Opinion ID: 2786941
Heading Depth: 2
Heading Rank: 2

Heading: The tax court’s statements regarding the GET

Text: At the summary judgment hearing, the tax court found that the GET applied to gross income resulting from the Assessed Transactions and granted the Director’s motion for summary 13 HRS § 237-7 defines “Service business or calling” as including all activities engaged in for other persons for a consideration which involve the rendering of a service, including professional and transportation services, as distinguished from the sale of tangible property or the production and sale of tangible property. “Service business or calling” does not include the services rendered by an employee to the employee’s employer. 14 HRS § 237-3 defines “Gross income” and “gross proceeds of sale”: “Gross income” means the gross receipts, cash or accrued, of the taxpayer received as compensation for personal services and the gross receipts of the taxpayer derived from trade, business, commerce, or sales and the value proceeding or accruing from the sale of tangible personal property, or service, or both, and all receipts, actual or accrued as hereinafter provided, by reason of the investment of the capital of the business engaged in, including interest, discount, rentals, royalties, fees, or other emoluments however designated and without any deductions on account of the cost of property sold, the cost of materials used, labor cost, taxes, royalties, interest, or discount paid or any other expenses whatsoever. HRS § 237-3 (1993) (emphases added). - 16 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER judgment as to the assessment of the tax.15 The tax court found that the GET is a tax upon the privilege of engaging in business activity in this state. The tax court reasoned that the Director may levy the GET upon “the privilege of engaging in a very lucrative business activity that exists and thrives upon Hawaiian transient accommodations.” The court next considered whether the OTCs’ GET liability would be affected by HRS § 237-18(g) (GET Apportioning Provision). The GET Apportioning Provision states: Where transient accommodations are furnished through arrangements made by a travel agency or tour packager at noncommissioned negotiated contract rates and the gross income is divided between the operator of transient accommodations on the one hand and the travel agency or tour packager on the other hand, the tax imposed by this chapter shall apply to each such person with respect to such person’s respective portion of the proceeds, and no more. HRS § 237-18(g) (1993) (emphasis added). Applicability of the GET Apportioning Provision to the Assessed Transactions would result in the OTCs and the hotels each being responsible for GET assessment upon their respective portion of the proceeds, rather than the liability of the OTCs being based upon the entire proceeds paid by the transient to the OTCs. The tax court found that the OTCs’ revenues from the Assessed Transactions are combined and collected in a single 15 The tax court elected not to make any findings of fact or conclusions of law, pursuant to Hawaiʻi Rules of Civil Procedure (HRCP) Rule 52(a). - 17 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER payment that includes the net rate, services charges, mark-up, and taxes, and the court also found that the OTCs only remit to the hotel a portion of the payment after retaining a mark-up and a service fee. The court ruled that “if there is an increase or expansion of the cost so there is a markup or some other cost that is added to a particular product,” then the entire amount becomes subject to the GET. Accordingly, the court determined that the entire payment from the transient customer to the OTC is subject to the GET. Thus, the tax court concluded that the Assessed Transactions did not fall within the GET Apportioning Provision. Consequently, the tax court granted summary judgment in favor of the Director in regard to the GET Assessments and the application of statutory interest. The tax court filed a minute order that explained the court’s rationale in affirming the Director’s determination that both a “failure to file” and a “failure to pay” penalty applied to the GET Assessments. As to the failure to file a tax return, the tax court found that the OTCs did not introduce any evidence that Hawaiʻi law or Department guidance failed to put them on notice that they were required to file GET returns and no evidence that any - 18 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER OTC taxpayer was advised by a tax advisor or attorney that it was not required to file a return.16 Second, the court found that the OTCs failed to demonstrate a subjective belief that they did not need to file GET returns and also failed to introduce any evidence into the record that any OTC was aware that the Department agreed that the OTCs were not required to file GET returns. To the contrary, the court noted that an OTC attorney testified that former tax Director Kurt Kawafuchi indicated that the OTCs may have GET liability. As such, the court found that “the [OTCs] are charged with the same knowledge as their [attorney].” Third, the court found no evidence that the OTCs were aware of the 2009 Attorney General Letter. Accordingly, the court affirmed the Director’s assessment of the failure to file penalty. The tax court next discussed its affirmance of the Director’s assessment of the failure to pay penalty. The tax court rejected the OTCs’ argument that the Director was personally required to make an affirmative finding of negligence or intentional disregard of the law in order to apply the 16 The OTCs asserted the attorney-client privilege on certain matters in regard to the application of penalties on the GET Assessments. The court noted that it did not draw any inference from the OTCs’ assertion of the attorney-client privilege, but the court declined to rule on the validity of that assertion. - 19 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER failure to pay penalty. The tax court found that it was sufficient that the Director delegated the responsibility of making such a finding and that such delegation was evident in the fact that the penalty was assessed.