 Okay, one o'clock, block, I'm Jay Fidel. This is Think Tech. This is Hawaii, the state of clean energy. We're talking today about clean energy, but we're also talking about tax. How do I know that? It's because Tom Yamachiga is in the room. He's the president tax foundation of Hawaii, and Ron Hiller, he's a tax attorney. So it's tax and energy, the intersection. Welcome, gentlemen. Thank you. Glad to be here. Well, last time we spoke a few weeks ago, you mentioned the Kahiava tax appeal. I was so fascinated, and I'm so glad you're back to discuss it. You're an amicus in that case, and Ron, you represent Kahiava Wind in a project on Maui. Who wants to present the case? Raise your hand. Ron. I'll give you the two-minute summary. Okay. Kahiava has a bunch of big wind turbines over on Maui. If you've ever flown into the Maui Airport, you've probably seen them on the mountain side, and they use those turbines to generate electricity that they sell to Maui Electric. The county of Maui has decided that those turbines are real property for purposes of real property taxation, and so they're taxing them on the value of the turbines. Which is substantial, I imagine. It begins. Yes. A lot more than the value of the land. Yeah. Interesting. There's real property tax on the land, but then they're treating the turbines as if they were buildings, and treating them as part of the real property for tax purposes. So that multiplies the value by maybe about 20 when you go from just taxing the land value to taxing the value of the turbines. The tax goes up by a factor of about 20 times, and that's what's at issue because Kahiava says those turbines are not buildings, they're machinery and equipment, and in fact, they're removable. They're bolted in place, they can be unbolted and moved. I mean, they're big, they're heavy, they're hard to move, but they could be unbolted and moved. Mm-hmm. How much money is involved in this particular tax appeal? How much tax? Well, there are two parts to the Kahiava project. There's phase one, phase two. There's one up the hill, and one further up the hill, as I remember. And in rough round numbers, the tax per year on each segment is between $400,000 and $450,000. And I can say that because it's all public record anyway. I could ask that because it's all public record. And his is not the only project that's involved in the appeal, there's also one other project. Oh, at the ranch, will the public go to a ranch? Right. Awahi wind energy. Awahi. That's the thing, they did the same thing there. Exactly the same issue. In fact, the two cases have been consolidated for argument before the Hawaii Supreme Court. Interesting. So does it make a difference as far as this tax is concerned about whether the turban is actually in use? Let's take hypothetically, and this is actually the case in the Ula-Palakua, one of the turbans, I think it's called cupola, flew off, you know, isn't there. And so that's not functioning, it's still there, you can see in the pictures. They still try to tax that particulate turban, even though it's not functioning? I think so. I mean, I'm not sure of the exact facts, because that one is in my case. But I think the county is still treating it as real property. Just like if you had an office building, the fact that you've got a lot of vacancies may arguably reduce the value a little bit, but it's still real property. Yeah. Okay. So that's the value and not to, you know, whether it's taxable or not. So your position is that this is an illegal assessment. This assessment is not justified by the law. But the county did, in fact, redefine real property to include this kind of turban, right? They did make that change. So you say that. Well, let me give you some background on that. Please. Yeah. This is not the first time that the case is being litigated. This is actually the third time. The first time, they went on a trip to the Intermediate Court of Appeals under the definition in the earlier tax years. And the Intermediate Court of Appeals basically- This is the county tax ordinance you're talking about. That's right. Right. And so the tax ordinance basically was the same as it was back in 1981 when the property tax functions were transferred from the state to the counties. Okay. You may remember this was part of the con con in the late 70s. And that was one of the recommendations, which was then adopted, and the implementation started in about 1981. It took them three years to get it together. Seven, eight con con. So what then happened was the definition at the time was, okay, basically you look at two things. One is the object that you're seeking to tax permanently affixed to the property. And the answer is no. You can unbolt it, like Ron said. And the second thing is, is it a fixture, which means is the operation or functioning of that property basically helping you do what you need to do on that property. And the answer to that one is no, because you're not generating power to run that particular property in which the turbine sits. You're sending it out to the grid. And you're powering lots and lots of homes and businesses with lots, you know, good clean renewable energy. And so we litigated that case. The court decided in our favor, said Cahiavas turbines are not real property. That was for tax years 2007 through 2011. County came back. It was the Intermediate Court. Yeah, went to the Intermediate Court of Appeals. The county asked the Hawaii Supreme Court to grant certiorari and hear that case. And they said no. So that was the end of it. It was a final decision. Then for tax years 2012 and 2013, county made a parallel assessment. We appealed again. Tax appeal court decided in our favor again. The county filed another appeal to the