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 June 4, 2018 The California Stupidity Fund, Part 2 By Tom Yamachika, President About three months ago, I wrote about the $10,000 limitation on deductions for state and local tax that is part of the Tax Cuts and Jobs Act of 2017. In a nutshell, you can only deduct up to $10,000 in state and local tax. If you paid more, you get no tax deduction for the excess; not now, and not later. (This limitation applies only to non-business taxes. If you have a business and it pays taxes, such as our state GET, those taxes are still fully deductible.) Some states, especially those with high income taxes, have been actively considering a “workaround.” New York, New Jersey, and Connecticut have passed legislation establishing a state fund into which people can “contribute” money in exchange for getting all or most of it back in the form of tax credits that can be used to reduce their tax burden. California and some other states are considering similar proposals. California’s legislation has cleared one of its two legislative chambers so far. Now, the IRS and the U.S. Treasury have indicated that they are going to weigh in. On Wednesday, May 23, IRS released Notice 2018-54, entitled “Guidance on Certain Payments Made in Exchange for State and Local Tax Credits.” The Notice says, “In response to [the $10,000 limitation discussed above], some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay.” (Translation: “We know what you, states, are trying to do.”) “Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions,” the notice continues, “taxpayers should be mindful that federal law controls the proper characterization of payments for income tax purposes.” (Translation: “You think we’re going to respect this type of payment as a deductible charitable contribution? Go on. Make our day!”) “The Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments (or other state-specified transferees) that the transferor can treat in whole or in part as satisfying state and local tax obligations. The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.” (Translation: “It. Doesn’t. Work. And if you think it does, we are going to make you attach Form 8275-R to your return, saying that your return position is contrary to regulations. Which, by the way, makes your audit risk higher by a bazillion percent.”) In the meantime, one state that’s been targeted by the notice said that it isn’t backing down. New Jersey Attorney General Gurbir Grewal threatened a swift and blistering court fight over the program in a letter to the IRS Commissioner. Grewal argued that 100 different charitable programs in 33 states, all of which offer credits for contributions to specified charitable programs, could be destroyed if the IRS attacks New Jersey’s new law. It looks like we can look forward to seeing some fireworks over this kind of tax workaround / tax dodge. So, when it comes time for you to take a position on your return, choose your side carefully. 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 May 27, 2018 We Can't See It or Touch It, But We Can Tax It! By Tom Yamachika, President This week we look at HB 2416, a bill that applies Hawaii Use Tax to intangible property. The Use Tax is a tax designed to protect our local businesses. As a consumer, you often have a choice between buying a product from a local seller and one from somewhere out of state. Our general excise tax applies to the local seller, but it might not apply to the foreign one. Therefore, our law says that if you buy from the foreign seller and our GET in fact cannot apply to that sale (usually because the seller does not have a sufficient presence within Hawaii for it to be subject to Hawaii taxes), then you as the buyer will have to pay the same amount of tax to the State directly. Most states that have a sales tax also have a use tax, for these reasons. But those states’ taxes generally apply only to sales of goods, not to services or anything else. Our tax applies to other things as well since there was a realization that local sellers of services needed to be protected. Thus, in 2000 and 2001 the laws were amended to bring services and contracting within the scope of the Use Tax. At the time, there was a lot of thought given to the issue because an “import” of services is tougher to see than, say, the import of a new car. Here, this bill makes taxable an entire new category, and it’s unclear how much thought, if any, was given to the matter. The bill sailed through the legislative process without much in the way of testimony. Even our Department of Taxation was only able to say that the bill was consistent with its position on custom software (software specially written for a customer). The relevance of the Department’s position is debatable because most states, including ours, consider custom software to be services, and we already apply Use Tax to services. So what, if anything, is the bill trying to tax? License fees, franchise fees, and royalties perhaps? Certainly, a franchise to run a particular