Opinion ID: 2786941
Heading Depth: 4
Heading Rank: 1

Heading: The OTCs operate as travel agencies

Text: Although the term “travel agency” is not defined within HRS Chapter 237 and has not been construed by our case law, this court applies the ordinary meaning of words. HRS § 1- 14 (1985); Saranillio v. Silva, 78 Hawaiʻi 1, 10, 889 P.2d 685, 694 (1995). In the ordinary sense, an “agency” is “an establishment engaged in doing business for another,” Webster’s Third New International Dictionary 40 (unabr. 1993) [hereinafter Webster’s], or “a business that provides a particular service.”23 “Travel agency” is “an office or enterprise engaged in selling, arranging, or furnishing information about personal transportation or travel.” Webster’s, supra, at 2433. A travel agency is “an agency engaged in selling and arranging 22 Regardless of the applicability of the GET Apportioning Provision to the Assessed Transactions, the hotels are liable for the GET on the net rate received by the hotels from the OTCs, which the parties do not dispute that the hotels should pay and have paid. 23 Agency, Merriam-Webster, http://www.merriam- webster.com/dictionary/agency (last visited Aug. 20, 2014). - 42 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER transportation, accommodations, tours and trips for travelers.”24 Thus, the ordinary usage of “travel agency” as an enterprise that “engages in doing business,” “provides,” or “sells” does not preclude the travel agency from entering into direct contractual privity with the traveler. The activities of the OTCs are therefore in accordance with the ordinary and commonly understood meaning of “travel agency” as an enterprise engaged in arranging and selling travel services.25 Even if the ordinary usage of “travel agency” is not dispositive, see HRS § 1-14, and it is assumed to be ambiguous, the meaning may be sought by examining the context within which the words appear. HRS § 1-15 (1985). Here, the conclusion that the OTCs perform as travel agencies is supported by examination of this term in the context of the GET Apportioning Provision. In context, the term “travel agency” is paired with “tour packager”; accordingly, we look to the use of the term “tour packager” to determine if it assists in the understanding 24 Travel Agency, Merriam-Webster, http://www.merriamwebster.com/dictionary/travel%20agency, (last visited Sept. 17, 2014). 25 This is in accord with the conclusion of the tax court in regards to the TAT. The tax court concluded as follows: And I think that because there is no definition of “travel agency,” that a common notion of travel agency is very close to what the OTCs performed. . . . . [W]hile there may be technical distinctions between a travel agency and an OTC, for the purpose of what our legislature was looking at, I viewed the term “travel agency” to be somewhat generic. - 43 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER of “travel agencies.” The term “tour packager” is also not expressly defined by statute, nor is a definition provided by common dictionaries. An aid to understanding the meaning of “tour packager” is provided by other definitions in the HRS and HAR. For instance, the term “tour packager” appears within the definition of “carrier”: a “carrier” is “a person who engages in transportation, and does not include a person such as a freight forwarder or tour packager who provides transportation by contracting with others, except to the extent that such person oneself engages in transportation.” HRS § 239-2 (Supp. 1998) (emphasis added) (defining “carrier”). Thus, under HRS § 239-2, a tour packager that provides a transient with transportation services is not precluded from entering into direct contractual privity with the transient. Similarly, for purposes of the rental motor vehicle and tour vehicle tax, “a wholesaler, tour packager, or travel agent whose business and service may include arranging the rental vehicle transportation for a person shall not be deemed a lessor, unless the wholesaler, tour packager, or travel agent actually rents or leases (as defined in section 18-251-1-04) the vehicle.” HAR § 18-251-1-02(b) (effective 1992) (emphasis added). Likewise, “tour vehicle operator” is defined to the exclusion of “wholesalers, tour packagers, and travel agents - 44 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER whose business and service may include arranging the transportation of persons via tour vehicles, unless the wholesaler, tour packager, or travel agent owns, manages, operates, or dispatches tour vehicles. HAR 18-251-1-06(b) (effective 1992 & 1993) (emphasis added). Thus, the Department’s rules pertaining to the rental motor vehicle and tour vehicle tax expressly contemplate that either a tour packager or a travel agent may directly enter into contractual privity with a transient seeking to rent or lease a vehicle. A further aid in understanding the term “tour packager” is provided by the Department’s TIR 91-8, which discusses the application of the GET Apportioning Provision and provides the following example: Example 2 – A tour packager sells a tourist a tour