Hawaii Intermediate Court of Appeals, but then voluntarily dismissed their own appeal, letting that judgment stand as a final judgment in Cahiavas favor. But then what they did is they rewrote the definition in their ordinance to specifically say that wind turbines are real property. So the previous case is the ordinance, what did the ordinance say in the previous cases? In the previous case, it pretty much followed the common law definition of what is real property versus personal property. And as Tom said, there's two parts to the test. One is, is it a fix to the property in such a way that it cannot be removed without major damage? And the answer to that was clearly no because you can just unbolt them and move them. And the second part of the test, the way it's worded in the ordinance is, is it quote unquote, essential to the utility of the property? And the way the cases have explained that concept over the years is essential to the utility of the property means it's something that enhances the value of that chunk of land no matter what use you're going to put it to. It's not something that's limited to the specific business activity that you happen to be conducting, but it's something that just enhances the value of the land in general. Let me give you an example. If I've got a piece of land and I put in a paved parking lot, you know, with stripes and curbs and everything to make it all nice, that's going to be useful regardless of whether I'm using that piece of land for a factory or for a retail store or for apartments or a bowling alley or whatever. I mean, it's, it just generally increases the value of the land regardless of what kind of use I'm making of the property. But stripes would be part of the land because they're really embedded. Right. But looking at it separately. How about another example, something closer to a windmill, which enhances the value of the land for any use? Sure. Okay. I've got a building and I put a solar panel or solar array on the roof so that I can use the power to run the lights and the air conditioning and so on. Now that's going to enhance the value of my building and that's going to be true regardless of whether the building is being used as a warehouse or a factory or a hotel or a movie theater or regardless of the use of the property. It just generally enhances the value. The windmills that Cahiava has in contrast have no value outside of the power generation business. I mean, they're, they're not useful for any other purpose. You can't use them just to power that particular piece of property because it wouldn't be economic. It wouldn't make sense. And in the case of Bulapalacua, that land is his cattle land, it's pasture for cattle. Right. So it had really nothing to do with wind. Right. And it wouldn't make any sense to put those turbines there unless you were going to engage in the specific business of selling the property. So their equipment for that specific business as opposed to a general enhancement of the real property, that's the distinction. So we won the first case based on applying those principles. Then the county said, we don't like that. We're going to rewrite the ordinance. This is the part that I really love. So what did they say in the rewritten ordinance? They specifically said towers and turbines used for the production of electricity for sale are a real property. And they also said that any property that increases the value of the realty it's on is also a real property. Okay. And that's a problem because it can go way beyond wind energy. Yeah. So in fact, just to unpack, in fact, if I go to one of these turbines and I was at U Palakua and I was at Kahiava too, I mean, the base of these windmills is like 10 feet wide or more. It's huge. But if you look down at the foot of it, you'll see a concrete pad and you'll see bolts that big. And you'll see nuts on the bolts and cost a lot of money to get them up there and put them up. But if you ever had to remove them, it wouldn't be very hard. If you undo the bolt, you put a truck out and you lay the shaft on the truck and you're gone. That's simple. Yeah. Well, you need a pretty big crane to pick it up. Big truck, crane. But the point is, it's bolted in place and in the first case, the county even stipulated that it could be removed without any damage. That was not an issue. Okay. Yeah. Sure. Because they thought they got by that by redefining what's taxable. Well, that sounds very reasonable, doesn't it? You just changed the tax law to meet the decision that had been entered earlier. I mean, and isn't it true that an ordinance can change the common law in this country? Isn't it true? Sure. But the county was granted the power to tax real property. What they've done is expanded that definition now to tax something that had already been determined to be personal property and not real property. This is if they're taxing your house with the real property tax and then they say, well, we're going to write a definition that says if you park your car in the garage, we get to tax the value of the car too. If they write that definition, that doesn't make your car real property. It just means they're putting the wrong label on it. They're calling it real property when it isn't. Yeah. It's basically scope creep as it applies to real property tax. This is really funny, actually. There's a certain, I hope you appreciate that, there's a certain sense of humor going on here. Yeah. And do you know what I mean by scope creep? No. It means the scope of the real property. Scope. SCOPE. SCOPE. The scope of the definition is creeping. Is creeping out. Okay. Right. And if they can do what they're doing in the Cahiava case and just redefine the towers and turbines as real property, then