Court Opinion

ID: 2786941
Source: CourtListenerOpinion
Date Created: 2015-03-17 21:02:39.198057+00
Date Added: 2024-06-11T11:05:32.037794
License: Public Domain

***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***

                                                              Electronically Filed
                                                              Supreme Court
                                                              SCAP-13-0002896
                                                              17-MAR-2015
                                                              09:32 AM

           IN THE SUPREME COURT OF THE STATE OF HAWAI#I

                                 ---o0o---

    In the Matter of the Tax Appeal of TRAVELOCITY.COM, L.P.,
     Petitioners and Respondents/Appellees-Cross-Appellants,

                                    vs.

             DIRECTOR OF TAXATION, STATE OF HAWAIʻI,
       Respondent and Petitioner/Appellant-Cross-Appellee.

                              SCAP-13-0002896

       APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
           (T.A. NO. 11-1-0021 AND CONSOLIDATED CASES:
     11-1-0022, 11-1-0023, 11-1-0026, 11-1-0027, 11-1-0029,
     11-1-0030, 11-1-0031, 11-1-0032, 11-1-0033, 12-1-0287,
     12-1-0288, 12-1-0289, 12-1-0292, 12-1-0293, 12-1-0294,
         12-1-0295, 12-1-0297, 12-1-0299, and 12-1-0300)

                              March 17, 2015

   RECKTENWALD, C.J., NAKAYAMA, McKENNA, AND POLLACK, JJ., AND
        CIRCUIT JUDGE LEE, IN PLACE OF ACOBA, J., RECUSED

                OPINION OF THE COURT BY POLLACK, J.

                         I.       INTRODUCTION

          This case considers whether the General Excise Tax

(GET) and the Transient Accommodations Tax (TAT) are assessable
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on the relevant income of commercial entities operating under

business models that were not expressly considered by the

legislature when the applicable GET and TAT statutes were

originally enacted.      The Director of Taxation, State of Hawaiʻi

(Director) retroactively assessed ten online travel companies

for unpaid GET and TAT for periods beginning between 1999 and

2001 and continuing until 2011, plus applicable penalties.

            The online travel companies appealed the assessments

to the Tax Appeal Court (tax court), and the assessments were

consolidated into the present case.         Both the online travel

companies and the Director moved for summary judgment.             The tax

court ruled in favor of the Director with regard to the

assessment of the GET (GET Assessments), with penalties and

interest, but ruled in favor of the online travel companies with

regard to the assessment of the TAT (TAT Assessments).1             That

disposition was reflected in the tax court’s Final Judgment

Disposing of All Issues and Claims of All Parties (Final

Judgment), from which the online travel companies and the

Director seek review.

      1
            The Director sought interest and penalties with regard to both
the GET and TAT Assessments. The penalties were a 25% “failure to file”
penalty, pursuant to Hawaiʻi Revised Statutes (HRS) § 231-39(b)(1) (Supp.
1994), and a 25% “failure to pay” penalty, pursuant to HRS § 231-39(b)(2).
Interest on unpaid tax is assessable pursuant to HRS § 231-39(b)(4). As the
tax court found that the online travel companies were not liable for the TAT,
the court rejected interest and penalties as to the TAT Assessment.

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            We affirm the Final Judgment in part and vacate in

part in regard to the GET Assessments, affirm in regard to the

TAT Assessments, and remand the case to the tax court for

further proceedings consistent with this opinion.

                          II.       BACKGROUND

            In early 2011 and 2012, the Director made multiple

retroactive assessments against Expedia, Inc.; Hotels.com, L.P.;

Hotwire, Inc.; Travelocity.com LP; Site59.COM, LLC; Orbitz, LLC;

Trip Network, Inc.; Internetwork Publishing Corp.;

priceline.com, Inc.; and Travelweb LLC (collectively the Online

Travel Companies or OTCs, sometimes individually OTC).               The OTCs

appealed the 2011 and 2012 assessments to the tax court and the

appeals were consolidated.       All the non-dismissed assessments

are consolidated in the present case, and the amounts that would

be subject to the GET and TAT Assessments are stipulated.2

            As noted, the Director and the OTCs both moved for

summary judgment, resulting in the Final Judgment.              The Final

Judgment was filed “pursuant to and consistent with” eight

underlying orders.3     In the Director’s appeal, the Director

      2
            The Director’s retroactive assessment of the GET to the
operations of the OTCs resulted in collective taxes and penalties of
approximately $247 million. The Director’s assessment of the TAT to the same
operations of the OTCs that was rejected by the tax court would have assessed
approximately $430 million in taxes and penalties.
      3
            Five of the orders addressed the GET Assessments:

                                                                (continued. . .)

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identifies as error the tax court’s grant of summary judgment in

favor of the OTCs in regard to the TAT Assessments, the denial

of summary judgment in favor of the Director on the TAT

Assessments, and the denial of the Director’s motion for

reconsideration.4

            In their cross-appeal, the OTCs identify the following

as error: the tax court’s grant of summary judgment in favor of

(. . .continued)

      (1)   Order Denying [OTCs’] Motion for Partial Summary Judgment on
            [GET] Assessments, filed February 8, 2013;

      (2)   Order Granting in Part and Continuing in Part [Director’s] Motion
            for Partial Summary Judgment on [GET] Assessments, filed February
            8, 2013;

      (3)   Order Denying [OTCs’] Motion for Reconsideration of the Order
            Granting in Part and Continuing in Part [Director’s] Motion for
            Partial Summary Judgment on [GET] Assessments, Entered February
            8, 2013, filed April 1, 2013;

      (4)   Order Granting [Director’s] Motion for Partial Summary Judgment
            on [GET] Assessments; Schedules 1-4, filed August 15, 2013; and,

      (5)   Order Granting [Director’s] Motion for Partial Summary Judgment
            on Statutory Interest on Statutory Penalties, filed August 15,
            2013.

            Three orders addressed the TAT Assessments:

      (6)   Order Granting [OTCs’] Motion for Partial Summary Judgment on
            [TAT] Assessments, Filed on August 31, 2012, filed February 8,
            2013;

      (7)   Order Denying [Director’s] Motion for Partial Summary Judgment,
            Filed on August 31, 2012, filed February 8, 2013; and,

      (8)   Order Denying [Director’s] Motion for Reconsideration Filed
            November 7, 2012, filed February 8, 2013.
      4
            Additionally, the Director cites as error the tax court’s
determination that the TAT does not apply to the OTCs on the gross rental
proceeds derived from certain transactions with Hawaiʻi hotels, “without any
deductions whatsoever.”

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the Director in regard to the GET Assessments, the court’s

denial of reconsideration of that grant, and the court’s

affirmance of penalties on the GET Assessments.5

            This opinion will first provide the factual background

common to both appeals.      Following the background, the

discussion will then address the separate appeals: the cross-

appeal by the OTCs in regard to the GET Assessments, followed by

the appeal by the Director in regard to the TAT Assessments.