of Honolulu for $50. Included in this tour are stops at a pineapple cannery (cannery) and the Arizona Memorial Visitor Center (Visitor Center). The tour packager pays a bus company $30 for transportation, pays the cannery $5 for a tour, and pays the Visitor Center $5 for admission to the Visitor Center. TIR 91-8 at 2 (July 8, 1991) (emphasis added).26 TIR 91-8 goes on to describe the tax effect of the various payments and the amount that is taxed to the tour packager. Id. However, what is significant is that because the tour packager makes all payments to the vendors for the activities collectively sold to 26 The TIRs are available at http://tax.hawaii.gov/legal/tir. - 45 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER the tourist, the TIR seems to describe an entity that is in direct contractual privity with the tourist. Thus, the term “travel agency or tour packager” is not inconsistent with an entity, which is in direct contractual privity with a consumer of transient accommodations, from applying the GET Apportioning Provision to the proceeds derived from that contract. It follows that the ordinary definition of travel agency, reinforced by the treatment of “tour packager” as that term is used in related statutes, the Department’s rules, and the Department’s published guidance, indicates that, for the purposes of the GET Apportioning Provision, the OTCs operate as travel agencies in the Assessed Transactions. This conclusion is further sustained in the context of the analysis of “gross income is divided” and “noncommissioned negotiated contract rates.” b. The gross income resulting from the Assessed Transaction is divided The second requirement for application of the GET Apportioning Provision is that 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 term “divided” is not defined by statute. Under general principles of statutory construction, courts endeavour to give words their ordinary meaning unless the statute requires - 46 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER a different interpretation. HRS § 1-14; Saranillio, 78 Hawaiʻi at 10, 889 P.2d at 694. Further, if the term “divided” is ambiguous, “[t]he reason and spirit of the law, and the cause which induced the legislature to enact it, may be considered to discover its true meaning.” HRS § 1-15. Dictionary definitions would indicate that the income resulting from the Assessed Transactions may be “divided.” “Divide,” as a verb, means “to separate into two or more parts.” Webster’s, supra, at 663. Thus, based on a dictionary definition of “divide,” it does not appear that the term precludes application of the GET Apportioning Provision to the Assessed Transactions. In context, the term “divided” or “gross income is divided” appears in five other subsections of HRS § 237-18, other than the GET Apportioning Provision set forth in subsection (g). See HRS § 237-18(a)-(b), (e)-(f), and (h) (2001). The legislative history for these subsections indicates that the legislature did not intend the verb “divide” to signify any type of unique accounting practice between the parties identified in each subsection. In the history of HRS § 237-18 and its precursors in the Laws of Hawaiʻi and the Revised Laws of Hawaiʻi, the first appearance of the term “divided” was in subsection (a), enacted in 1949, which offers special tax treatment for operators of coin-operated devices. - 47 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER Where a coin operated device produces gross income which is divided between the owner or operator of the device, on the one hand, and the owner or operator of the premises where the device is located, on the other hand, the tax imposed by this chapter shall apply to each such person with respect to the person’s portion of the proceeds, and no more. HRS § 237-18(a) (1993) (emphasis added). HRS § 237-18(a) serves the same purpose between an operator of a coin-operated device and the owner of the premises as does the GET Apportioning Provision between a travel agency and the hotel operator. HRS § 237-18(a) has remained unchanged since its enactment. See 1949 Haw. Sess. Laws Act 252, § 1 at 300. The legislative history does not indicate that the legislature placed any special meaning on the term “divided.”27 Further, it seems likely that the relationship between the “owner or operator” of a coin operated device and the “owner or operator of the premises where the device is located” would have an armslength, contractual relationship. Thus, in the context of HRS § 237-18(a), the phrase “gross income is divided” does not specify, require, or preclude a certain type of business relationship or revenue-division agreement. 27 See S. Stand. Comm. Rep. No. 530, in 1949 Senate Journal, at 1368-69 (“This bill provides that in the case gross income from coin-operated machines is divided between the owner of the machine and the owner of the premises. . . .”); H. Stand. Comm. Rep. No. 926, in 1949 House Journal, at 2218 (“This bill provides that where the gross income derived from the operation of a coin operated device is divided between the owner or operator of such device, on the one hand, and the owner or operator of the premises where such device is located, on the other hand, the general excise tax shall . . . be imposed on each such person’s portion of the proceeds . . . .”). - 48 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER The 1951 legislature added subsections (b) and (e) to HRS § 237-18. 