they can also write a definition that says your car parked in your garage is part of the real property. Yeah. I mean, every business that has valuable things on it, like a medical clinic with an MRI machine or manufacturing businesses like bakers with ovens and mixers and process machinery, manufacturers of all types, even the auto body shops with their specialized devices that work on cars. All of them are at risk with this new definition because any and every one of these machines could be real property under the definition that it increases the value of the real property in which it sits. Okay. This is in front of the State Supreme Court right now. And before we go to break, Ron, can you tell the people what Pandora's Box is all about and why we studied that in law school? Well, the idea is you start out by doing something that seems relatively narrow and limited. In this case, you know, it only affects wind turbines and there are only maybe what, four or five companies in the state that operate wind turbines, right? But if they can do this, they can apply the same theory in a lot of other areas, as Tom says, and who knows where it's going to get to in the long run. Yeah. And the other part of that is about incentives and disincentives. The fact is that we have some new installations going in Oahu and elsewhere where solar is way cheaper than wind as it exists. So if you start applying real property tax in this quantum to wind facilities, which I think are very important in the array of the portfolio of renewable energy, then you're really putting a burden on the wind developers that's worse than before. Let's take a short break. We'll come back and we'll find out exactly what you guys argued in your briefs. Ooh, it'll be right back. Aloha and Mabuhay. My name is Amy Ortega Anderson, inviting you to join us every Tuesday here on Pinoy Power, Hawaii. With Think Tech, Hawaii, we come to your home at 12 noon every Tuesday. We invite you to listen, watch for our mission of empowerment. We aim to enrich, enlighten, educate, entertain, and we hope to empower. And maraming, salamat po, Mabuhay, and aloha. Aloha, I'm Wendy Lo and I'm coming to you every other Tuesday at 2 o'clock live from Think Tech, Hawaii. And on our show, we talk about taking your health back. And what does that mean? It means mind, body, and soul. Anything you can do that makes your body healthier and happier is what we're going to be talking about, whether it's spiritual health, mental health, fascia health, beautiful smile health, whatever it means, let's take healthy back. Aloha. OK, Tom Yamachika, president of the Hawaii Tax Foundation, Ron Heller, a tax attorney. Well, what a fabulous group to be here today, talking about a case that is pending in the state supreme court over the attempt of Maui County to tax wind turbines as real property. Wow, exciting. Why is it exciting? You guys, you know, you wanted to know during the break. Wow, I think this is funny. It's because you're going to law school. You're banging your head against the property course, which in most law schools is a full-year course. It's one of those fundamental courses you have to take right away so you can appreciate real property in our society. And they teach you about fixtures. They teach you what Ron said a fixture was. And now we have a county here in Hawaii telling us that no, no, no, it's not a fixture. It's something else. This is why it seems funny to me. Yeah. I mean, one other thing that you may want to think about is that the definition, the common law definition of property is used in other tax contexts, like, for example, depreciation. You get to depreciate things that are used in your business, but you don't get to depreciate real property because it doesn't have a useful life. Right? It's just there and it keeps existing forever. There is something called the investment tax credit, which we still have in Hawaii through the capital goods tax credit. And it awards you a credit for personal property and not for real property. Okay? I'm sure that the credit was taken for these turbines. It was. And that's one of the arguments we make in our brief is that the county is taking a position that is inconsistent with both state law and federal law because both the state and the IRS consider these turbines to be personal property as opposed to real property. In fact, when they were installed and they applied for the excise tax credit that Tom just mentioned, the state agreed with that and said, yeah, they qualify, you know, allow the credit. So that's effectively a determination that they're not real property, that they're a tangible personal property. So you win in the Intermediate Court of Appeals on this as before and now you're in the Supreme Court and they file the opening brief, that is the Maui County Corporation Council of Maui County files the opening brief to try to upset the Intermediate Court ruling in your favor. Well, we didn't go through the Intermediate Court in this appeal. Okay. So we went to the Intermediate Court last time. This time we won at the tax appeal court level, the trial court level, and then the county, well county appealed to the Intermediate Court of Appeals, but before they heard it, the county asked the Supreme Court to take it direct and they did. Okay. So it jumped the Intermediate Court. So it's the burden though of the county of Maui to make opening brief on this. What was in their brief? Basically the county's argument is that they have complete and total power over the taxation of real property and that at least in their view includes the power to define what is real property. And it is true that the constitution, the state constitution gives the counties control over the real property