                     A.    The Assessed Transactions

            The OTCs are organizations doing business with Hawaiʻi

hotel guests (transients) and Hawaiʻi hotels.          They operate

websites where transients can research their destinations,

compare travel options, and make reservations with third-party

travel suppliers such as airlines, car rental companies, and

hotels.   The OTCs do not own any hotels.

            The OTCs sell room accommodations using a business

model that involves two different types of contracts: in the

first, the hotel grants the OTC the right to sell occupancy of a

hotel room to a transient, and in the second, the right to

occupy the hotel room is sold to the transient by the OTC.              The

      5
            The OTCs do not identify as error the tax court’s order granting
interest on the penalties or the court’s denial of summary judgment in their
favor on the GET Assessments.

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Director’s GET and TAT Assessments are on transactions made

under this business model (Assessed Transactions).6

                      1.    The OTC-hotel contracts

            In a contract between an OTC and a hotel, the hotel

grants the OTC the right to offer room occupancy to the public

out of the hotel’s inventory.        The hotel contractually delegates

to the OTC numerous “day-to-day” responsibilities the hotel

would otherwise perform itself, including the marketing,

pricing, tax collecting, payment processing, legal contracting,

accounting, and customer service functions.           The OTCs maintain

that they do not have the right or the ability to control or

take possession of any hotel rooms; they do not buy, resell, or

rent rooms or blocks of rooms; and they bear no risk if they

fail to arrange room reservations at any hotel.

            The OTC-hotel contract establishes the rate the hotel

will charge the OTC for a room (net rate).          The net rate is

typically not a fixed amount, but floats, based on a discount

from the hotel’s “best available rate” offered to the public.

            An OTC independently sets the price the transient is

charged for the room based on the net rate under the OTC-hotel

      6
            The OTCs also enter into transactions that the OTCs refer to as
“agency model transactions” and the Director refers to as “Hotel-Controlled
Sales,” in which the OTCs operate as a “traditional travel agent.” “Agency
model transactions” or “Hotel-Controlled Sales” are not at issue in this
case.

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contract.    That room price is made up of the net rate, plus two

other elements set by the OTC: a “mark up” and a “service fee.”

The mark-up added to the net rate equals the “retail rate” the

OTCs charge the transient for the room.          In addition to the

mark-up, the OTCs charge transients a service fee.            The OTCs set

the amount of the service fee.

                   2.    The OTC-transient contracts

            An OTC enters into a contract with a transient that

reserves the transient’s right to occupy a hotel room for a

certain period of time.7      In the Assessed Transactions,

transients obtain the right to occupy those hotel rooms by

transacting with the OTCs rather than with the hotels

themselves.    The OTC-transient contract may also include terms

and conditions of the hotel.8

            The OTC controls significant aspects of the

relationship with the transient from the time the transient logs

on to the OTC’s website until the transient checks in at the

hotel.    For instance, it is typical that prior to check-in, the

only contact the transient has regarding the hotel reservation

      7
            The parties appear to use the term “reservation” as synonymous
with “paid reservation” to describe the booking made by the transient for the
right to occupy a hotel room for a certain period of time.
      8
            The Director asserts that there is no written contract between
the transient and the hotel. The answering brief of the OTCs did not dispute
this assertion; however, the declaration of a Travelocity.com LP employee
indicated that on “arrival at the hotel for check-in, the traveler will be
asked to . . . sign the hotel’s agreement and/or registration card.”

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is with the OTC.    Prior to check-in, the transient is considered

to be solely the OTC’s customer.       Once the transient accepts the

OTC’s contract terms, the OTC processes the credit card

transaction as the merchant of record.         The transient pre-pays

the OTC in full when the right to occupy a hotel room for a

certain period of time is reserved.        The transient owes nothing

to the hotel at check-in.

          The OTC does not disclose the individual amount of the

net rate, mark-up, service fee, or tax to the transient.            In the

invoice to the transient, the OTC combines the taxes and service

fees into a single line item called “taxes and fees.”

Similarly, the OTC never discloses to the hotel the amount of

the mark-up, service fee, or total price paid by the transient.

Only the OTC knows all the individual amounts comprising the

total price paid by the transient, including the net rate, mark-

up, service fee, and taxes.

          Upon completing the reservation, the OTC sends an

invoice or email confirmation to the transient.          The hotel does

not confirm the reservation directly with the transient.            The

OTC has its own cancellation policies the transient must accept

when the booking occurs.      If the transient changes or cancels a

reservation, the OTC handles the change or cancellation.            After

booking the reservation, the OTC provides continuing customer

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support to the transient.      The OTCs bear the risk of loss from

credit card fraud or bad debt.

            In the Assessed Transactions, the OTCs collect the

room charge and taxes from the transients and control the monies

paid by the transients.     The hotels contractually delegate to

the OTCs the responsibility to collect all amounts, including

taxes, from the transients.      The OTCs thus collect all amounts

from the transient at the time the transient makes the

reservation with the OTC.

            The hotel invoices the OTC for the hotel stay,

typically after the transient has checked out.          Pursuant to the

hotel’s invoice, the OTC pays the hotel the net rate and the tax

(TAT and GET) that has been collected from the transient on the

net rate.   The OTC is not an occupant and does not obtain a

right of hotel room occupancy.       The transient is the occupant

and obtains a right to room occupancy, but the transient is not

a party to the payment of the net rate by the OTC to the hotel.

   B.   Contact between the parties and actions of the parties
                  prior to the 2011 Assessments

            The parties dispute the import and extent of prior

knowledge and prior contacts of the parties in regard to the

OTCs’ potential tax liability for the GET and TAT on the

Assessed Transactions.     The actions and contacts of the parties

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prior to the 2011 Assessments that can be garnered from the

record are included here.

             Attorney-client privilege logs in the record indicate

some OTCs were in discussions with their counsel regarding

“excise tax,” “hotel occupancy taxes,” and “state tax accrual”

from 2001.

             The record contains an email dated April 7, 2004, from

an ostensible employee of the State of Hawaiʻi to a person

apparently involved in the state government of Florida that

indicated that Hawaiʻi could not “impose our TAT on an internet

company’s retained portion of payment for a hotel rental.”9

             In June 2006, the record indicates that members of the

Department of Taxation (Department) convened an internal meeting

to discuss the issue of taxing OTCs.10

             In March 2007, employees of the Department met with a

representative from one of the OTCs.         A member of the Department

testified that the conclusion reached at the meeting was “the

Department was not going to pursue a case at that time,” and

that conclusion was “probably communicated” to the OTCs’

representative.     A declaration by the OTCs’ representative
      9
            The OTCs maintain that the email was written by a Hawaiʻi
Department of Taxation Administrative Rules Specialist responding to an
inquiry from the Florida Department of Revenue. The record does not indicate
when the OTCs first became aware of this email.
      10
            The record does not indicate when the OTCs first became aware of
the 2006 meeting.