1951 Haw. Sess. Laws Act 165, § 4 at 294-95. Subsection (b) addresses an entertainment venue where gate receipts are divided between the person furnishing or producing an event and the promoter.28 Subsection (b) has a similar effect as the GET Apportioning Provision; although the promoter is responsible for the GET on the “whole of the proceeds,” liability between the producer and the promoter is limited by subsection (b) to one application of the GET. Subsection (e) concerns commissions by insurance agents or real estate brokers. Where insurance agents . . . or real estate brokers or salespersons . . . produce commissions which are divided between such general agents, subagents, or solicitors, or between such real estate brokers or salespersons . . . the tax levied . . . shall apply to each such person with respect to the person’s portion of the commissions, and no more. HRS § 237-18(e) (emphasis added). Thus, subsection (e) has generally the same purpose between insurance agents or real 28 Subsection (b) provides: Where gate receipts or other admissions are divided between the person furnishing or producing a play, concert, lecture, athletic event, or similar spectacle . . . on the one hand, and a promoter . . . offering the spectacle to the public, on the other hand, the tax imposed by this chapter . . . shall apply only to the promoter measured by the whole of the proceeds, and the promoter shall be authorized to deduct and withhold from the portion of the proceeds payable to the person furnishing or producing the spectacle the amount of the tax payable by the person upon such portion. HRS § 237-18(b) (emphasis added). - 49 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER estate agents as does subsection (g) between a travel agency and the hotel operator. The legislative history for the 1951 amendment does not indicate that the legislature placed any unique or special meaning on the term “divided,” but it does indicate that the legislature found the term synonymous with “split” or “splitting.”29 Thus, the 1951 amendment provided two significantly different economic relationships--a promoter/producer relationship and a relationship between insurance agents or between real estate brokers--and defined both categories of relationships as “dividing” or “splitting” their income. Subsection (f) provides special GET treatment for “tourism related services”:30 29 The report of the House Standing Committee stated that the 1951 amendment “relat[ed] to the splitting of gate receipts” and the “splitting of commissions between insurance agents or between real estate brokers.” H. Stand. Comm. Rep. No. 369, in 1951 House Journal, at 501. The House Committee also indicated the 1951 amendment addressed the situation when an insurance agent “receiv[ed] part of a commission.” Id. Similarly, the Senate Committee Report noted, “The bill relates to the application of the [GET] to commissions split between real estate brokers, or between insurance agents, gate receipts or other admissions split between promoters and performers . . . .” S. Stand. Comm. Rep. No. 394, in 1951 Senate Journal, at 893. 30 “Tourism related services” means: catamaran cruises, canoe rides, dinner cruises, lei greetings, transportation included in a tour package, sightseeing tours not subject to chapter 239, admissions to luaus, dinner shows, extravaganzas, cultural and educational facilities, and other services rendered directly to the customer or tourist, but only if the providers of the services other than air transportation are (continued. . .) - 50 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER Where tourism related services are furnished through arrangements made by a travel agency or tour packager and the gross income is divided between the provider of the services and the travel agency or tour packager, 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(f) (emphasis added). Subsection (f) has the same purpose between a travel agency and a provider of tourism related services, as does subsection (g) between a travel agency and the hotel operator. Subsection (f) was added in 1986 to prevent the Department from “grossing up”31 the income of tourism-related service providers. Your Committee after reviewing the law in this area agrees, with reservation, that under the reasoning of the general excise tax law the need for a gross up provision or the ability to gross up is required. On the other hand, the use of gross up in the area of certain tourism-related services does not serve the interests of the State in encouraging tourism. . . . This amendment provides for a split of the gross proceeds from tourism-related services between the travel agency or tour packager and the tour provider. For example, if the tour provider furnished tickets to the travel agency for $80 which normally sell for $100, the tour provider will only be taxed on the $80 received. The travel agency or tour packager will be taxed on the commission it receives. Conf. Comm. Rep. No. 70-86, in 1986 House Journal, at 962, 1986 Senate Journal, at 765-66 (emphases added). Thus, when HRS § (. . .continued) subject to a four per cent tax under this chapter or chapter 239. HRS § 237-18(f). 