branded business in Hawaii or a license to show a particular television show here, for example, are intangible property in Hawaii. But there is already a Hawaii Supreme Court case, In re Heftel Broadcasting Honolulu, Inc., 57 Haw. 175, 554 P.2d 242 (1976), cert. denied, 429 U.S. 1073 (1977), saying that when that kind of intangible property is created, the franchise owner or license owner has to pay GET, even though the owner may not have any other connection with or physical presence in Hawaii. Now, the way the Use Tax is designed is that if the seller is legally obligated to pay GET, Use Tax is not imposed on the buyer. The buyer won’t know if the seller paid the GET, so liability for Use Tax doesn’t depend on whether the seller actually paid the GET. So what is really happening? Is the objective to scare people into paying taxes they don’t owe? Consider what happened to the automobile dealerships in the late 1960’s and through the 1970’s when they were paying Use Tax, thinking that they were importing automobiles from an unlicensed seller, and the Department was getting GET from the manufacturers unknown to the dealerships. The story is described in another Hawaii Supreme Court case, In re Aloha Motors, Inc., 69 Haw. 515, 750 P.2d 81 (1988), but the court had to give effect to the statute of limitations and held that the dealerships could get a refund of three years of Use Tax, although there had been double payments for a decade. Eventually, special legislation was passed in 1990 (Act 297) to relieve the dealerships from this injustice. The Use Tax Law is already confusing. Rather than mindlessly adding to the confusion with new taxes that haven’t been tried anywhere else, a comprehensive revamp of the Use Tax Law is needed. At least make it so people have a reasonable chance of understanding the existing law. 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 May 21, 2018 Finding the Magic Bullet: City’s Share of Rail Administrative Costs By Tom Yamachika, President In a recent hearing in the Honolulu City Council’s Budget Committee, council leaders say that they might have found a “magic bullet” – one that they say will get the City’s share of rail funding done painlessly. Here’s the issue. The City needs to cover $44 million in administrative costs for rail for 2018 and 2019. The City previously didn’t provide for them in its budget, on the ground that the project already had enough money to cover those costs, but the Federal Transit Administration didn’t like that, thinking that the City didn’t have enough of its own skin in the game. Thus, the Mayor included that money in the City’s fiscal 2019 budget. The City Council’s budget chair proposed to deal with it by putting it in the Honolulu Authority for Rapid Transportation’s capital budget. That way, dollars from the Hawaii general excise tax surcharge, which are restricted in that they can pay for the capital cost of the project only, would be available to pay those charges. So, the City wouldn’t need to endure the pain of paying them out of its own operational funds. But wait. Is that really a viable solution to this problem? Normally, an operating budget pays for the ongoing operational costs of a business, including salaries, wages, office overhead, and other day-to-day costs. A capital budget normally pays for the costs of building something and getting it into a state of readiness for its intended use. If you are building something very large, for example, those costs may include buying the parts, paying for the labor to move those parts to their intended location and to assemble them, for example. Those costs are incurred to build the asset and then stop when the asset is built and in use. The general and administrative costs of HART – the salary of the executive director, for example – are not going to stop after the project is built, so it is hard to think of those as capital costs. There is also the matter of state law. Hawaii Revised Statutes section 248-2.7(c)(2), which was added in the special session of 2017, says that the monies in the mass transit special fund, which includes the GET surcharge as well as the extra percentage point of transient accommodations tax, can’t be used for: “Administrative, operating, marketing, or maintenance costs, including personnel costs, of a rapid transportation authority charged with the responsibility for constructing, operating, or maintaining the mass transit project.” Merely putting the administrative costs of HART into its capital budget isn’t going to get around these requirements. Unless the City Council budget chair has a secret weapon. Maybe the Council can argue, “Guys, the GET surcharge is City money from the outset because we raised it through a City taxing ordinance, so you folks at the State don’t have the right to restrict our ability to spend it.” Mayor Caldwell, in the meantime, issued a statement saying that he would support the plan if the FTA does. Has the Council found the magic bullet? Only time will tell. |
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