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confirms that the meeting took place.        The representative

testified that he was informed that “we were certainly not

subject to TAT” but “we may be subject to a GET or use tax.”

Testimony by former Department Director Kurt Kawafuchi (Director

Kawafuchi) does not contradict this assessment of the meeting

and suggests that the Department may have invited a request for

a private letter ruling that the OTCs did not owe the TAT.             The

OTCs did not request such a ruling.

            In 2008, the Department began investigating the

potential assessment of the GET and TAT against the OTCs.            In

May 2008, the Director sent information requests to the OTCs for

transactional data.

            In July 2008, a meeting was held involving the

Governor’s office and representatives from the Department and

the OTCs.   Another meeting involving representatives of the OTCs

and the Department’s outside counsel took place in August 2008.

On August 21, 2008, the OTCs were apparently informed that the

Department’s requests for transactional data were on hold

pending a request to the OTCs for information regarding tax

litigation in other jurisdictions.         The OTCs were informed that

the Director’s review of the litigation materials would take

some time and that there was no expectation for the OTCs to

provide the transactional data as long as the OTCs were in

discussion with the Department.

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             In 2008, however, the matter was dropped.         Director

Kawafuchi testified that the matter ultimately was elevated to

the Governor’s level and the “Governor decided not to pursue a

case.”   The OTCs’ representative declared he spoke with Director

Kawafuchi in November 2008 and was informed that the TAT inquiry

would not go forward.      The OTCs’ representative also declared

that it was communicated to him that “the recommendation that

the Department not go forward was unanimous among members of

[the Department] leadership team” and that the Governor “had

decided that the State would not pursue the [TAT] matter against

the OTCs.”    The representative further declared that the

Department would “get back” to him regarding a possible GET

audit but that the Department “never contacted” him.

             In a letter dated October 9, 2009, the Attorney

General of the State of Hawaiʻi (Attorney General) responded to a

request from the Senate President and the Speaker of the House

relating to OTCs and the Hawaiʻi GET and TAT (2009 Attorney

General Letter).11     The letter stated that the Department

“determined that it did not wish to pursue and would not support

litigation against the OTCs.”        The reasons provided in the

letter for that determination were that the TAT “did not apply

to [OTCs] because the OTCs are not operators” and the GET “would

      11
            The record does not indicate when the OTCs became aware of the
October 9, 2009 letter to the Senate President and the Speaker of the House.

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probably also not be applicable due to the sourcing of the

income outside of Hawaii.”       “In addition, the [Department]

believed it may have had substantial litigation hazards in

showing that the majority of OTCs had sufficient presence in

Hawaii to establish substantial nexus as a prerequisite to the

imposition of state taxes.”

            Director Kawafuchi, who was copied on the letter,

testified that he did not write the letter and could not

remember if he reviewed it before it went out.           Director

Kawafuchi testified that he disagreed with the letter’s

conclusion that the Department may have difficulty proving that

the OTCs had sufficient presence in Hawaiʻi to establish

constitutional nexus; he testified that the OTCs “have nexus in

the State of Hawaii.”

            On October 13, 2009, the Rules Office of the

Department prepared a memorandum to file that concluded that the

OTCs were not subject to the TAT because they are not operators

and the Department was not likely to succeed in assessing the

OTCs for the GET because current Hawaiʻi nexus and sourcing laws

are uncertain.12

            The Director suggests that some of the conclusions

generated by the Department between 2007 and 2009 were due to

      12
            The record does not indicate when the OTCs became aware of the
October 13, 2009 memorandum to file.

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misrepresentations by the OTCs.       The voluminous sealed records

that provide factual support for the Director’s assessment of

the Assessed Transactions were not available to the Director

when the Department initially considered taxing the OTCs in 2007

through 2009.   The implication from the Director is that the

Department’s current position is the result of the information

that was gathered during pretrial discovery relating to this

case.

                       C.    Standards of review

          This court reviews an award of summary judgment de

novo, under the same standards applied by the trial court.

Therefore, “summary judgment is appropriate if the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party

is entitled to a judgment as a matter of law.”          Fujimoto v. Au,

95 Hawaiʻi 116, 136, 19 P.3d 699, 719 (2001) (alteration omitted)

(quoting Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw.

85, 104, 839 P.2d 10, 22 (1992)).

          Where the appeal is from the Tax Appeal Court, it is

well settled that, in reviewing the findings of fact, “a

presumption arises favoring its actions which should not be

overturned without good and sufficient reason.          The appellant

has the burden of showing that the decision of the Tax Appeal

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Court was ‘clearly erroneous.’”         Weinberg v. City & Cnty. of

Honolulu, 82 Hawaiʻi 317, 322, 922 P.2d 371, 377 (1996); see

Kamikawa v. United Parcel Serv., Inc., 88 Hawaiʻi 336, 338, 966

P.2d 648, 650 (1998).       When the facts are undisputed and the

sole question is one of law, the decision of the Tax Appeal

Court is reviewed “under the right/wrong standard.”             Kamikawa,

88 Hawaiʻi at 338, 966 P.2d at 650 (quoting Weinberg, 82 Hawaiʻi

at 322, 922 P.2d at 377).

          III.          DISCUSSION OF THE GET ASSESSMENTS

                             A.    Introduction

          The GET is imposed by Hawaiʻi Revised Statutes (“HRS”)

Chapter 237; HRS § 237-13 provides as follows:

          There is hereby levied and shall be assessed and collected
          annually privilege taxes against persons on account of
          their business and other activities in the State measured
          by the application of rates against values of products,
          gross proceeds of sales, or gross income, whichever is
          specified, as follows:

          . . .

             (6)         Tax on service business.

                  (A)    Upon every person engaging or continuing within
                         the State in any service business or calling
                         including professional services not otherwise
                         specifically taxed under this chapter, there is
                         likewise hereby levied and shall be assessed
                         and collected a tax equal to four per cent of
                         the gross income of the business . . . .

HRS § 237-13 (Supp. 1999) (emphases added).           A service business

“includes all activities engaged in for other persons for a

consideration which involve the rendering of a service,

including professional services, as distinguished from the sale

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of tangible property or the production and sale of tangible

property.”        HRS § 237-7 (Supp. 1999) (emphasis added).13          Gross

income includes rental income.            HRS § 237-3 (1993).14      Thus, the

GET is imposed on the gross income derived from the sale of

services or rental income resulting from all services activities

that occur within the state.

           B.      The tax court’s statements regarding the GET

                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).

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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).

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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

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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.

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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.

             C.    The parties’ GET arguments on appeal17

            The OTCs appeal the tax court’s grant of summary

judgment in favor of the Director on the issue of the OTCs’

liability for the GET, the court’s denial of reconsideration of

that grant, and the court’s affirmance of penalties on the GET

Assessments.

