Damn the Tax Clearances, Full Speed Ahead!
By Tom Yamachika, President
 
Several articles in this space have been about features in Governor Ige’s emergency proclamations.  We are now on the tenth one and counting, which makes us wonder about the 60-day limit written into the emergency powers statutes (see HRS section 127A-14(d)), but that issue may be sorted out in lawsuits that were recently filed.

We have previously written that the list of laws suspended by the proclamations is 20 pages long.  This proclamation is no exception, with the list of suspended laws beginning on page 11 and ending on page 31.

On this 20-page list are two lines suspending HRS section 103-53, relating to tax clearances.

That law provides (more correctly, used to provide) that people who want to do business with the State of Hawaii or municipal governments in it need to be current with their state and federal taxes.  A business that wants to bid on a government project, or that is seeking final payment on a government project it worked on, needs a piece of paper from the Department of Taxation saying that it has filed all the state and federal tax returns it needs to file, and has paid the taxes shown on those returns.  There are exceptions provided:  permission to bid or to receive final payment can be granted if the taxpayer is fighting with the Department about whether it indeed owes tax, or if the taxpayer is current on a payment plan that both the taxpayer and the Department have agreed to.

So, could someone tell me the thinking behind why this requirement needs to be suspended?  COVID-19 upended our tourism economy and state tax revenues have fallen into the toilet.  Don’t we need to make sure that the taxpayer dollars we are spending are spent with vendors who have done their part to keep our government going? 

The emergency powers statute, HRS section 127A-13(a), allows for suspension of “any law that impedes or tends to impede or be detrimental to the expeditious and efficient execution of, or to conflict with, emergency functions,” and allows the Governor to “[r]elieve hardships and inequities, or obstructions to the public health, safety, or welfare, found by the governor to exist in the laws and to result from the operation of federal programs or measures taken under this chapter, by suspending the laws, in whole or in part.”  Does suspending the tax clearance requirement on a categorical basis satisfy any of those legal requirements?

We previously wrote that the Governor tinkered with the tax code in the proclamations by shutting off distribution to the counties of what little transient accommodations tax revenues we have left.  So, doing a money grab was fine under emergency powers.  But we are allowing vendors to the State to do business and be paid without making sure they pay their taxes?  Is that even a consistent philosophy?

Again, we are not talking about people who owe taxes and legitimately can’t pay them, because of our economic collapse or otherwise.  They can get forbearances or payment plans from the Department and still be qualified to bid on or receive State contracts.  The same is true with people who have a genuine dispute with the Department over whether they legally owe tax.  So, who does this law suspension benefit?  Was this suspension really thought through?

Future of the Aloha Stadium
By Tom Yamachika, President
 
While everyone’s attention is focused on COVID-19 and racially charged police brutality, we should also pay some attention to major happenings here at home.

One of them is the venerable Aloha Stadium, former home to the Aloha Bowl and now affectionately called the Rust Bucket.  The stadium was built using a then-new product called “Weathering Steel,” which was supposed to develop a thin coat of rust on the outside of the steel that would prevent the steel from rusting any further.  The makers of this product didn’t factor in Hawaii’s salt-laden moisture, however, and the stadium developed way more than a thin coat of rust. 

Then there were bleachers that were supposed to move and convert its football shape into a baseball configuration but wound up being non-movable.  Hawaii residents did get some use out of the stadium but its condition has deteriorated further and now needs significant maintenance.

To deal with this problem, our government came up with the idea of NASED, an acronym for New Aloha Stadium Entertainment District.  It even has its own nifty website.  The idea was that a design firm would be hired to come up with some plans, and then a Public-Private-Partnership would be formed by late 2020 between the State and a selected private developer to do the build-out.

The design firm, in late 2019, produced three draft concept plans that would be put out for discussion and debated:

Plans for restaurants, retail, entertainment, hotels, and residences are presented in the three renderings.

