The Cruise Fee Quandary

by Tom Yamachika, President Tax Foundation Hawaii

Litigation is still raging over the extension of our Transient Accommodations Tax to cruise ships in what has been called the “Green Fee” bill.  And the Legislature is getting involved as well.

In last year’s legislative session, as you may recall, the TAT was increased and broadened to include cruise ships.  The cruise ship industry filed suit, leading to an end-of-year flurry of court activity.

The cruise ship industry has pointed to the Tonnage Clause in the U.S. Constitution and the Rivers and Harbors Act in its attempt to strike down the Green Fee as applied to cruise ships.  These federal laws are trying to prevent states that happen to have ports in them from taxing maritime traffic.  This, in theory, burdens the other states that don’t happen to have ports in them if they need the goods that came in by ship.  Which is not a good thing if all of the states in the USA are supposed to be parts of one big, happy family.

One of the State’s principal arguments is that the Green Fee isn’t a tax on maritime traffic, it’s a tax on transient accommodations.  It just so happens that for the cruise ship industry, their transient accommodations happen to be aboard a ship.  It is lawful to tax hotel rooms, the argument goes, so it should be lawful to tax cabin berths as well.

Not so, says the cruise ship industry.  The TAT is only imposed on the rental component of what is paid for a hotel room.  If a hotel room is offered as a package that includes meals, for example, then the TAT is not imposed on that portion of the package price that is for the meals.  But how about the Green Fee?  There is nothing in the Green Fee law that allows cruise ships to do the same thing.  The TAT is imposed on the passenger fares, with no comparable exclusion for the price of meals which the fares include.  Therefore, says the industry, the Green Fee law is not simply a nondiscriminatory tax on transient lodging, it does indeed tax maritime traffic, and should be struck down as a result.

Interestingly, we have not seen any bills in the current legislative session that would address this issue.

Instead, there are bills that would undo the TAT extension to cruise lines and, instead, impose a per-passenger charge on cruise ship docking.  These bills are moving in the Legislature with the administration’s and the cruise industry’s support.

Per-passenger charges have been around for decades.  The Hawaii Department of Transportation imposes them now and they have never been challenged.  This is because these charges are kept within the DOT, go into the Harbors Fund, and are, in theory, wholly used for repairs, maintenance, and improvements to the boat harbors.  That would make the charges user fees, not taxes; as such, they would not be a tax on maritime traffic. 

But theory and practice aren’t always the same.  There is a 5% “central services assessment” that the Department of Budget and Finance levies against the fund for expenses in administering the fund.  According to Departmental Communication 35 submitted to this year’s Legislature, the Harbor Fund paid $7.3 million — which seems to be a lot more than expenses of administration.  That same report details reimbursements paid to other departments to administer their special funds, and the biggest one is $650,000 to the Department of Land and Natural Resources for administering the Ocean-Based Recreation Special Fund.  (The Harbor Fund is exempt from departmental assessments.)

And, in the future, there may be pressure on the Legislature or the Department of Transportation to use the Harbor Fund for environmentally friendly causes having nothing to do with harbors or cruise ships.  If that happens, the State and the industry might once again fight over the legality of these charges.