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 July 2, 2017 Carving Up the Price of Car Rentals By Tom Yamachika, President One of the legislative bills that is now being considered by Gov. David Ige is a curious bill, HB 735, involving the car rental industry. The bill doesn’t seek to impose new taxes or fees upon rental cars. Instead, it affects how car rental businesses can show these fees on rental car invoices as separate line items. Hawaii Revised Statutes section 437D-8.4 states that motor vehicle lessors may visibly pass on certain charges to a lessee. These charges are the general excise tax (GET); county surcharge; rental motor vehicle and tour vehicle surcharge tax; rents or fees paid to the Department of Transportation; and 1/365 (per day rented) of the annual vehicle license and registration fee, and annual weight taxes. This is already quite a bit more than most businesses, which customarily pass on to the consumer only the GET and county surcharge. The bill would allow the per-day amount of the annual fees to be increased to 1/292, on the theory that most vehicles are only rented 80% of the time (365 times 80% is 292, the expected number of days rented in a year), would include more annual fees such as license renewal fees and safety check costs, and would allow one-time fees such as license plate fees and use taxes to be recovered, apparently on the same basis as annual fees. Some industry testifiers in support of the bill said that the changes would allow rental car companies to recover all government fees they pay for their cars, rather than the fraction of the fees that they are currently collecting under existing law. Even under current law, there are quite a bit of costs being passed on. I tried to reserve a car on Maui and was quoted a base daily rate of $32 with $14.14 (44% of the base price) in additional fees and taxes, some of which are not charged by the government: Concessionaire fee (11.11%) $ 3.64 per day Customer Facility Charge 4.50 Frequent Travel Program 0.75 Highway Surcharge 3.00 Vehicle License Fee Recoupment 0.52 Total Tax 1.73 Total Fees and Taxes $ 14.14 Actual Per-Day Charge $ 46.14 What happens if there are other government charges besides those listed here? The companies indeed recover those costs, but as part of the car rental price. That’s what most businesses do when they have any expenses, whether charged by the government or anyone else – they consider and include those costs in the price of their product or service. This legislative bill doesn’t change these costs, but allows them to be included on a separate line item so they can blame the big bad government for the charges, rather than the poor innocent car rental company. The Office of Consumer Protection, which is part of our Department of Commerce and Consumer Affairs, opposed the bill. OCP observed that the addition of one-time fees to the list of passed-on fees is not consistent with the current law, which only allows the pass-on of recurring costs. It also complained that the bill “unnecessarily complicates” the calculation of the pass on. As consumers, it’s important to understand that additional taxes and fees apply. If you are quoted a base rate, like $32 in the example above, know that you will be paying somewhat more than the $32 in the end. If you are shopping for a rental car, you should understand what your bottom line is going to be before you hit the “reserve” button.
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 25, 2017 Anatomy of Epic Fail on Rail By Tom Yamachika, President In early May, on the day our Legislature adjourned, one of the newspapers summarized our Legislature’s work on the Honolulu transit surcharge extension as “Epic Fail on Rail.” With the Federal Highway Administration poised to pull out its $1.5 billion commitment if no funding solution is firmed up, our legislators need to get their collective act together if they want to help the project get back on track. How did we get to be in this spot? This week, we’ll retrace Senate Bill 1183 and its tortuous history through our legislative labyrinth. SB 1183, like its companion House Bill 1442, was a 6-page bill to extend permanently the current rail surcharge on general excise tax (GET). The bill also proposed to give an unspecified percentage of the surcharge proceeds to the state DOT (Department of Transportation). The other counties were given the option to adopt their own GET surcharge beginning in 2018. The first committees to work on the bill, the Senate Committees on Transportation and Energy and Public Safety, Intergovernmental, and Military Affairs, came up with a 78-page monster containing two parts, one that would extend the surcharge permanently and another that would extend it to the year 2032. (Yes, these conflict with each other.) Other sections of the bill would establish a tax credit for low-income taxpayers; raise the base GET rate to 4.5% for everyone (the surcharge would be on top of that); and contained a pages-long laundry list of mandates to the City. At the time, the Senate Transportation Chair explained that she wanted to keep all options open. The Senate Ways & Means Committee took a very different tack. Its 10-page version basically said, “We’ll take away the State’s 10% skim off the surcharge, but no extension; you’re on your own.” That draft unanimously passed the full Senate and went over to the House. There, the House Transportation Committee kept the bill alive by putting blanks in it – its draft extended the tax to an unspecified date, reinstated the skim but replaced the percentage with a blank percent to recover the State’s costs and a blank percent that would go the DOT for State highway projects. The House Finance Committee then