The Doomsday Rules in the General Excise Tax
By Tom Yamachika, President
 
Now that the economy is down and tax revenues are in the tank, we are now seeing cases of our Department of Taxation using some particularly nasty provisions in the tax code.

In 2010, lawmakers enacted Act 155, which the Department named the “General Excise Tax Protection Act.”

The Act has two draconian provisions.  The first says that if you don’t file your GET annual return within a year after it’s due, you lose the benefit of all exemptions, deductions, and reduced rates.  This means, for example, that if I had wholesaling income of $1 million and didn’t file my annual return within a year after it was due, even though I paid the $5,000 in tax when it was due, I could now owe $40,000 more.

The consequences are severe, but the idea is not new.  The federal tax code says that if you are a non-resident alien or a foreign company, you’re not entitled to take deductions, credits, or other tax benefits unless you file a return.  Federal regulations specify a “doomsday date” after which the tax benefits are disallowed.
 
The federal law has been around for a while so there are court cases as well as regulations and rulings giving us guidelines on when the full force of these provisions can be applied.  Not so with the state provision, which has been in existence only ten years.

Indeed, one feature of the GET that isn’t found in the federal system is that periodic (monthly, quarterly, or semiannual) returns are required, with the same information called for in the annual returns, but the periodic returns don’t count for purposes of this doomsday provision.  Many states with a sales tax also require submitting detailed information with a periodic return, but no annual return is required in those states so some taxpayers are genuinely surprised to find that we have an annual return requirement with severe consequences in addition to the doomsday provision (for example, the statute of limitations never starts to run) if it is not followed.

The second provision in the GET Protection Act says that if GET is owed by a business entity and the entity doesn’t pay it, the department can go after “responsible officials“ of the company, basically meaning anybody who could’ve signed a company check, and collect the tax as a personal debt of any of those individuals.  

Again, the provision is harsh but is not new. The payroll tax has had a similar provision for decades.  So, the many precedents under payroll tax should be useful in giving us an idea of how this provision should be applied.

Of special interest is the “willfulness” requirement.  It says that a company’s GET debt can’t fall upon you as an individual unless you made a conscious decision to pay another creditor before paying the State.  For example, if you paid the tax shown on the company returns and more was assessed later, you aren’t responsible to satisfy the assessment out of your personal assets — unless you, now knowing about the back tax assessment, then pay another bill (rent, electricity, etc.) while leaving the deficiencies unpaid.  Those with check signing authority could easily be put into a very tough situation if they don’t know how this law works.

When the economy is down and cash is tight, businesses might be tempted to pay other priority items.  After all, if you don’t pay your taxes the water isn’t shut off, the lights don’t stop working, and the Internet connection doesn’t go dark.  (At least not right away.)  But, as we see here, the Department has some very scary tools to make sure that taxes keep getting paid.  The best we can do is know how the tools work and make sure they are being used responsibly and not arbitrarily.
 
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Unemployment Tax in the Nonprofit Sector
By Tom Yamachika, President 
Two weeks ago, in this space, we discussed the unemployment tax and insurance system and how employers are likely to be hit with a significant and automatic rate increase at the end of this year.

For many nonprofit employers, the system works differently.  Tax-exempt 501(c)(3) charities (like the Tax Foundation of Hawaii) may “self-insure” against unemployment claims.  That means a nonprofit sector employer doesn’t need to pay the unemployment tax that for-profit employers need to pay, but if a nonprofit sector employee gets laid off and makes an unemployment claim that the State pays, the State bills the employer and doesn’t take the money out of its unemployment insurance trust fund.  Some of the larger nonprofits have cash reserves and can pay the bill.  Others buy unemployment insurance from insurance companies selling only to the nonprofit sector and find that their premiums are quite a bit less because they are not sharing losses with high-cost seasonal businesses.

With employees in the nonprofit sector dropping like flies just as in the private sector, nonprofits have good news and bad news.  The good news is that the huge rate increase that is likely to hit at the end of the year won’t affect them.  The bad news is that they need to get out their checkbooks now to pay the unemployment claims that they are being charged with.