31 “Gross up” or “grossing up” is not defined by statute or in the legislative history. In context, it appears to mean the practice of the Department to assess an entity for the GET on imputed income for certain transactions that is greater than the income resulting from the transaction reported by the taxpaying entity. - 51 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER 237-18 was amended to add subsection (f), the legislature recognized a class of transactions between travel agencies and providers of tourism-related services that it wanted to provide preferential tax treatment, and the use of the term “gross income is divided” did not connote any unique type of business relationship or accounting practice. Subsection (h) of HRS § 237-18 addresses transportation services. Where the transportation of passengers or property is furnished through arrangements between motor carriers, and the gross income is divided between the motor carriers, any tax imposed by this chapter shall apply to each motor carrier with respect to each motor carrier’s respective portion of the proceeds. HRS § 237-18(h) (2001) (emphasis added). This section was added in a special session of the legislature following the terrorist attacks of September 11, 2001. 2001 Haw. 3rd Spec. Sess. Laws Act 9, § 3 at 28-29.32 Your committee finds that the visitor industry’s significant contributions to Hawaii’s economy have been dealt a severe blow as a result of the aftermath of the terrorist[] actions of September 11, 2001. If Hawaii’s visitor industry is to recover in a timely manner, immediate action must be taken to increase the marketing of Hawaiʻi as a preferred destination. H. Stand. Comm. Rep. No. 3, in 2001 3rd Spec. Sess. Senate Journal, at 100; S. Stand. Comm. Rep. No. 3, in 2001 3rd Spec. 32 The legislative history does not specifically discuss the addition of subsection (h) but notes that the bill was designed to “support the State of Hawaii as a visitor destination.” H. Stand. Comm. Rep. No. 3, in 2001 3rd Spec. Sess. Senate Journal, at 100; S. Stand. Comm. Rep. No. 3, in 2001 3rd Spec. Sess. Senate Journal, at 53. - 52 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER Sess. Senate Journal, at 53. Thus, the legislature identified transportation as an element of the Hawaiʻi visitor industry that needed protection and provided special tax treatment to motor carriers that divide income derived from the collaborative transportation of passengers or property. Based on the variety of situations and business relationships set forth by the subsections of HRS § 237-18 in which “gross” or other income “is divided,” the phrase “gross income is divided” merely signifies that there must be an economic transaction between the two entities identified by the subsections of HRS § 237-18 in which income derived from that transaction is shared or otherwise split. That is, when entities identified within HRS § 237-18 subsections (a), (b), (e), (f), (g), or (h) participate in an economic transaction of the type therein described and the income derived from that transaction is split between these entities, the entities’ income is divided. Guidance provided by the Department also indicates that a vendor-vendee relationship is not precluded from “dividing” income, as contended by the Director. Example Two of TIR 91-8, discussed supra, does not express whether the tour packager is in an arm’s-length transaction with the cannery, bus company, and the Visitor Center or whether the tour packager is in some type of joint venture or partnership, but in context, an - 53 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER arm’s-length transaction seems more plausible. See TIR 91-8 at 2. Thus, the tour packager in Example Two “divided” its “income” for purposes of income-dividing under HRS § 237-18(g), notwithstanding that the transactions are at arm’s length, standard retail transactions. The first example in TIR 91-8 produces a similar conclusion: Example 1 – XYZ Travel, a Hawaiʻi corporation based in Honolulu assembles package tours consisting of air travel from the mainland to Hawaiʻi, a lei greeting, ground transportation from the airport to the hotel, hotel accommodations, certain meals, and admissions from independent vendors and suppliers, paying vendors and suppliers a total of $500 per customer or tourist. TIR 91-8 at 1. Example 1 goes on to state that XYZ Travel resells the package for $600 and that XYZ Travel is liable for GET on its $100 profit. Id. However, the example does not suggest that XYZ Travel is in a joint venture or partnership with each of the other parties involved in the transaction. Thus, the phrase “gross income is divided” in HRS § 237-18(g) identifies