The plan is for the State to put up $350 million, with $20 million coming from the general fund and the rest being borrowed through a bond issue.  That sounds like a good deal, with 25 years of maintenance costs projected to be $423 million.  But there are still some tough questions to be answered.

The land on which the stadium sits is 98 acres owned by the State.  Access to the area is very easy, with Kamehameha Highway, the H-1 Freeway, the Moanalua Freeway (H-201), and a new Stadium rail station serving the area.   Do we really want the entire site developed as an entertainment district?  

We have a major recession that is expected to continue for a while and continued high unemployment.  What about housing, especially affordable housing, that was previously identified as a high priority for our State?

Can we afford to take the risk of building a new stadium with an entertainment center that may become a financial white elephant like our convention center?  The financial plan assumes that the State’s share is going to be $350 million, but the actual number might be nowhere near that if, for example, the selected developer uses COVID-19 as an excuse to jack up the price tag.  

In any case, shouldn’t the financial drain that this project will cause be justification enough to push the pause button, as Honolulu Mayor Caldwell did on the proposed $772 million Blaisdell Center renovation project?  Will this project become Convention Center 2.0 or Rail 2.0?  Let’s make sure we are getting something we really need at a price we can afford to pay.

Pitfalls of the Subcontractor Deduction
By Tom Yamachika, President 

This week we’ll look at another general excise tax exemption that the State Auditor has put under the microscope in Report No. 20-05. It affects the construction industry, and the price tag the Auditor put on it, based on 2018 numbers, was $19 million. 

The primary benefit of this exemption occurs when a construction contractor hires and pays other people qualifying as contractors to build a project.  Suppose, for example, a general contractor is paid $100,000 to build an annex to an existing house. The general contractor hires a plumber and an electrician, paying $5,000 to each.  Current law says that the plumber and electrician pay GET on the $5,000 each that they get, and that the general contractor is only taxed on the remaining $90,000.  

If a subcontractor needs to sub out part of its job, say the electrician needs to hire another electrician and pays the second one $2,000, the same rules apply at that level.  The first electrician pays GET on only $3,000, and the total tax on the project remains the same. 

There are, of course, wrinkles
.
First, the contractor hiring the subcontractor needs to be a contractor in the construction industry.  Many vendors who do work for the government are called contractors, but they do not qualify as contractors in the GET sense.

Next, if money is paid to someone not a contractor, then the special treatment fails. Let’s say the plumber hired a design consultant and bought pipes from a supply house, and paid each $1,000.  The plumber still needs to pay GET on the $5,000, and the plumber’s vendors each need to pay GET on the $1,000 as well, although at the 0.5% tax rate, assuming the transaction is documented properly.

If we suspended this GET provision as we did in 2011-2013, then all sub-vendors would be in the same situation as the plumber in this example. The general contractor would have to pay GET on the whole $100,000. Each sub-vendor, and each sub-sub-vendor, would have to pay GET as well. 

The result would be even higher construction prices than what we are suffering through now. Is that what we want when the lack of housing, affordable or otherwise, is a major problem here?

At the same time, the complexity of the current system is a major problem.  Many of the clients I’ve represented were confused over at least some of the aspects of the subcontract deduction system I’ve briefly explained above.

Maybe we should transition over to a simpler system.  Guam has a gross receipts tax, and they had a subcontract deduction system like the one in Hawaii until 2010.  As we have written about before, Guam’s system is that there is no subcontract deduction, so the general contractor pays tax on the whole contract, but the subcontractors are exempt on their payments from the general contractor.  In theory, that system yields the same tax revenue as the current one, but there are fewer moving parts. 

Issues about whether the subcontractors are really subcontractors or are simply wholesalers can be sorted out at the vendor level without putting the tax on the main contract at risk.  And if for policy reasons we want to forego GET on the main contract, such as if the contract is to build affordable housing, then we allow an exemption at the general contractor level instead of increasing complexity by letting the exemption propagate through to all of the subcontractors.

How about that, lawmakers?  Let’s do something constructive for the construction industry and our economy.