Weekly Commentary

For the Week of July 29, 2018
​
The Wayfair Switch In Time
By Tom Yamachika, President
 
In late June, the U.S. Supreme Court decided the Wayfair v. South Dakota case.  It was a huge turning point in constitutional law involving the ability of states to tax “online sellers” such as Amazon, Newegg, and Wayfair.

“Yeah,” you might say.  “I know about online sellers because last April, Amazon started charging Hawaii GET, so I had to pay more for what I buy online. What a drag!”

But another way to look at the case is fairness to local businesses.  Local stores hire local people, pay taxes to local government, and support local communities.  Online stores typically didn’t do any of the above and were able to boast that local taxes weren’t added to purchase prices, giving them a 4% or 4.5% economic advantage.  (This is not quite true because the law says that the buyer is supposed to pay the 4% or 4.5% tax in that situation, which we call “Use Tax,” but many buyers, especially individuals, don’t.)

This year our legislature passed, and the Governor signed, Act 41 (S.B. 2514).  That law put key provisions of the South Dakota law into our GET law so we are well positioned to take advantage of South Dakota’s Wayfair victory.  It also said that it “shall take effect on July 1, 2018, and shall apply to taxable years beginning after December 31, 2017.”

Apparently, the Tax Department couldn’t contain its excitement over this turn of events.  On June 27, two days after the Wayfair decision was announced, the Department released Announcement 2018-10, which told taxpayers that if they met the criteria in the new law (200 transactions or $100,000 in sales in Hawaii either in the current or previous taxable year) that they were liable for GET as of the beginning of their taxable year.  For many taxpayers, that meant January 1, 2018.  The Department magnanimously offered to allow affected taxpayers to pay their back taxes ratably over the remainder of the year, without penalties and interest.  But it wanted the tax.

This would be a problem for some online sellers who had sold products or services to Hawaii customers for the first six months of the year.  Those sales transactions were already closed and completed, leaving no opportunity for the sellers to reevaluate their economic deals to take the Hawaii tax into account.

It seems that the Supreme Court foresaw just such a problem.  In its opinion, the Court noted that the South Dakota law had three features designed to prevent discrimination against or undue burdens upon interstate commerce, and one of them was that the law was not retroactive.  In that way it dropped a big hint that retroactivity was not going to be looked at favorably.

Act 41, moreover, wasn’t even retroactive.  It took effect on July 1, 2018, which probably meant that the Department had no business asking for tax retroactive to January in the first place.

On July 10, the Department amended Announcement 2018-10 to flip the Department’s position.  The new law would be applied from July 1, and there would be no retroactive application to that extent.  But there would be “catch-up payments” required for those taxpayers who tripped the threshold late in the year.  For example, if a taxpayer had no sales in Hawaii in 2018 but managed to break the threshold in sales in December 2019, then the Department wants tax on all $100,000 for the whole of 2019 to be paid with the December 2019 return.  Is that a fair outcome for the online seller that probably had no idea that the $100,000 would be achieved until November at the earliest?

Big note to businesses and others who are paying Use Tax:  After July 1, more vendors probably will be registered for GET.  If a vendor is registered for GET, the purchaser does not have to pay Use Tax.  So, it may pay to check your Use Tax list and stop paying tax on purchases from any newly registered vendor.
 

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Weekly Commentary

For the Week of July 22, 2018

Who Can We Beat Up with Property Tax?
By Tom Yamachika, President
 
The ongoing furor in Honolulu over the extent to which the rail project is adequately funded, or lack thereof, and the possibility of new state-mandated property taxes to fund education lead us to look at how we can or should make property tax classifications.

Real property tax is currently a county tax.  It applies to real property that is owned by a taxpayer, or to residential property subject to a long-term (varies by county, but usually more than 20 years) lease.  If the object is to raise more revenue, and to spare all or most normal people who otherwise would be motivated to kick out present or future county officials at the ballot box, we need to make classifications.  How can that be done?

According to the teachers’ union’s public testimony on the constitutional amendment bill, we should be heavily taxing nasty foreign real estate speculators and vacation home buyers.  If they can afford million-dollar homes, so they say, then they can afford money to educate our keiki. 

Under constitutional law, it’s easy to create tax classifications.  They only need a “rational basis,” which means it is very hard for a classification scheme to fail.  For example, most counties already have different tax classifications for residential property, commercial property, hotel/resort, and agriculture, and they apply wildly different tax rates to those classifications.  There are some classifications that are impermissible, however.  Governments can’t discriminate based on race, sex, or religion. That comes at no surprise.  They also can’t discriminate on nationality.  So, a higher tax classification for foreigners wouldn’t fly.

Most jurisdictions that impose a real property tax give a break, typically a “home exemption,” to people whose primary residence is the property being taxed.  So far, courts haven’t viewed that kind of classification as discrimination against those in other states and countries.  The City & County if Honolulu then took this principle to the next level when it established its “Residential A” classification, which targets properties over a certain dollar value that are not registered for a home exemption.  That classification was challenged in court and has survived, at least for now.

Just because a classification is constitutional, however, doesn’t mean that it does what it’s supposed to.  Does Residential A hit speculators and the owners of vacation homes?  Sure, but it also hits rental properties and properties where the owner wants to but can’t live there (for example, where the owner is of advanced age and needs to be in a nursing home; we wrote about that some time ago).  Residential A also applies where the owner was eligible for a home exemption but, for whatever reason, didn’t apply for one — ouch.  It turned out that there were quite a few people who fell into that category, prompting the City Council to enact relief measures.

To be administered properly, a tax classification should be simple and should be capable of verification with information that the tax agency has or can get without excessive additional cost.  If a county wanted to tax homeowners with high incomes, for example, it would need access to Social Security numbers and income tax data.  But what about the foreigners it might want to tax?  Neither the State nor the IRS might have data on how much these people make, or what their net worth is.

So, how does a county zero in on foreign fat cats and speculators?  It’s tough to find a classification that is constitutional, works correctly, and doesn’t create collateral damage.  We wish the authorities good luck, because they are going to need it!