      1.    The OTCs’ arguments regarding the GET Assessments

            The OTCs argue that the GET only applies to revenue

generating activities within the State of Hawaiʻi and their

activities do not occur in Hawaiʻi; that their services are not

used or consumed in Hawaiʻi; that if the GET applies to the

Assessed Transactions, then the GET Apportioning Provision also

applies; and that rules of statutory interpretation indicate

that any ambiguity in the GET Apportioning Provision must be

construed in their favor.

      17
            Both parties used extensive emphases in their briefs, and
multiple types of emphases were used (e.g., underlining, bold, italics, bold
italics, underlined bold italics). Therefore, in the sections summarizing
the parties’ briefs in both the GET and TAT appeals, removed emphases will
not be indicated.

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 a.     The OTCs argue the GET applies only to revenue-generating
                 activities performed “in the State”

            The OTCs argue that the Assessed Transactions are not

subject to the GET tax because the GET applies only to revenue-

generating business activities performed “in the State” and

their activities do not occur within Hawaiʻi.           The OTCs contend

that the “in the State” limitation within the GET refers to the

“physical, geographical location” where “the particular

activity” that generates income is performed.            The OTCs further

contend that “this Court never has held an out-of-state business

liable for GET on income generated by activity performed outside

of the territorial limits of Hawaiʻi.”

            The OTCs cite first to this court’s decision in In re

Tax Appeal of Grayco Land Escrow, Ltd., 57 Haw. 436, 449, 559

P.2d 264, 266 (1977), for the holding that the GET “is measured

. . . by the income realized by the particular activity engaged

in by the taxpayer within the state.”          The OTCs next point to In

re Tax Appeal of Baker & Taylor, Inc., 103 Hawaiʻi 359, 82 P.3d

804 (2004), in which the OTCs maintain that this court held a

“mainland company liable for GET on books it sold and delivered

to customers in Hawaiʻi.”       Third, the OTCs contend that In re Tax

Appeal of Heftel Broadcasting Honolulu, Inc., 57 Haw. 175, 554

P.2d 242 (1976), upheld the assessment of the GET against a

mainland company that rented films to a Hawaiʻi broadcaster

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because “the presence and rental of CBS’ films in Hawaiʻi

constituted ‘economic activity’ sufficient to meet the ‘instate

business activity’ requirement of the statute.”          Lastly, the

OTCs rely on In re Tax Appeal of Subway Real Estate Corp. v.

Director of Taxation, 110 Hawaiʻi 25, 39, 129 P.3d 528, 542

(2006), in which a mainland company was held liable for the GET

on its activities of “‘signing and maintaining the leases and

subleases for each Subway shop’ in Hawaiʻi, from which it derived

economic benefit.”

          Particularly, as to service businesses, the OTCs argue

that in each case, this court has held that the GET applies only

to services the putative taxpayer has performed “in the State.”

The OTCs contend that in Ramsay Travel, Inc. v. Kondo, 53 Haw.

419, 495 P.2d 1172 (1972), this court upheld the imposition of

the GET on travel agencies because their business activity was

conducted exclusively within the State of Hawaiʻi and the

agencies were physically in Hawaiʻi.        The OTCs argue that in HC&D

Moving & Storage Co. v. Yamane, 48 Haw. 486, 405 P.2d 382

(1965), this court upheld the GET against a Hawaiʻi taxpayer,

noting that the taxpayer’s activities were “performed entirely

and solely within the State.”

          In further support of their argument, the OTCs refer

to the Department’s rules, which impose the GET on business and

other activities of “every person engaging or continuing within

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the State in any service business.”         (Quoting Hawaiʻi

Administrative Rules (HAR) § 18-237-13-06.05(b)(1)).

             The OTCs also cite to Tax Information Releases (TIRs),

guidance documents issued by the Department, in support of their

argument that “in the State” is a physical and geographic

limitation.    The OTCs claim that the TIRs make clear that a

travel agency performing its services outside Hawaiʻi is not

liable for the GET, even when the arranged travel occurs within

Hawaiʻi.    The OTCs assert that their argument is further

supported by a 1965 State Attorney General Opinion (1965 AG

Opinion).18

             The OTCs argue that, by “concluding that the GET

reaches activities both in the State and outside the State, the

Tax Court stripped the ‘in the State’ limitation of any meaning,

improperly rendering it mere surplusage” and unconstitutionally

vague.     The OTCs further contend that interpreting a vaguely

constructed statute in favor of creating liability would violate

the principle that statutes imposing taxes must be construed in

favor of the taxpayer.

      18
            The OTCs argue that the 1965 AG Opinion suggests that a person
contracting with or employed by a mainland travel agency that accompanies a
tour group to Hawaiʻi is not subject to the GET because “the privilege of
doing business is being exercised outside the [S]tate of Hawaiʻi, and that
which is being done in Hawaiʻi is in aid or furtherance of the business being
done outside Hawaiʻi.” The OTCs maintain that they are entitled to the same
tax treatment as an out-of-state travel agency.

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     b.    The OTCs argue that their services are not “used or
                        consumed” in Hawaiʻi

           As an independent reason that the Assessed

Transactions are not subject to the GET, the OTCs assert that

the tax court erred in upholding application of the GET on

services that are not used or consumed in Hawaiʻi, citing an

exception for services exported out of the state under HRS

§ 237-29.53(a) and referencing the “Conformity to Constitution,

Etc.,” an exception established by HRS § 237-22(b).            The OTCs

assert that their services are not consumed in Hawaiʻi, but

rather, in whatever out-of-state location the transient is

located at the time of purchase.

   c.   The OTCs argue that if the GET applies to the Assessed
    Transactions, the GET Apportioning Provision also applies

           The OTCs maintain that the GET Apportioning Provision

was intended to eliminate the effect of “pyramiding” in certain

circumstances.19    The OTCs assert that the GET Apportioning

Provision “avoids multiple taxation on the same gross proceeds”

when travel agents and tour packagers arrange room reservations

on a noncommissioned basis.       Thus, the OTCs contend that even if

they are liable for the GET, they are liable only for their

     19
            “Pyramiding” is an informal term referring to multiple tax
assessments on different persons or entities on the same or related revenue
and is an accepted feature of certain implementations of the GET. See In re
Tax Appeals of Busk Enters., Inc., 53 Haw. 518, 497 P.2d 908, 910 (1972);
Subway, 110 Hawaiʻi at 34, 129 P.3d at 537.

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“respective portion of the proceeds, and no more,” because they

are travel agents using noncommissioned negotiated contract

rates.   (Quoting the GET Apportioning Provision).          The OTCs

claim that the 1965 AG Opinion and the Department’s

documentation--including TIR 91-8, Announcement No. 2011-27, and

published Department instructions for filing a GET return--

confirm that even in-state travel agencies operating under the

merchant model are liable for the GET only to their mark-up and

no more.