an economic transaction between the OTC and the hotel in which accommodations are provided to a transient and the income from that transaction is shared or split between the hotel and the OTC.33 Thus, in the Assessed Transactions, 33 Further, the record indicates that the OTC’s purchase of the right to transfer occupancy to the transient and the transfer of that right to the transient is effectively a simultaneous transaction. Thus, the Director’s argument that the OTCs do not divide income with hotels “by virtue of paying the hotels for room occupancy later sold to transients,” is not (continued. . .) - 54 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER gross income is divided, as that term is used in the GET Apportioning Provision. Further, HRS § 237-18 illustrates the legislature’s intent to protect certain categories of business transactions from the pyramiding effect of the GET and thus adds to the understanding of the term “travel agencies.” Notably, the legislature repeatedly sought to protect tourism-related industries in three separate provisions: tourism-related services in HRS § 237-18(f), the furnishing of transient accommodations in subsection (g), and the furnishing of transportation services by motor carriers in subsection (h).34 In light of the special tax treatment that the legislature sought to provide to transactions between travel agencies and hotel operators in HRS § 237-18(g), the term “travel agency” should not be given a constrained interpretation that would frustrate the legislative intent to protect the tourism industry. (. . .continued) determinative of the applicability of the GET Apportioning Provision to the Assessed Transactions. 34 Other industries the legislature sought to provide special tax treatment include sugar cane hauling and harvesting. HRS § 237-18(d). - 55 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER c. The Assessed Transactions supply transient accommodations at noncommissioned negotiated contract rates Finally, in order to qualify for the GET Apportioning Provision, the Assessed Transactions must supply transient accommodations under noncommissioned contract rates. The definition of noncommissioned negotiated contract rates is also not provided by HRS § 237-18(g). It is clear that the room rates are specified by contract, and the parties do not dispute that the rates were negotiated. Thus, the disputed term would appear to be “noncommissioned.” A “commission” is normally understood to be a “fee paid to an agent or employee for a particular transaction, usu[ally] as a percentage of the money received by the transaction.” Black’s Law Dictionary 327 (10th ed. 2014). A “noncommissioned” rate, then, would suggest an amount of money paid to an entity or person other than an agent or an employee. It would seem to be dispositive that the OTCs did not function as an agent or employees of the hotels in the Assessed Transactions to find that the rate is “noncommissioned.” The legislative history of the GET Apportioning Provision provides additional guidance. The GET Apportioning Provision was originally added to HRS § 237-18 in 1988. See 1988 Haw. Sess. Laws. Act 167, § 1 at 293. In explaining the - 56 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER addition, the conference committee report defined the problem the legislation was intended to address. Your Committee finds that in the case of the tour packager and the operator of transient accommodations, in many instances the tour packager blocks out a number of rooms and acts as a wholesaler of those rooms to the members of the tour. The tour packager packages the rooms as part of a tour which may include ground transportation, meals, and entertainment. Although it is clear that the tour packager is in business to make money, neither the operator of transient accommodations or others involved in the tour know what the mark-up of the tour packager is. In these instances the Department . . . is imposing the general excise tax on the operator based on the cost of the room and not on the price for which the operator sold the rooms to the tour packager. Conf. Comm. Rep. 94-88, in 1988 House Journal, at 803, 1988 Senate Journal, at 698 (emphasis added). Thus, the problem identified by the legislature was that the GET was imposed on the operator for the marked-up cost of a room, even though the hotel did not know what the marked-up cost was. The committee report explains that the Department based this tax imposition on its treatment of a roughly analogous situation: a commissioned transaction. [I]n the case of transient accommodations, the cost of commissions is attributable to the gross income of the operator without deduction. In a commission operation the hotel may offer a 10 per cent commission to a travel agent. The hotel then may collect $100 from the agent and return $10 to the agent or the agent may collect $100 and return only $90 to the hotel. In both situations the hotel must pay the general excise tax on the $100 room rental. Both the hotel industry and the department agree that this is proper. Id. (emphasis added). However, when the