​WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
​To view the archives of the Tax Foundation of Hawaii's commentary click here. ​​​​​​​

​By Tom Yamachika, President

This week we’ll discuss a couple of examples from this legislative session of the controversial but commonly used technique called “Gut and Replace” where a bill is amended so much that it looks nothing like its former self.

Senate Bill (SB) 162, as originally introduced, would have provided tax credits for hiring elderly people.  

In late February, the Departments of Taxation and Transportation (DOT and DOTAX) came to key legislators with a problem.  In 2018, a law was enacted to raise the special tax on car rentals from $3 to $5 – but only for those who couldn’t produce a Hawaii drivers’ license.  The car rental companies opposed the bill then, citing constitutional concerns, but legislators pooh-poohed the objections after a deputy attorney general concluded that the bill was okay.  In the beginning of 2019, however, some of the car rental companies came back in with a new analysis concluding that the law’s discrimination against nonresidents was prohibited by a part of the U.S. Constitution that the deputy attorney general didn’t consider.  “Oops,” the deputy said.  “I think these guys may have a point.”

DOT was greatly concerned because the car rental company threatened to sue to invalidate the tax.  Revenue from the tax normally goes to the Highway Fund, which DOT uses to fix roads and bridges.  Interruption of revenue to that fund would put DOT in a bind.  The discrimination could be solved by making the tax on locals and visitors equal.  So, DOT’s fix was for everyone to pay $5 a day.  That solution would, however, require a bill to be passed and signed into law.

Eyes then fell upon SB 162.  Now, once a bill is introduced, its title can’t be changed, and its contents need to be consistent with the title.  There were several bills floating around that would allow a tax credit for hiring the elderly, so no one would miss this one. It was titled “Relating to Taxation,” meaning that it could appropriately contain the language to fix the rental vehicle tax.

On March 1, Senate Ways & Means published a hearing notice for the bill along with a proposed Senate draft that would trash the language currently in the bill and change it to fix the rental motor vehicle tax.  The bill passed out of Ways & Means in a form close to the proposed draft, but at least people had a chance to, and did, testify on the language in the proposed draft.  When the bill crossed over to the House, public hearings were held and only a few minor changes were made.  The Senate disagreed to those changes, and a conference committee was appointed.  The committee made another minor amendment to the bill, and the bill is now on the Governor’s desk for consideration.

Contrast this with the saga of SB 1405, which, as it was moving through committees of both houses, would have made it a crime for unlicensed people to ship e‑liquid products (used for “vaping”), increased tobacco wholesaler or dealer license fees and retail permit fees, and hiked administrative fines and criminal penalties for electronic smoking devices by persons under 21.  The bill that came out of Conference Committee requires educators to confiscate e-cigarettes found on school kids, provides a safe harbor for disposal of e-cigarettes, and increases fines and criminal penalties on underage smoking.  The final version of this bill is not completely unrelated to the prior versions, unlike SB 162, but there was no opportunity for public input at all on the final version of SB 1405.

Now here is the question for you to consider as a taxpayer and citizen.  The system our constitution sets up for bills to become law requires opportunity for public comment. Although both of these bills technically comply with the rules, they are “gut-and-replace” bills because the final version and the version as introduced embody entirely different concepts.  Was there a meaningful chance for the public to comment on the ideas in the bills before they were shipped off to the Governor?  And if not, should either or both bills be invalidated as a result?

(Disclosure:  The author represents some of the car rental companies.)

​Revenue Raisers Already Sent to the Governor
By Tom Yamachika, President
 
We’ve previously warned that our legislature has a dogged focus on new taxes –
“ARF!  Don’t make fun of me like that!”

It’s the Hawaii State Tax Watch Doggie, with a report on recent bills!

Q:        What would you like to report?
A:        Our Legislature is wasting no time pushing those revenue raisers!  A couple of them cleared the legislative process already and were sent to the Governor’s desk on March 20th.

Q:        What does that mean?
A:        When a bill is sent to the Governor during session, he needs to decide whether to sign or veto the bill within 10 days rather than the usual 45.  So, bills could become law much earlier than June or July when most bills are approved.

Q:        What else has gone up to the Governor’s office already?  I wrote about SB 94 last week which would try to force presidential candidates to post their tax returns, and I know that’s gone upstairs.
A:        SB 1361 would raise estate taxes on Hawaii estates valued at over $10 million.  It would apply a top tax rate of 20%.  That would make us tied with Washington state as the highest state estate tax rate in the country.

Q:        We want to be top dog that much?
A:        (Facepaw)  I’ll forget you said that.  I guess they really want to soak the rich folks who die here.  That’s dangerous.  You need to remember that these folks easily can jump on a plane and be out of here.  According to the Census Bureau we lost more than 10,000 people a year to the mainland for the last three years.