             The OTCs assert that although “travel agent” is not

defined by the GET statute, they fall “squarely” within the

definition of “travel agent” under HRS § 486L-1 as they act as

“an intermediary between a person seeking to purchase travel

services and any person seeking to sell travel services.”

Further, the OTCs maintain that they “have held themselves out

as” and are “understood by the industry to be” travel agencies.

The OTCs also contend that the transactions between the OTCs and

the hotels are noncommissioned, and the rates at which hotels

allow OTCs to arrange room reservations are negotiated between

the hotels and the OTCs.      Thus, the OTCs conclude that the

Assessed Transactions fall within the GET Apportioning

Provision.

             The OTCs contest the tax court’s two stated reasons

for non-applicability of the GET Apportioning Provision.            First,

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the OTCs note that the “GET Statute expressly contains the anti-

pyramiding provision, which necessarily means it applies in the

general excise tax arena.”        Second, the fact that the travel

agency adds its own margin and service fee to the contractual

net rate does not render the GET Apportioning Provision

inapplicable.     The OTCs maintain that the tax court’s ruling is

“contrary to the plain language of the Statute and the

Department’s own guidance[] and improperly renders the anti-

pyramiding provision a nullity.”

 d.     The OTCs argue that any ambiguity in the GET Apportioning
              Provision must be resolved in their favor

            The OTCs contend if the applicability of the GET

Apportioning Provision is ambiguous, “where there are competing

reasonable constructions, the resulting ambiguity must be

strictly construed against the taxing authority and in favor of

the asserted taxpayer.”

   2.     The Director’s arguments regarding the GET Assessments

            In response, the Director argues the following: (1)

because the OTCs conduct “business and other activities in the

State,” they are subject to the GET; (2) there is no legal

authority for the OTCs’ “consumed or used” test; (3) the OTCs

are not subject to the GET Apportioning Provision; and (4) the

assessed penalties are correct in all respects.

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   a.       The Director argues that the OTCs do business “in the
                 State” and are thus subject to the GET

             The Director characterizes the GET as “a ‘privilege

tax’ that is ‘based on the fact that the party chose to engage

in business activity within the state’ and ‘is justified on the

ground that companies conducting business enjoy the protections

and benefits given by the state.’”            The Director contends that

the GET statute is especially broad in scope, evincing an

intention to tax virtually every economic activity imaginable

and virtually all transactions with economic gain or benefit.

The Director contends that this court had upheld the application

of the GET in analogous circumstances, citing to Grayco, Subway,

Heftel Broadcasting, and Baker & Taylor.

  b.      The Director argues the OTCs must pay GET on their gross
                      income without any deduction

             The Director contends the OTCs owe the GET on the

total gross income from the Assessed Transactions without any

deductions “whatsoever” because the OTCs have “independent GET

obligations.”      (Quoting HRS § 237-3(a)).        The Director argues

that the GET Apportioning Provision does not apply to the OTCs

because the provision requires three elements, “none of which

are found in [the Assessed Transactions].”

             First, the Director argues that the OTCs “are not

functioning as travel agents” because they do not “act as []

intermediar[ies],” but rather, act as direct sellers of Hawaiʻi

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hotel rooms to transients.      The Director contends that under the

OTC-hotel contracts, Hawaiʻi hotels grant the OTCs control over

their inventory and the right to offer room occupancy to the

public.   “The contracts provide that the OTCs, not the hotels,

control the relationship with the transients . . . .”

Transients “obtain the right to occupy those hotel rooms by

transacting with the OTCs rather than with the hotels.”            “The

OTCs collect all amounts, including rent and taxes, from the

transients when the transients make the reservation with the

OTCs.”    The Director argues that the fact that the OTCs are

registered as travel agents under HRS § 468L-2 and hold

themselves out as online travel agencies does not prove that the

OTCs function as travel agents in the Assessed Transactions.

            Second, the Director argues that in the Assessed

Transactions, the gross income is not divided.          “Under the OTC-

Hotel Contracts, OTCs pay hotels as they do any other creditor.

The transient’s payment to the OTCs is not ‘pooled’ or ‘divided’

with the hotel . . . .”     The Director contends that “the OTCs do

not divide income with hotels by virtue of paying the hotels for

room occupancy later sold to transients.”         Thus, the Director

concludes that “[r]ather than being in a legal relationship such

as a partnership or joint venture where revenues are divided,”

the OTCs’ relationship with the hotels is at “arm’s length.”

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            Third, the Director contends that the OTCs’ income in

the Assessed Transaction is not consistent with noncommissioned

negotiated contract rates.        The Director argues that the

legislative history indicates that the GET Apportioning

Provision “was added to address the legislature’s concern that

tour packages presented a unique problem in that it might be

‘impossible’ for the Director to determine what portion of the

total package price is attributable to each travel component for

tax purposes.”      The Director states that noncommissioned

negotiated contract rates should only apply to agreements

between a hotel and tour packager under which the hotel room

price is set at a “fixed dollar amount” or a “sum certain.”                  In

contrast, the Director maintains that the OTC-hotel contracts

involve room rates that are “‘floating’ ‘net rate’ amounts”;

“the ‘net rate’ is a formula and the dollar amount fluctuates.”

 D.    The parties’ arguments regarding interest and penalties on
                        the GET Assessments

            The tax court affirmed the Director’s assessment of a

25% “failure to file” penalty and a 25% “failure to pay”

penalty, authorized under HRS §§ 231-39(b)(1) and 231-

39(b)(2)(A), respectively.

             1.    The OTCs’ arguments regarding penalties

            The OTCs argue that the failure to file penalty should

not be imposed where the taxpayer proves its inaction was “due

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to reasonable cause and not due to neglect.”          The OTCs argue

Hawaiʻi case law does not limit reasonable cause to reliance on

advice of a competent accountant or attorney.          Further, the OTCs

cite to federal case law for the proposition that “where the law

is unsettled or ambiguous, such that it does not give notice of

the requirement to file a return, the circumstances of the case

speak for themselves and there is reasonable cause for failure

to file as a matter of law.”      The OTCs represent that because

they “voluntarily approached the Department to discuss potential

liability,” and because the former Director and Attorney General

advised them that the Department had concluded the OTCs likely

were not liable for GET, they had reasonable cause to not file

GET returns.

             In regard to the failure to pay penalty, the OTCs

argue that the failure to pay penalty requires an affirmative

determination by the Director that the failure to pay was due to

negligence or intentional disregard of rules.          The OTCs contend

that there is no evidence that the Director made such a

determination.    With no support in the record, the OTCs contend

that the failure to pay penalty is “baseless.”