One provision of the CARES Act, section 2103, is supposed to help with that situation.  It says that the federal government is going to cover half of the unemployment benefit costs that self-insured employers need to pay to the State for weeks of unemployment beginning on or after March 13, 2020 and ending on or before December 31, 2020.  But, according to the U.S. Department of Labor, the employer needs to pay DLIR first, the federal government reimburses half the cost, and then DLIR then repays or credits the employer for the federal money received.  (The CARES Act says that the state workforce agency can’t use the money for any purpose other than reimbursing the employers, so it can’t keep the money.)  The trouble is that these reimbursement processes “take a while,” and by the time the State receives the federal funds and gets around to repaying the nonprofit employer, the employer either may have closed for good or may be overwhelmed with penalties and interest if they couldn’t pay the full amount of the unemployment benefits when they were billed.

When I spoke with the Employer Services Section at the DLIR, the good folks there were aware of the federal provision but hadn’t yet received guidance from their leadership on how the State was going to implement it.  (Translation:  They either haven’t figured out what to do or haven’t yet been convinced that they have to do anything.)

I can’t help but wonder if the DLIR feels like it is being forced to do something it doesn’t want.  It’s certainly more work for DLIR to keep tabs on its self-insured employers, put together claims to the federal government, and then dole out the money to the employers when the federal money appears.  DLIR doesn’t get separately paid to do that.  And it does seem that they already have their hands full fighting the backlog on individual unemployment claimants.

DLIR, please hang in there.  The public needs you and the nonprofits do too!

Two Tax Bills This Year
By Tom Yamachika, President
 
Our Legislature has reconvened and has adjourned for the year.  If you blinked and missed it, you probably are not alone.  This year, there was a huge focus on passing only essential items.  As a result, only 86 bills passed the Legislature this year while in a typical year 250-300 bills are sent up.

Source:  Capitol.hawaii.gov reports compiled by Tax Foundation of Hawaii.

If you wanted to see a new exemption or tax credit, it didn’t happen.  If you were shuddering to think that new tax increases were on the table, they didn’t happen either.  Only two of the tax bills made it up to the Governor this year.
One bill that went up changed the renewable energy credit by disallowing it for solar farm projects of 5 MW or more that started in 2020, but providing that tax treatment would be grandfathered for certain projects pending approval as of the end of last year.

The second bill was sponsored by the Department of Taxation.  Every year, the Department prepares a bill to specify which of the many changes to the federal income tax law get reflected in the Hawaii income tax law.  The usual practice is that the federal changes in the previous calendar year, in this case 2019, are considered in the current legislative session.  Indeed, a bill to do just that was introduced at the request of the Administration and was passed out of the Senate.

 Then the pandemic hit and lots of things happened, including the passage of the federal CARES Act.  Some testifiers, including the Tax Foundation of Hawaii, urged the Legislature to adopt key provisions of the CARES Act although it became law in 2020.  The Department, in testimony, proposed to adopt a few provisions and leave others on the cutting room floor.  Without much fanfare or public discussion (the Capitol was still closed), the House adopted those provisions and the Senate agreed to them.

As a result, Paycheck Protection Program (PPP) loan forgiveness will not be recognized as income, federal stimulus payments will not be recognized as income, the limits on people taking out retirement plan loans will be relaxed, and the new treatment of charitable deductions will be expanded to the same extent as in the CARES Act.  However, lawmakers did not adopt the provisions of the CARES Act that allowed businesses to monetize their prior net operating losses by allowing them to be applied against other income and by allowing the losses to be carried back to previous taxable years were not adopted.  At the national level, it was thought that those provisions would help struggling businesses to weather the COVID-19 economic shock.

We don’t know why some provisions were adopted while others weren’t.  The Department of Taxation’s testimony was only that it recommended the changes, but it had no discussion or reasoning behind its recommendations.  Public discussion and debate could have brought out the Department’s reasons, which the legislators could then weigh against the concerns of businesses. 

The results of this legislative session for tax bills were perhaps understandable, but the process left something to be desired.  Is this going to be the new normal?  We certainly hope not.