million, respectively.”

The audit identified the cause as being “delays in the County’s process of implementing software to assist with the reconciliation of a taxpayer’s MCTAT payments to its filing with the State of Hawaiʻi, and provide information related to delinquencies and penalties and interest owed.”

It also noted that the County’s TAT office has experienced staffing shortages.

Without proper systems and adequate staffing, accounting for Maui County’s collection of TAT money will “continue to be challenging, especially as time goes on,” the N&K audit says.

The audit recommended the County continue to work on implementing a TAT software program and recruit and hire additional staffing.

The audit also identified “material weaknesses,” the most serious classification of problems, in two other areas: “improve controls over financial reporting” and “develop controls over financial purchases.” But it was the County’s management of collecting transient accommodations tax money that raised the most concern for council members.

In March, the Budget Committee heard from County Auditor Lance Taguchi. At that time, he discussed his report, titled an “Evaluation of the Assessment and Collection of Maui County Transient Accommodations Tax.” Completed in December 2023, the report details problems the Department of Finance faced in collecting TAT money beginning in November 2021 when a state law kicked in to allow the county to tap millions of dollars of visitor-generated revenue.

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

When asked during Tuesday’s meeting to address seriousness of the County’s collection of transient accommodations tax, Taguchi said it is a “serious matter” when millions of dollars due to the County are not paid.

“Going forward, the department needs to fix its accounts receivable and start collection efforts,” he said. “But, in order to start collection efforts, you need to have an accurate accounts receivable. So it’s not a matter of it’s going to be fixed immediately. It’s not a matter it’s going to be fixed by just implementing a software. There’s gonna be a lot of work to be done. If you can imagine, you gotta start collecting it properly going forward, and then you gotta go back and clean up the misapplied payments and all these things.”

Taguchi said that unpaid tax payments get increasingly more challenging to collect as time passes.

“The reality is (that) it is very difficult to collect things once it goes maybe past a couple of years,” he said. “Businesses go out of business. They no longer are doing transient accommodations, so . . . the older the receivable is, the more unlikely you’re ever gonna collect from it. . . The bottom line is, the longer this goes, the harder it will be to collect.”

Martin said getting computer software is a priority so the department can track the accounts and then follow through with collection. “I think the starting point with all of this really is to get a good software program so that things can be handled efficiently and everything we do will be documented,” she said.

Taguchi said one of the difficult things about administering the TAT tax in Maui County is that it has far more accounts for visitor accommodations than Kauaʻi or Hawaiʻi counties; Maui is more comparable to the City and County of Honolulu, in terms of the number of visitor accommodations, but Honolulu has “way more resources” than Maui County to assess and manage TAT collections.

Maui County’s Finance Department didn’t have sufficient staffing to implement the TAT tax, he said. “They did the best they could, but by doing so you create these problems in terms of who’s going to go after the delinquencies? Have we communicated enough so that people know that they gotta to pay? All this comes into play.”

Council Chair Alice Lee noted that Martin has been appointed as new director of the Department of Finance. “Aren’t you lucky?” she said wryly. (A resolution approving Martin’s appointment is on the County Council’s July 5 agenda. Her resume is attached to Mayor Richard Bissen’s transmittal letter here.)

Lee told Martin, in light of the discussion of TAT collections, that “we don’t blame you for anything or anybody, really, but we need to get to the bottom of the TAT issue; and, as quickly as possible, because you can’t be leaking, you can’t be hemorrhaging money, you know, like this, continually. That’s my main concern and my message to you.”

The Budget Committee deferred action on the financial audits. The Finance Department will have time to answer questions in writing.

As a side note related to Maui County’s struggles with the TAT, Senate Bill 2831 failed to make its way through the Legislature.

Drafted by Maui Sens. Angus McKelvey and Troy Hashimoto, the bill was intended to help Maui County with anticipated revenue shortfalls following the August wildfires disaster. The measure would have authorized the Hawaiʻi Department of Taxation to assist Maui County in levying, assessing, collecting and otherwise administering the county transient accommodations tax for six years beginning Jan. 1, 2025.

The bill passed third reading in the House on April 9, but it stalled in the Senate.