        2.      The Director’s arguments regarding penalties

             The Director asserts it is “indisputabl[e]” that the

OTCs were on notice of potential GET liability and that the

OTCs’ discussions with the Department in 2007 and 2008 are

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“legally irrelevant” and based upon “factual

misrepresentations.”       The Director contends that the penalties

assessed by the Department are “prima facie correct in all

respects” and that the burden is on the taxpayer to overcome the

presumption of proper assessment.        Based upon the OTCs’ failure

to offer any evidence in support of that burden, the Director

asserts that the tax court correctly affirmed the penalties

assessed by the Director on the unpaid GET.          The Director

further disputes that the failure to pay penalty cannot be

imposed absent an affirmative determination by the Director that

a failure to pay was due to negligence or intentional disregard

of rules.

                      E.     Discussion of the GET

            The GET is imposed on the gross income derived from

the sale of services or rental income resulting from all

services activities that occur within the state.           HRS § 237-13.

      1.      The Assessed Transactions are subject to the GET

            This court has previously stated that the GET statute

“evidences the intention of the legislature to tax every form of

business, subject to its taxing jurisdiction, not specifically

exempted from its provisions.”       Grayco, 57 Haw. at 443, 559 P.2d

at 270.    In enacting the GET, “the legislature cast a wide and

tight net.”    In re Tax Appeal of Island Holidays, Ltd., 59 Haw.

307, 316, 582 P.2d 703, 708 (1978); see In re Tax Appeal of C.

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Brewer & Co., 65 Haw. 240, 247, 649 P.2d 1155, 1156 (1982).

“Read as a whole,” the GET taxes “virtually every economic

activity imaginable.”        Pratt v. Kondo, 53 Haw. 435, 436, 496

P.2d 1, 2 (1972); see C. Brewer & Co., 65 Haw. at 244, 649 P.2d

at 1158 (noting that the legislative design was “to reach

virtually all transactions with economic gain or benefit”).

             The GET is a privilege tax assessed “based on the

privilege or activity of doing business within the State and not

on the fact of domicile.”         Grayco, 57 Haw. at 447, 559 P.2d at

272.    It “is a gross receipts tax on the privilege of doing

business in Hawaiʻi.”       Baker & Taylor, 103 Hawaiʻi at 365, 82

P.3d at 810; accord Subway, 110 Hawaiʻi at 32, 129 P.3d at 535.

“[I]t is a tax imposed upon entrepreneurs for the privilege of

doing business” that “applies at all levels of economic activity

from production or manufacturing to retailing . . . and to

virtually all goods and services.”            In re Tax Appeal of Cent.

Union Church Arcadia Ret. Residence, 63 Haw. 199, 202, 624 P.2d

1346, 1349 (1981).       It is assessed when the taxpayer avails

itself of the “protection, opportunities, and benefits” afforded

by the State of Hawaiʻi.        Heftel Broad., 57 Haw. at 182, 554 P.2d

at 248 (emphasis added); accord Baker & Taylor, 103 Hawaiʻi at

365, 82 P.3d at 810.

             The Director is not required to acquiesce to a

taxpayer’s chosen form of accounting practices and nominal

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distinctions when making a determination of liability for

taxation.   “Though it may be axiomatic that a taxpayer can order

its affairs in any manner not proscribed by law to minimize the

impact of taxation, the Director is by no means bound by its

accounting practices.”     C. Brewer & Co., 65 Haw. at 246, 649

P.2d at 1158-59 (citation omitted).        “It is also fundamental

that [the Director] can look at the substance rather than the

form of a transaction in fixing tax liability.”          Id.

“Actualities and consequences of a commercial transaction,

rather than the method employed in doing business, are

controlling factors in determining such liability.”            In re

Taxes, Kobayashi, 44 Haw. 584, 590, 358 P.2d 539, 543 (1961).

“To hold otherwise would permit the schemes of taxpayers to

supersede legislation in the determination of the time and

manner of taxation.”     Kobayashi, 44 Haw. at 590, 358 P.2d at 543

(quoting Higgins v. Smith, 308 U.S. 473, 477 (1940)).

            The OTCs assert that the statutory phrase “in the

state” means a “physical geographical limitation” and that

Grayco, Subway, Baker & Taylor, and Heftel Broadcasting so hold.

However, our case law does not support the contention that the

taxpayer must have a physical presence in the state.

            In Grayco, the taxpayer was a California corporation

with its principal place of business in California.            Grayco, 57

Haw. at 438, 559 P.2d at 267.       The taxpayer was not licensed to

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do business in Hawaiʻi pursuant to HRS Chapter 237, nor did it

have a place of business or any employees in Hawaiʻi.           Id.    The

taxpayer held legal title to land in Hawaiʻi as trustee for

certain beneficial owners in California.         Id. at 439, 559 P.2d

at 269.    The taxpayer executed agreements of sale in California

for subdivided lots of the land in Hawaiʻi, received principal

and interest payments in California, and distributed those

payments to the beneficiaries.       Id. at 441, 445, 559 P.2d at

269, 271.   The Director assessed the taxpayer for the interest

income.    Id. at 442, 559 P.2d at 269.

            This court found that the “initial and primary issue”

in Grayco was whether the trustee, as legal title holder to and

vendor of the subdivided property, was “engaging or continuing

within the State in any business, trade or activity.”            Id. at

443, 559 P.2d at 270 (alteration omitted) (quoting HRS § 237-

13(10)).    We held, “It is clear that the taxable event in this

case was the receipt of interest income derived from the sale of

land located in Hawaiʻi under agreements of sale . . . .”             Id. at

454, 559 P.2d at 276.     Accordingly, we found there was

sufficient business activity by the taxpayer in this State to

justify the privilege tax.      Id. at 449, 559 P.2d at 273.

Additionally, we noted that the taxpayer benefited not only from

roads, police and fire protection of the State, but also

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utilized the State’s recording offices, laws, courts, and “other

opportunities, protection and benefits of the State.”               Id.

             Further, the Director in Grayco looked through the

taxpayer’s contractual edifice to assess the taxpayer.               “The

fact that [the beneficial owner] is under a duty to pay all

taxes assessed on the property pursuant to the trust agreement

is . . . of no effect.        The trust agreement between the various

parties is not binding on the taxing authority or determinative

of the tax consequences.”         Id. at 456, 559 P.2d at 277.        “To

hold otherwise would create havoc for the taxing authorities.”

Id.    Accordingly, this court found that the taxpayer, as trustee

and legal owner of the property in question, was liable for the

assessment of the general excise tax.

             In Subway, the Director assessed the taxpayer for

income arising from sublease agreements for properties located

in Hawaiʻi.     Subway, 110 Hawaiʻi at 27, 129 P.3d at 530.           The

taxpayer had no employees or offices in Hawaiʻi.             Id. at 31, 129

P.2d at 534.      Under the sublease agreement, all sublease rent

was paid directly by the sublessee to the landlord; none of the

income went to the sublessor taxpayer.            Id. at 27, 129 P.2d at

530.