transaction was not commissioned and the hotel could not know the actual room rate - 57 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER charged to the transient, the committee found that treatment unfair: In the case before your Committee in this bill, the hotel does not know what the actual price the $100 room is sold for by the tour packager. The rooms may be sold to the tour packager for $90 and the tour packager may resell the rooms for $90, $100, or any price in between or even less than $90. Many of the largest tour packagers operate out of New York and Japan, and the hotel industry has no means of knowing what the mark-up of these packagers is. The Department . . . is grossing up the revenues of the hotel to $100 in the preceding example, by treating this as a commission operation. In this instance, it appears unfair for the [D]epartment to gross up the amount of revenue received by the hotels, and your Committee finds that this bill will solve that problem and disallow gross up in this instance. Id. (emphases added). To summarize, the Conference Committee Report indicates that when hotels paid an agent for the room on a commission basis, the room rate was readily definable, and all the parties agreed that it was “proper” for the hotel to pay the GET on the gross room rate. But in the case of a noncommissioned tour packager, the hotel had “no means of knowing” what the packager’s mark-up was, and thus it was undetermined what the actual room rate was. Under these circumstances, the committee found it was “unfair” for the Department to charge the GET on the “grossed up” room rate. Viewed in the context of its legislative history, the GET Apportioning Provision appears to have been implemented in part to protect hotels from paying the GET on a higher room rate than could be conveniently demonstrated that the transient had - 58 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER actually paid. Instead, GET liability is placed on “each . . . person with respect to such person’s respective portions.” HRS § 237-18(g). Thus, the GET Apportioning Provision protects persons who meet its requirements from paying the tax on more than their share of the proceeds received from providing transient accommodations. This case is analogous to the situation envisioned by the 1988 legislature in which the “rooms may be sold to the tour packager for $90 and the tour packager may resell the rooms for $90, $100.” Conf. Comm. Rep. 94-88, in 1988 House Journal, at 803, 1988 Senate Journal, at 698. Here, the OTCs purchase the right to sell the right of occupancy to a transient, complete the sale to a transient, and the hotels have “no means of knowing” what the OTCs’ mark-up is. It is undisputed that the hotels are not providing the OTCs with a commission; rather, the hotels receive payment according to their contract with the OTCs for the rooms rented after they invoice the OTCs. Thus, the OTCs provide transient accommodations at noncommissioned negotiated contract rates.35 35 In postulating that “tour packagers” bought and then sold the room, the committee report indicates that contractual privity can exist between transient and a travel agent or tour packager seeking to apply the GET Apportioning Provision. See Conf. Comm. Rep. 94-88, in 1988 House Journal, at 803, 1988 Senate Journal, at 698. - 59 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER d. Summary of the elements of the GET Apportioning Provision The Assessed Transactions meet each of the three elements of the GET Apportioning Provision. Thus, HRS § 23718(g) applies to the Assessed Transactions such that the GET is assessable on the gross income of each person providing transient accommodations in accordance with the respective portion of the proceeds of each.36 Accordingly, when travel agencies and hotel operators contract to provide transient accommodations to a transient, the GET Apportioning Provision provides that the GET is imposed on the travel agency and hotel operator on the respective portion of the gross income allocated or distributed to each, and no more.37 36 Although the tax court declined to make findings of fact or conclusions of law, the court reasoned that the GET Apportioning Provision did not apply to the Assessed Transaction because the contractual rate was variable and because, as the OTCs added the mark-up and service fee, value was added to the transaction; thus, in adding value to the transaction, the OTCs fell within the intent of the GET to pyramid. However, a “noncommissioned negotiated contract rate” is not restricted to a fixed rate, the income received by the OTCs and the hotels in the Assessed Transactions is consistent with a “noncommissioned negotiated contract rates” inasmuch as the income is not a commission and is according to rates under contracts that are negotiated, and the legislative history of the GET Apportioning Provision indicates the provision’s applicability. Thus, the tax court’s analysis in this regard is in error. 