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 November 26, 2017 Are Car Rentals "Tourism Related Services"? By Tom Yamachika, President In the last few weeks I’ve been discussing the Foundation’s involvement in litigation involving online travel companies and the State’s attempts to wrest more general excise taxes out of them. The Foundation has limited its involvement with the case to the “res judicata” issue. This article describes the other issue: whether car rentals are “tourism related services.” This issue is significant because “tourism related services” have favorable treatment under the general excise tax (GET). Let’s suppose that Travel Agent T sells a car rental for $50. For the car rental, it pays Rent-A-Car Company R $40. Then T pays 4% GET on the $10 and R pays 4% GET on the $40. If the special treatment for tourism related services weren’t there, T might have to pay 4% GET on the $50, which is what it collected, and R pays 4% GET on the $40, which is what it collected. The tax law defines “tourism related services” as “catamaran cruises, canoe rides, dinner cruises, lei greetings, transportation included in a tour package, sightseeing tours…, admissions to luaus, dinner shows, extravaganzas, cultural and educational facilities, and other services rendered directly to the customer or tourist.” Now, you and I know that tourists rent cars. They need to get themselves to the luaus, dinner shows, or extravaganzas, and their own vehicles are hundreds or thousands of miles away, and lots of water is in between. So, why wouldn’t rental cars be “transportation included in a tour package” or “other services rendered directly to the customer or tourist”? According to the Attorney General’s briefs filed with the Supreme Court of Hawaii, there are plenty of reasons. Here are some of them: First, the Legislature easily could have included car rentals in the list of tourism related services written into the law, but didn’t. Because car rentals are a big part of the tourism industry, one would expect that car rentals would be written into the law if they were supposed to be included. Second, there is a significant difference between “transportation included in a tour package,” generally a bus with a driver, and a rental car that the tourists would need to drive themselves. Third, T may be a travel agent, but where’s the tour package? Fourth, to make sense, “other services rendered directly to the tourist” needs to have something in common with the other ten services spelled out in the law. The common thread between the ten services is that they are for pleasure or recreation, while car rentals are only utilitarian – you need them to get around, but there’s no pleasure or recreation involved. There are of course other reasons, but those seem to be the big ones. The problem, of course, is that many in the tourism industry believed for a very long time that car rentals were, and are, tourism related services. Not only online travel companies are affected. Many hotels and airlines offer fly-drive or hotel-car packages and priced them assuming that the favorable GET treatment would apply. These packages and more would be impacted if the Hawaii Supreme Court rules in the Department’s favor. Furthermore, court rulings generally are retroactive, primarily because the job of the court system is to interpret laws that already exist instead of making new law. Here, the Tax Appeal Court already has ruled in favor of the Department as to standalone car rentals sold by a travel agent (the fact pattern presented in the example above) for tax years 2000-2013. So, taxpayers should now be making some decisions. Should they re-evaluate their tax filings now that the Department’s litigation position is out in the public for all to see? If so, how far back should they go? If not, what financial measures can they take to protect themselves if the decision goes south? Tough questions, to be sure! 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 November 19, 2017 No End to Litigation, Part 2 By Tom Yamachika, President Two weeks ago, we wrote about a case now before the Hawaii Supreme Court in which the State audited and assessed the taxpayers, causing the taxpayers to spend millions of dollars on litigation that resulted in a court judgment. The State then audited and assessed more of the same taxes (General Excise taxes) for the same years, forcing both the taxpayers and the court system through the wringer again without any apparent limit. The Foundation asked the Hawaii Supreme Court to participate in the litigation as an “amicus,” or “friend of the court,” in order to present a perspective from its role as a watchdog for taxpayers generally. On Halloween, the State filed a response opposing the Foundation’s request, saying that our brief “cannot aid the Court in the disposition of this dispute.” The State argued: TFH’s proposed brief fails to take into account that the [taxpayers] did not file tax returns, including “annual reconciliation returns,” for the periods to which any res judicata argument might apply. The broad principles of res judicata that TFH urges the Court to adopt are not properly asserted when the taxpayers utterly fail to meet their filing obligations. Rather, principles of res judicata should have no application to taxpayers that flaunt their reporting obligations, like the OTCs here. For this reason TFH’s motion should be denied because it fails to aid the Court in any way. Although the Foundation wanted to file a response to the State’s opposition memo, the appellate