             Nonetheless, this court held that under the

anticipatory assignment doctrine, the taxpayer could not “be

excused from its liability for GET by channeling the sublease

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payments directly to the landlords.”           Id. at 33, 129 P.2d at

536.    “To permit Taxpayer to do so would directly subvert the

overall scheme of HRS chapter 237 to tax ‘all levels of economic

activity.’”        Id. (quoting Cent. Union Church, 63 Haw. at 202,

624 P.2d at 1349).

             This court found that the subleasing taxpayer derived

certain benefits, including, inter alia, the power to prohibit

the landlord from leasing to competitors, the right to assign

subleases without the landlord’s consent, and the capacity to

enforce provisions of the sublease agreement.             Id. at 34, 129

P.2d at 537.       Thus, we concluded that “inasmuch as [the

t]axpayer gained or economically benefitted from the subleasing

transactions at issue, . . . the Director’s assessment and

imposition of the GET for [the t]axpayer’s subleasing activities

was proper.”       Id.

             In Baker & Taylor, a Delaware corporation, with its

principal place of business in North Carolina, contracted to

sell books and other education materials to Hawaiʻi customers.

Baker & Taylor, 103 Hawaiʻi at 362, 82 P.3d at 807.              Title to the

books and other materials passed to the customer outside of

Hawaiʻi.     Id.    The taxpayer had no office in Hawaiʻi, no

employees based in Hawaiʻi, and no real property in Hawaiʻi.                  Id.

at 361-62, 82 P.2d at 806-07.          The taxpayer argued that as title

to the goods passed outside of Hawaiʻi, the transactions were not

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subject to the GET.        Id. at 364, 82 P.3d at 809.        This court

disagreed.      Id. at 367, 82 P.3d at 812.

             We found that the taxpayer was “not a passive seller

of goods to Hawaiʻi consumers.”          Id. at 366, 82 P.3d at 811.

Rather, the taxpayer “engaged in active solicitation in Hawaiʻi

by sending employee representatives to meet potential and

current purchasers of its products.”           Id. at 366, 82 P.3d at

811.    Further, the sales “were made pursuant to a contract that

[the taxpayer] obtained through bidding with the State” for the

business, and the taxpayer provided “software and training for

purchasing and cataloging its materials in Hawaiʻi.”              Id.

Accordingly, we found that it was “evident that in engaging in

such activity,” the taxpayer received the “benefits and

protection of the laws of the state, including the right to

resort to the courts for the enforcement of its rights.”                Id.

(quoting Int’l Shoe Co. v. Wash., 326 U.S. 310, 320 (1945)).

Thus, the court concluded there was “sufficient ‘business and

other activities in the State’ to impose the general excise tax”

on the sales transactions and that the taxpayer was liable for

the GET assessed.       Id. at 367, 82 P.3d at 812.

             In Heftel Broadcasting, the Director assessed the GET

against out-of-state corporations that had license agreements

providing telecast rights for films to a local corporation.

Heftel Broad., 57 Haw. at 176, 554 P.2d at 244.             The out-of-

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state corporations were not physically present in Hawaiʻi nor

engaged in any activity in Hawaiʻi, other than owning and renting

film prints and their telecast rights and shipping the films to

the local corporation.        Id.   All of the licensing agreements

were consummated outside of Hawaiʻi.           Id. at 177, 544 P.2d at

245.    The threshold issue was whether the transactions had taken

place “in the State.”        Id. at 179, 544 P.2d at 246.        This court

concluded as follows:

             These telecast rights were wholly consumable and only
             consumable in Hawaii within specific time limits. . . . So
             even though the agreement was consummated on the mainland,
             it was done so with the intent that performance would occur
             almost entirely in Hawaii. Furthermore, unlike a sale of
             goods that takes place on the mainland with the goods being
             transported here, the license arrangement continued into
             this State wherein it was a source of income to the
             licensor.

Id. at 180-81, 554 P.2d at 246-47 (emphases added) (footnotes

omitted).      Thus, we were “of the opinion that regardless of the

fact that all activities in the consummation of the agreement

between the parties herein occurred on the mainland, [the

taxpayer] was engaged in local ‘business’ within the meaning of

chapter 237.”      Id. at 181, 544 P.2d at 247.

             Here, it is clear that the taxable event is the

receipt of income by the OTCs under agreements with transients

to provide accommodations in Hawaiʻi hotel rooms.             Like the

taxpayer in Subway, the OTCs receive income by virtue of selling

the right to occupy hotel rooms located in Hawaiʻi.              The OTCs

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have previously contracted to have access to that right through

the OTC-hotel contracts, in a manner analogous to the

subleasor/subleasee agreements present in Subway.           As in Subway,

the OTCs gain and economically benefit from the transactions at

issue.   Just as transients are Hawaiʻi consumers when they

purchase hotel rooms directly from a hotel, they remain Hawaiʻi

consumers when they purchase a Hawaiʻi hotel room from an OTC.

           As in Baker & Taylor, the OTCs are not passive sellers

of services to Hawaiʻi consumers.       The OTCs actively solicit

customers for Hawaiʻi hotel rooms and actively solicit hotels to

contractually provide the right to sell on their website the

right of occupancy of hotel rooms.

           Similar to Heftel Broadcasting, it is clear the

occupancy rights that the OTCs are selling to transients are

wholly consumable and only consumable in Hawaiʻi.          Even though an

OTC’s agreement with a transient may take place outside of

Hawaiʻi, the agreement is effected with the intent that

performance would occur entirely in Hawaiʻi.         Further, the OTC-

transient agreement, in which an OTC provides a Hawaiʻi hotel

room to the transient, is similar to the licensing agreements in

Heftel Broadcasting, in that the transient accommodation

agreements continue into this State where it is a source of

income to the OTCs.     Finally, it is clear that the OTCs

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constructively benefit through the transients’ use and benefit

from state services--including use of the roads and access to

police, fire, and lifeguard protection services.              Thus, it is

inescapable that there are sufficient “business and other

activities in the State” to impose the GET on the gross income

resulting from the Assessed Transactions.20

   2.        The GET Apportioning Provision applies to the Assessed
                                Transactions

               As noted, the GET “evidences the intention of the

legislature to tax every form of business, subject to the taxing

jurisdiction, not specifically exempted from its provisions.”

Grayco, 57 Haw. at 443, 559 P.2d at 270.             Similarly, the

receipts of taxation are likewise described in expansive terms.

Gross income means in relevant part:

               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 . . . .

HRS § 237-3 (1993) (emphasis added).            Thus, under the definition

of gross income provided by HRS § 237-3, the GET would be

assessed on the gross income received by the OTCs from the

        20
            In light of our opinion that the OTCs are liable for the GET, we
do not address the OTCs’ claim that it was error for the tax court to deny
their motion for reconsideration of the order granting summary judgment in
favor of the Director on the GET issue. Further, as it is clear that the
Assessed Transactions are business transactions that continue in the state,
the OTCs’ argument that their services are not “used or consumed in the
State” is rejected.