37 The OTCs have conceded that their respective portion of the gross proceeds includes both the margin and their service fee, arguing that if the GET Apportioning Provision applies to the Assessed Transaction, “GET liability would . . . extend to the amount the OTC retains, i.e., its margin and service fee.” - 60 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER F. Penalties on the GET Assessments 1. Failure to file The “failure to file” penalty is authorized by HRS § 231-39(b)(1), which provides, in relevant part: In case of failure to file any tax return required to be filed on the date prescribed therefor . . . unless it is shown that the failure is due to reasonable cause and not due to neglect, there shall be added to the amount required to be shown as tax on the return . . . not exceeding twenty-five per cent in the aggregate. HRS § 231-39(b)(1) (Supp. 1994) (emphasis added). “Thus, it is clear that the penalty is to be imposed unless the failure to file is ‘due to reasonable cause and not due to neglect.’” Grayco, 57 Haw. at 457, 559 P.2d at 278. “‘Reasonable cause’ has been interpreted to mean no more than the exercise of ordinary business care and prudence. However, a mere showing of absence of willful neglect is insufficient to avoid the penalty.” Id. (citations omitted). “The issue is one of fact and the burden of proving reasonable cause is on the taxpayer.” Id.; see also In re Tax Appeal of E-Z Serve, Inc., 65 Haw. 283, 284, 651 P.2d 469, 470 (1982) (stating that the failure to file penalty “is a matter which turns on a finding of fact”). A finding of fact will not be overturned on appeal unless it is clearly erroneous. Diamond v. Dobbin, 132 Hawaiʻi 9, 24, 319 P.3d 1017, 1032 (2014). To meet its burden of proof in regard to a failure to file, “appellants must show the presence of other supporting - 61 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER circumstances, in addition to its honest belief, that it was not responsible for the tax.” Grayco, 57 Haw. at 459, 559 P.2d at 278-79. “It is generally recognized that the presence of certain factors, in addition to the honest belief of the taxpayer, constitutes reasonable cause for the failure to file a return, e.g., the advice of a competent accountant or attorney; or reliance on the statements of an [agent of the taxing authority].” Id. at 459, 559 P.2d at 279 (emphasis added) (citations omitted). Thus, there must be both “other supporting circumstances” and “honest belief.” In Grayco, the taxpayer contended that it was justified in failing to file a return because it reasonably believed that it was not responsible for the tax and that tax liability was uncertain. Id. at 458, 559 P.2d at 278. Grayco held, “Absent reliance on competent counsel or the Director or his representative, Grayco’s erroneous belief that it had no taxable income that would necessitate the filing of a return, was not reasonable cause.” Id. at 459, 559 P.2d at 279 (emphasis added). Here, the tax court determined the OTCs failed to demonstrate a fact that indicated a dispute as to whether they were required to file GET returns and the OTCs failed to demonstrate that they were aware of any Department or AG letter, opinion, or communication to the contrary. The determination of the tax court that the OTCs failed to meet their burden to - 62 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER demonstrate their honest belief that they were not responsible for filing GET returns was not clearly erroneous and is therefore affirmed. However, as the failure to file penalty was assessed on the gross income resulting from the Assessed Transactions without application of the GET Apportioning Provision, the actual dollar award is clearly erroneous and must be recalculated based on each OTC’s respective portion of the gross income derived from providing transient accommodations, as apportioned under HRS § 237-18(g). 2. Failure to pay The “failure to pay” penalty is authorized by HRS § 231-39(b)(2)(A), which provides in relevant part: If any part of any underpayment is due to negligence or intentional disregard of rules (but without intent to defraud), there shall be added to the tax an amount up to twenty-five per cent of the underpayment as determined by the director. HRS § 231-39(b)(2)(A) (emphasis added). While it is clear that “there shall be added” a failure to pay penalty, it is not clear from the statute whether the Director must affirmatively demonstrate the existence of such negligence or intentional disregard, or whether the taxpayer seeking to avoid the penalty must show that the failure was not due to negligence or - 63 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER intentional disregard of the rules.38 In contrast, in the “failure to file” provision, discussed supra, the burden on the taxpayer is made clear by the language that “unless it is shown that the failure is due to reasonable cause and not due to neglect, there shall be added” a penalty. HRS § 231-39(b)(1) (emphasis added). The Director implies the application of the failure to pay penalty is mandatory and asserts the provision implies discretion as to the amount of the underpayment penalty, not as to whether to apply the penalty or whether negligence or intentional