filled in the blanks, extending the tax for two years, and dropping the skim to 1%, none of which would be earmarked for the DOT. This version went to the Conference Committee, and then surprising things started happening. First, the Senate proposed a new draft, radically different from the version that passed the Senate, which extended the surcharge for ten years and raised the skim to 20%. The House came back with a draft that left the GET surcharge untouched, dropped the skim to 1%, and raised the hotel room tax from 9.25% to a hefty 12%. The latter proposal, though innovative, caught the hotel industry unaware, prompting vigorous objections. Then-Senate money chair Tokuda agreed to that version with tweaks a few hours later, thereby making the Final Decking deadline. After frantic meetings through the weekend, the money chairs, apparently with some members of the hotel industry, reached a compromise involving a shorter GET extension and a lower TAT hike. Amendments were introduced on the chamber floors to implement the “agreement,” although another version with only a GET extension and no TAT increase, which Mayor Caldwell supported, was circulating in the Senate. The House passed one version and jettisoned its Speaker, while the Senate adopted the other version and deposed Chair Tokuda. With no agreement between the chambers, neither version can be enacted. That is where we are now. We now seem to have a bunch of rudderless ships in the harbor banging into each other. Could the Governor have brought both sides together? Was Senate President Kouchi capable of herding the 25 senators? And how about former Speaker Souki, new Speaker Saiki, or House money chair Luke? To what or whom should we be looking for leadership to get us out of this mess? 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 18, 2017 Closing an Estate Tax Loophole? By Tom Yamachika, President One of the bills our legislature sent up to Gov. Ige to be signed, which is almost certain to become law because the Department of Taxation sponsored it, is one to close an estate tax “loophole.” The issue isn’t as simple as it might seem, however. First, some background. An estate tax is imposed when a person dies. The Federal Government imposes it when a decedent owned more than $5.45 million at death. The federal tax rate brackets start from 18% and go to 40%. Only fifteen U.S. states have an estate tax, and Hawaii is one of them. Our law generally conforms to federal law, but our tax rates go from 10% to 15.7%. (Six states impose an inheritance tax, which is similar except that the tax falls upon the heirs; of these, two states also have an estate tax.) For a person’s estate to have an estate tax liability, the estate is usually substantial, and may include assets in more than one place. For a person who doesn’t reside here, we tax assets that are located, or “sitused,” in Hawaii. For a person who does reside here, we tax all property in the federal taxable estate, but give credit for estate or inheritance taxes paid to other states. What happens if there is an entity, like a corporation or a LLC, that owns property? Because an entity doesn’t die, the estate tax isn’t imposed on the entity. But entities have owners. Corporations have stockholders, for example. So, the estate tax reaches the value of those ownership interests, such as corporate stock. So far, so good; an individual can’t beat the estate tax by throwing property into an entity. But an individual can use an entity to “situs shift.” Suppose the individual lives in Ohio and the entity owns valuable real property in Hawaii. The entity is not subject to Hawaii estate tax, and neither is the individual, because the shares of stock are generally sitused to the individual’s place of residence. Lo and behold, Ohio doesn’t have an estate tax, so this estate will not be taxed in any state! This is the loophole the bill addresses. The bill says that if the entity is a single member LLC that has not elected to be taxed as a corporation, then the estate owning the LLC will need to pay estate tax in Hawaii the same as if the decedent owned the Hawaii property directly. But wait. The bill doesn’t plug the loophole completely. In the situation just described, Hawaii estate tax can be avoided regardless of the type of entity, while the fix only works if the entity owning the Hawaii assets is a single member LLC disregarded for income tax purposes. Thus, if the entity is a partnership, a LLC with more than one owner, or a LLC that has opted to be taxed as a corporation (perhaps a S corporation), the fix doesn't apply and the loophole remains. Furthermore, how does the Department think it would be able to implement and enforce this law if it is enacted? The Department might be able to find out about a nonresident decedent who owned Hawaii property if there is a Hawaii ancillary probate, which would be needed to distribute Hawaii realty and other Hawaii assets, but how would it even find out about an LLC that owns Hawaii property and has a recently deceased owner? Even if the Department can keep an eye on all the Hawaii properties owned by LLCs, how could it watch their owners? In theory, LLCs that do business in Hawaii, wherever organized, need to register with the Department of Commerce and Consumer Affairs, but the registration form does not require the LLC to state who the owners are, just that a list of the owners will be kept on file at the company’s principal office. In all, this bill seems like a knee-jerk reaction to a perceived problem. If this situs-shifting anomaly is a loophole that needs closing, it’s very doubtful whether this bill will accomplish it. Well, we can see what happens. |
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