tax. That was something that was just in, you know, public view in terms of the proposed constitutional amendment because the state wanted to impose a state level property tax and the counties were fighting it saying, no, we have control of the real property tax. That's our turf, right? And the constitution does give the counties complete control over real property tax. But the key question, the critical question there is what is real property? Because the constitution says the counties have the power to tax real property. What does real property mean when it's used in the constitution? Yeah. To kind of further expand on that, the state has the ability to tax whatever it wants. The counties don't. The counties can only tax what they're given the power to tax. It's derivative from the state constitution. Well, they can get power to tax either from we the people through the constitution or by state statutes. So if the state legislature gives the counties the power to tax them, they can do it. And they've done so for like the county gas tax. Is that what they argued here, that they had the power? Yes. Yes. On the basis of what language? The constitution. Which says that the counties are given the power to tax real property. So they're changing the meaning of that term. Well, but there are some Supreme Court decisions in Hawaii that say that the counties have very broad power over the taxation of real property. So we're not disputing that. I mean, they do have the power to tax real property and they do have very broad power over real property taxation. But the question is, can they define real property to mean something that goes beyond what the common law would have regarded as real property? And I suppose in her and what you just said is that, well, in the state constitution, you could redefine what real property is. Sure. And in the state statute governing this, you could redefine what real property is. But if the state constitution said real property includes turbines, we'd lose. But the state constitution just says they have the power to tax real property. It doesn't define what real property means. And our position is therefore what it has to mean is the accepted common law meaning of the customary definition. And what we said in our brief was... This is in your amicus brief, Jafar. Right. And a derivative of that, namely, the power to tax real property didn't exist in a vacuum. The state exercised that authority for years. And then in the 78-con-con transferred it to the counties. So upon transfer, they have had to have some understanding of what it was when it was transferred. That was being transferred. Right. So there was another constitution provision that said, hey, you counties have to keep the same provisions, the same exemptions, the same rates, the same everything for 11 years after the transfer. So at the time of transfer, there was a common understanding of what was going on. And the statutes and the ordinances of all four counties read the same thing. So that was the common understanding. That's what went over. And that, I think, defines what real property is that the county was giving taxing power over. Okay. So if they want to define real property and tax fewer things, that's fine. But if they want to tax more things, wait a minute. They didn't get that authority. Yeah. Yeah. Yes, but I still think it's funny. You still think it's funny. So were your briefs the same? You know, usually it's not exactly the same. So the principal brief would be by the party, Kahiava went. You'd file an amicus brief, you'd probably add value in some way. What did you say? Well, Aaron's brief was primarily on the common law definition. And he got that from various sources. I said, you know, I don't care what the common law definition was. There was a common agreement in 1981 about what was going over. And that's what you got to, you know, that's what they're bound by. Well, it is common law of sorts. It's the common law of practice, no? Yeah. And we get to the same place, obviously. We just get there through slightly different routes. What I'm saying is, if you ask what did the drafters of that 1978 constitutional amendment think they were doing when they gave the county the powered attacks real property? Committee reports or something. Yeah. Yeah. I mean, you can look at those too. But my point is, you know, they wrote an amendment that said real property. What did they mean by that? I think the only answer that makes sense is what real property was generally understood to mean at the time they used those words. Sure. And in fact, in those days, there were no such thing as, well, not in the same sense as wind turbines are today. But there was a well-established body of law of when and how personal property becomes part of real property. Yes. And clearly it can. I mean, if I have a stack of bricks and a bag of mortar, that's personal property. If I build a house, it becomes part of the real property. That's been going on for 500 years or more. Right. And my point is there's a well-established body of law that says exactly when that personal property becomes real property instead. What is the test? Yeah. That was understood in 1978. Yeah. And presumably that's what the members of the Constitutional Convention and the public thought it meant in 1978. Right. And when they used the term real property, we're saying they must have meant what everybody thought real property meant at that time. OK. So have we covered what the government would have said in response to your arguments? Well, there was one other thing that I thought was fascinating. And a lot of the county's brief was spent on criticizing the previous appellate court decision. Remember how we said that the immediate