Q:        Voting with their feet, I guess.
A:        Then, there is SB 396, relating to marketplace facilitators.

Q:        What’s that all about?
A:        The state has tried really hard to go after online sellers like Amazon, Wayfair, and Overstock.  Previously those sellers could offer products to Hawaii customers without paying Hawaii tax, and that  gave them an advantage over local stores.  Last year, following a state-friendly U.S. Supreme Court ruling, our state adopted a law requiring many of those businesses to register and pay tax.

Q:        So there was a problem with that?
A:        The online sellers also set up “marketplaces.”  Under that system they said they weren’t selling their own products, but were selling on behalf of other stores like Dan’s Dog Food in Plano, Texas.  So the marketplace said Dan’s Dog Food isn’t registered or paying tax in Hawaii, so the marketplace had no responsibility to collect or pay GET.  Amazon, for example, was only paying tax on about half of its sales because the other half was marketplace sales.

Q:        Why Dan’s Dog Food?
A:        I’m hungry.

Q:        So SB 396 will change this?
A:        Yes.  It says that if an online marketplace collects money on a sale to Hawaii, the marketplace needs to pay GET as the retailer.  The business on whose behalf the marketplace is selling is treated as selling its goods to the marketplace.

Q:        So the marketplace pays 4%, and Dan’s Dog Food would pay the half-percent wholesale rate GET.
A:        Yes.  I don’t know if Dan’s will actually pay, but that’s the theory.  And the marketplace facilitators that don’t handle money will be required to report all of their Hawaii sales, with names and addresses of the buyers, to our tax office. 

Q:        Anything else on its way to the Gov’s desk?
A:        Not right now, but we’ll keep you informed!  Woof!

WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
​To view the archives of the Tax Foundation of Hawaii's commentary click here. ​​​​​​​
 
Weekly Commentary

For the Week of March 31, 2019

Judgments Aren’t Necessarily the End of Litigation
By Tom Yamachika, President
 
Several online travel companies engaged in protracted litigation against the Department of Taxation over whether and to what extent they are liable for Hawaii General Excise and Transient Accommodations Taxes on hotel accommodations that they sold to third parties on their respective platforms.  The litigation spanned multiple years, resulted in one exhaustive Hawaii Supreme Court opinion, In re Travelocity.com, Inc., 135 Haw. 88, 346 P.3d 157 (2015), and then resulted in entry of judgment.

Before the ink was dry on those judgments, the Department of Taxation produced additional assessments against the taxpayers, this time on car rental commissions, for the same tax type (General Excise Tax) and for many of the same years as those covered in the judgment.  Can they do that?

The Supreme Court of Hawaii’s answer:  Yes, they can.

The case name is In re Priceline.com, Inc.  The decision was rendered on March 4, 2019. 

Normally in civil litigation, if A sues B, both A and B need to include in the lawsuit all the claims that each of them has against the other.  If the lawsuit goes to trial and final judgment is rendered, the controversy between A and B is at an end.  The courts won’t be too happy if either A or B had some other beef, for whatever reason forgot to put it into the suit, and now wants to do another trial.  “Not happening,” they’ll say.

When one of the litigants is the Department of Taxation exercising the government’s sovereign power, however, the rules are a little different.  Basically, they want to make sure that the government’s rights are not lost through a boo-boo made by some random government official.  Such as the ones who agreed to the lower court’s judgment when there were still car rental taxes to be paid.

This decision isn’t as outrageous as it sounds.  First, it only applies when the accused taxpayer has not filed a return.  If a return has been filed, there is a statute of limitations that runs against the State.  Second, if the taxpayer and the State have actually litigated the issue that the taxpayer is complaining about, the State is barred. It won’t get another shot at litigating an issue it has already litigated and lost.  The rule is apparently designed to protect the State if the taxpayer has never filed returns and is not forthcoming with any information, the Department digs up information about income source #1, assesses, litigates, and obtains judgment, and then later digs up information about income source #2.

Still, it’s tough to accept that the second wave of assessments should be allowed here.  When the online travel companies were first audited, their books were exposed to a thorough and searching examination.  If no one was playing “hide the ball” (if some of that went on, that would be actual fraud, with understandably dire consequences to the fraudster), the financial details of both the hotel and the car rental income would have been fully exposed to the Department’s auditors.  If the Department was fully aware of the issue but decided not to pursue it in the assessments and litigation, then they should be made to sleep on the bed that they made for themselves.

Judges and taxpayers alike should take this ruling to heart.  Taxpayers need to understand that filing their annual returns is critical.  Those with disputes must make sure that the case being litigated contains all the Department’s claims.  If the Department is declining to pursue one or more issues that come up in an audit or assessment, this fact must be made clear in the record so the Department cannot later claim to be blindsided and take advantage of this case precedent.