court rules didn’t allow us to. So, we are using this space to tell you, the court of public opinion, what we would have filed on Halloween. We wanted to say: The State opposes the Foundation’s motion because it says the ideas expressed in its proposed brief will not help this Court. The State essentially argues that the rules of law and justice should be tossed out the window because the taxpayers before the Court failed to file returns. The Department fundamentally misconceives what this issue is about. The Department apparently regards the taxpayers here as lower life forms and wants to give them no respect. This case, however, is not about respect for the taxpayers. It is about respect for this Court and the Hawaii Judiciary. The Legislature provided that the Executive Branch could assess taxes when the taxpayer fails to self-assess. It also provided that the Judiciary could review those assessments. Thus, the taxpayers and the Department litigated the assessments, and the courts have rendered judgment. Even if the taxpayers were demons, ghouls, or devils incarnate, they have a judgment. The issue is the respect to be accorded that judgment. If the Department can pursue repeated litigation without mercy and without end, woe be to the rest of us, for we do not know who the Department will demonize tomorrow. UPDATE: On November 7, the Court allowed the Foundation to file its brief. So there! Oral argument and a decision of the Court won’t be expected until weeks or months later. We like to think that our viewpoint will someday help taxpayers in our state, so we will be anxiously awaiting the next chapter in this story. 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 November 5, 2017 A Halloween Nightmare: No End to Litigation By Tom Yamachika, President Halloween may be over, but we still have lots of scary stories! Once upon a time there were several companies that were audited by our Department of Taxation. The companies and the Department didn’t agree on what was owed. They spent several years and millions of dollars in a heated court fight that went to the Supreme Court of Hawaii and went back down to the Tax Appeal Court, which then rendered a judgment to establish the amount of general excise taxes due for calendar years 2000 to 2011. The companies paid what was owed according to the judgment – about $30 million. But before the ink was dry on the judgment, the Department issued additional final assessments of the very same tax, namely general excise tax (GET), and for the very same years. And let’s just say that the additional final assessments were not for chump change. “Do you have a problem with that?” the State said. “You didn’t file returns for those years, so we may assess additional GET at any time.” “But you did that already.” “That was for online hotel transactions. Now we are going to go after you for rental car transactions.” “What about all the years we spent fighting in court over those years, and the final judgments entered by the courts?” “That was for online hotel transactions. Now we are going to go after you for rental car transactions.” Sadly, this is not a made-up Halloween story. This is a case now in the Hawaii Supreme Court called In the Matter of the Tax Appeal of Priceline.com, Inc., No. SCAP-17-0000367. One issue that the court will be considering is whether a court judgment on a tax type and year closes the door for that tax type and year. The U.S. Supreme Court, when dealing with the income tax, has determined that income “taxes are levied on an annual basis. Each year is the origin of a new liability and of a separate cause of action. Thus, if a claim of liability or nonliability relating to a particular tax year is litigated, a judgment on the merits is res judicata [a ‘thing adjudicated,’ thereby closing the door] as to any subsequent proceeding involving the same claim and the same tax year.” Commissioner v. Sunnen, 333 U.S. 591 (1948). Certainly, the GET and the federal income tax are two very different beasts. But they both call for annual returns, with the return of GET on Form G-49. Taxpayers are of course required to pay tax more frequently, typically monthly, to make sure that the government has a steady stream of money coming in the door. But the legally significant return is the annual G-49. The Sunnen case should be applied to the GET as well. The Hawaii Supreme Court has recognized the same concept in a nontax context. In Kauhane v. Acutron Co., 71 Haw. 458 (1990), it said that the rule of res judicata “serves to relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication. The res judicata doctrine thus furthers the interests of litigants, the judicial system and society by bringing an end to litigation where matters have already been tried and decided on the merits. It is a rule of fundamental and substantial justice, of public policy and private peace. The doctrine therefore permits every litigant to have an opportunity to try his case on the merits; but it also requires that he be limited to one such opportunity. Unsatisfied litigants have a remedy: they can appeal through available channels. But they cannot, even if the first suit may appear to have been decided wrongly, file new suits.” Bringing an end to litigation is also eminently practical. If we allow our government to keep on bludgeoning our taxpayers with repetitive assessments, how can we expect those taxpayers to survive and generate the revenue the government needs? Let’s stop scaring people, and move on. |
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