court gave Kahiava wind of victory and the county tried to get the Hawaii Supreme Court taken and they didn't take it? Well, the county comes up in this brief and says, underneath the Supreme Court's supervisory power, you can correct this decision if it's wrong. Wait a minute. So they want to re-argue the prior decision? Yeah. Which is a different case, really. It is a different case. The documents were different. The ordinance was different. Right. Yeah. I mean, we have the legal doctrine of race judicata, which basically says if parties have litigated a case to a final judgment and it's become final, then those same parties cannot re-litigate the same issue, right? But the county at this point is effectively asking the Supreme Court to go back and re-decide the same questions that the intermediate court was trying to perform. So but you don't know what the Supreme Court is going to do. You told me before the show began that a month from now they'll have arguments and the county will go first. It has the burden. You'll follow. Amicus, will you get a chance to argue? No, no. Typically Amicus. You'll be there. Won't you, Tom? I'll be there. But Amici don't get to argue unless some special arrangement is made. But the other taxpayer will also be there, O'ahu'i Window, because it's a combined deal of the two cases. Because they're combined because I was in it. Yeah. Very interesting. So I know lawyers don't like to make predictions, but I wonder if you could give me what you think is going to happen at that hearing and in the decision to follow. Well, typically the justices will ask tough questions of both sides. And then they'll take the matter under advisement, which means they'll think about it, and then some months or years later then the decision will pop out. And there's no way of knowing how long it's going to take. They could decide within a few months or they could take considerably longer to think about it. I'm not going to make a prediction at this point, but I will say that I think the issues have already been laid out pretty well in the briefs, and I expect the court will ask all the questions they need to really figure it out. I'll make a prediction. Go ahead. I'm confident that the position you guys have expressed is correct. And I think the Pandora's box problem here is a pretty big one. And I think everyone who has gone to law school really does have a sense of what a fixture is. And this sort of violates a lawyer's education, what they've done here. The other thing is, and we talked about this before, before the show, is that this would be a disincentive for wind. Wind doesn't need any disincentives. It has enough trouble in staying afloat. So as a matter of public policy, the Supreme Court really should not allow this kind of penalty to wind operators. In fact, our state has an express goal of getting to 100% renewable energy by the year 2045. To get there, obviously we need more wind, more solar, more alternative sources of energy. Increasing the tax burden on wind projects just seems like the wrong way to try to do it. Right. And conceivably also on solar, because if you rule this way on wind, it does have implications to use the same precedent against solar. So if you win, and my recollection is in the tax appeal court, you have to pay the tax in order to make the appeal. With real property taxes, yes. Real property tax. So they taxed Kahiava and also O'ahu. And then Kahiava and O'ahu had to pay the money in, whatever was taxed, right or wrong. And then when it's reversed, hopefully it will be not wood, you get a check, am I right? Yes. That'll be nice. The project has a remaining lifetime that's part of this whole thing too, because if the county wins, they're going to keep on assessing it year after year after year. If Kahiava wins, they won't have to pay that tax year after year after year. So the value here is not just the potential refund, but the future year is for the rest of the project. And similarly situated projects as well. Okay. I mean, you guys, you know, the public is not involved, but I wonder if you could tell the public, it's camera one over there, what you'd like to leave them with. What message you would like to leave them with, it's camera one's right over there. Ron, you first. Okay. Well, I would say the key thing here is that if there's no limit on the county's power to define real property any way they want, then they can tax anything. They can tax the car that's parked in your garage. They can tax the manufacturer's equipment. They can expand to tax a lot of things that we would not normally think of as real property, that we would consider personal property rather than real property. But I mean, if they're right, there's no limit. Yeah. This would be bad policy. Yeah. Yeah. I mean, certainly you need to set some limits on the exercise of governmental taxing power. You know, you don't want, you don't want scope creep, creep, creep, creep, creep. Scope creep. Yeah. The other thing you don't want is a situation where you're actually doing this kind of deceptive trick on the law. If the counties need money, they have the real property tax power. All they have to do is raise the rates. They can do that at the county council on a Tuesday. So it's politically unpopular, of course. And somebody will, you know, get a lot of votes against them for her, for having, you know, pass that tax increase. But the fact is, if they're desperate for money, they need money for police, fire, and infrastructure, you should just raise the rates. It's easy. Yeah. But it comes with consequences. It comes to consequences. Thank you, Ron. Thank you. Thank you, Tom. Thank you, Jim. Great to have you here. Wish you well on that case. Thank you. Aloha.