disregard of the rules was present. However, whether or not the imposition of the failure to pay penalty is mandatory is irrelevant in this case because once made, the assessment enjoys a presumption of validity. Irrespective of which party prevails in proceedings before a state board of review, or any equivalent administrative body established by county ordinance, the assessment as made by the assessor, or if increased by the board, or equivalent county administrative body, the assessment as so increased, shall be deemed prima facie correct. HRS § 232-13 (1993) (emphasis added); see also In re Tax Appeal of Valley of Temples Corp., 56 Haw. 229, 232, 533 P.2d 1218, 38 The failure to pay penalty was originally enacted in 1967 as an amendment to Revised Laws of Hawaiʻi (RLH) § 115-43. See 1967 Haw. Sess. Laws, Act 134, § 1, at 123-34, HRS Tables of Disposition, at 11. The committee reports related to 1967 Act 134 do not make any statements relevant to assigning the burden to show or disprove negligence or intentional disregard of the rules. See H. Stand. Comm. Rep. No. 916, in 1967 House Journal, at 835; S. Stand. Comm. Rep. No. 644, in 1967 Senate Journal, at 1144. - 64 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER 1220 (1975) (“The assessment made by the State’s assessor is deemed to be prima facie correct.”). An assessment is a “[d]etermination of the rate or amount of something, such as a tax or damages” or the “[i]mposition of something, such as a tax or fine, according to an established rate; the tax or fine so imposed.” Black’s Law Dictionary, supra, at 139. Thus, the term “assessment” is equivalent to a determined and imposed tax. HRS § 231-39(b) provides that interest and penalties “shall be added to and become a part of the tax imposed by such tax or revenue law, and collected as such.” HRS § 231-39(b) (emphases added). Thus, HRS § 231-39 is a taxing statute and the application of interest and penalties is an assessment. In re Taxes Maui Agric. Co., 34 Haw. 515, 531 (Haw. Terr. 1938) (discussing the effect of a taxpayer refusing or neglecting to file a real property tax return and stating, “And in any such case a penalty . . . is imposed to be added by the assessor to the amount of any assessment made by him, which penalty becomes a part of the assessment.” (emphasis added)).39 39 That interest and penalties are part of the “assessment” is consistent with federal law. Section 6201 of the Internal Revenue Code defines the Internal Revenue Service’s (IRS’s) authority for assessment and collection of taxes to include civil penalties. The IRS is specifically required to assess “all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.” 26 U.S.C. § 6201(a) (2010). - 65 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER In light of the statutory mandate that the Department’s assessments are prima facie correct, it is clear that the legislature intended an evidentiary presumption that the failure to pay was due to negligence or intentional disregard of the rules by the taxpayer,40 and it is the taxpayer’s burden to prove otherwise. As such, the assessments of the Department, including penalties for failure to pay due to negligence or intentional disregard of the rules, are prima facie correct and the burden is on the taxpayer to prove otherwise. The Director’s assessments enjoy a presumption of validity that places the burden on the taxpayer seeking to avoid the failure to pay penalty to prove that such failure was not due to negligence or intentional disregard of the rules. Therefore, “assessment notices, lists, and records are deemed to be prima facie proof that assessments were determined in compliance with carefully prescribed procedures.” Valley of Temples, 56 Haw. at 232, 533 P.2d at 1220. “In attacking [an assessment], we are mindful that the taxpayers have the burden to show clearly the invalidity claimed by overcoming the presumption that the tax assessor has faithfully performed his 40 We express no opinion as to the respective burdens of the Director and the taxpayer when the Director asserts that the failure to pay was due to fraud. See HRS § 232-19(b)(2)(B). - 66 - FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER duty.” In re Taxes of Ewa Plantation Co., 47 Haw. 41, 50-51, 384 P.2d 287, 292 (1963). The OTCs do not argue that they presented any evidence rebutting the presumption of negligence or establishing a genuine issue of material fact that would preclude summary judgment, nor do they point to any such evidence in the record. Thus, the determination of the tax court that “there are no genuine issues of material facts on the question of penalties for failure to pay general excise taxes” was not clearly erroneous and is therefore affirmed. However, as the failure to pay penalty was assessed on the gross income resulting from the Assessed Transactions without application of the GET Apportioning Provision, the actual dollar award is clearly erroneous, and the case is remanded for recalculation based on each OTC’s respective portion of the gross income of the Assessed Transactions, as apportioned under HRS § 237-18(g).