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transient for the provision of Hawaiʻi hotel rooms.            However, the

“inherent pervasiveness” of the GET, with its expansive

definition of income, is mitigated by limited categories of

income-reducing provisions.       Cent. Union Church, 63 Haw. at 202,

624 P.2d at 1349.     As stated previously, the GET Apportioning

Provision divides income between hotel operators and a “travel

agency and tour packager”:

           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) (emphases added).21         Accordingly, if the income

resulting from the provision of the transient accommodation may

be divided between the hotel as “the operator of the transient

accommodation on the one hand” and the OTCs as the “travel agent

or tour packager on the other hand,” then the GET may only be

imposed on the OTCs’ “respective portion” of the gross income--

that is, the gross income less the “net rate.”

           However, for the GET Apportioning Provision to apply

to the Assessed Transactions, three requirements must be met.

     21
            It is undisputed that the hotels are “operators” under HRS §
237D-1 (1993). See infra Part IV for discussion of HRS Chapter 237D, which
establishes the TAT. It is also not a matter of dispute that the
accommodations provided in the Assessed Transactions are “transient
accommodations” as defined by HRS § 237D-1.

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First, the OTCs must operate as a travel agency or tour packager

in the Assessed Transaction.       Second, the gross income resulting

from the Assessed Transactions must be divided between the

travel agency or tour packager and the operator.              Third, the

Assessed Transactions must furnish transient accommodations

under noncommissioned contract rates.22

               a.    The OTCs operate as travel agencies

            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).

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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.merriam-
webster.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.

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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

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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.

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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

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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.

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             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 arms-

length, 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 . . . .”).

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            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).

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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. . .)

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            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.

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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.

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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

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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. . .)

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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).

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 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

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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

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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

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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.

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 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 § 237-

18(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.”

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                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

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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

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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

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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.

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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).

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             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).

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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).

           IV.           DISCUSSION OF THE TAT ASSESSMENTS

                               A.    Introduction

           The TAT is imposed by HRS Chapter 237D; HRS § 237-2

provides as follows:

           (a) There is levied and shall be assessed and collected
               each month a tax of:

                 . . .

                 (3)     7.25 per cent for the period beginning on January
                         1, 1999, and thereafter; on the gross rental or

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                      gross rental proceeds derived from furnishing
                      transient accommodations.

            (b) Every operator shall pay to the State the tax imposed
                by subsection (a), as provided in this chapter.

HRS § 237D-2 (Supp. 1998) (emphases added).           Thus, the TAT is

assessed on the “gross rental or gross rental proceeds,” (Gross

Rental Proceeds) derived from furnishing transient

accommodations and is payable by “operators.”

            In their motions for summary judgment, both the

Director and the OTCs made arguments regarding the assessment of

the TAT upon the Assessed Transactions, and, separately, the

assessment of a “failure to file” penalty and a “failure to pay”

penalty.

    B.     The tax court’s in-court statements regarding the TAT
                              Assessments

            At the summary judgment hearing, the tax court heard

arguments and made statements regarding the TAT.41           The court

first analyzed the statutory definition of operator:

            “Operator” means any person operating a transient
            accommodation, whether as owner or proprietor or as lessee,
            sublessee, mortgagee in possession, licensee, or otherwise,
            or engaging or continuing in any service business which
            involves the actual furnishing of transient accommodation.

HRS § 237D-1 (1993).      The tax court recognized two definitions

provided by the statute.

      41
            The tax court did not make findings of fact or conclusions of
law, pursuant to Hawaiʻi Rules of Civil Procedure (HRCP) Rule 52(a).

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             Under the first definition, the tax court examined the

terms “owner, proprietor, lessee, sublessee, mortgagee in

possession, [or] licensee.”        The court observed that these are

“all individuals or entities that have some form of ownership

interest.”     Thus, the court found that the “first half of the

operator definition deal[s] with entities who have some type of

ownership interest.”

             Under the second statutory definition, the court found

that the reference to “engaging or continuing in any service

business which involves the actual furnishing of transient

accommodation” signified that the operator was “a non-owner or

some entity or person that does not have an ownership interest

but has another connection to the property.”

             The court found that the TAT was enacted to tax the

tourist industry and that the OTCs were “travel agents.”

Accordingly, the lack of a “connection” to the hotel property

indicated to the tax court that the OTCs were not operators.

             The court further examined the operation of an

apportioning provision within the definition of Gross Rental

Proceeds (TAT Apportioning Provision).          The TAT Apportioning

Provision provides as follows:

             Where transient accommodations are furnished through
             arrangements made by a travel agency or tour packager at
             noncommissionable 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, . . . [G]ross [R]ental

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            [P]roceeds to the operator means only the respective
            portion allocated or distributed to the operator, and no
            more.

HRS § 237D-1.      The court found that the TAT did not “envision”

pyramiding because the legislature split the gross revenues

between a travel agency and an operator and specified that

revenues that were assessable for the TAT meant only the

respective portions “allocated or distributed to” the operator.

            The tax court concluded that the TAT only applied to

the net rate that is distributed to the hotels.           Based on that

conclusion, the tax court granted the motion for summary

judgment filed by the OTCs and denied the motion filed by the

Director.    The court reiterated its conclusion when it denied

the Director’s motion for reconsideration: “[T]he hotel as an

operator under the TAT law pays the TAT on the revenue the hotel

generates for transient accommodations.          No pyramiding is

permitted under the law.       The OTCs are not hotel operators and

therefore are not subject to TAT . . . .”          Thus, influenced in

part by its reading of the TAT Apportioning Provision, the tax

court found that the OTCs were not operators.

              C.     The parties’ TAT arguments on appeal

            The Director appeals the tax court’s grant of summary

judgment in favor of the OTCs on the issue of the OTCs’

liability for GET, the court’s denial of reconsideration of that

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grant, and the court’s denial of the Director’s motion for

reconsideration.

   1.   The Director’s arguments regarding the TAT Assessments

          The Director argues that the OTCs function as TAT

“operators” and are subject to the TAT on all proceeds received

from transients.

    a. The Director argues that as TAT “operators,” the OTCs are
                           liable for the TAT

          The Director argues that the OTCs are liable for the

TAT because they function as “TAT operators.”          The Director

focuses on the definition of the word operator:

          “Operator” means any person operating a transient
          accommodation, whether as owner or proprietor or as lessee,
          sublessee, mortgagee in possession, licensee, or otherwise,
          or engaging or continuing in any service business which
          involves the actual furnishing of transient accommodation.

HRS § 237D-1 (emphases added).       The Director contends that the

OTCs function as TAT “operators” under the second definition by

“engaging or continuing in any service business which involves

the actual furnishing of transient accommodations.”

          The Director maintains that the legislature chose a

“very broad definition” of operator for the TAT and “rejected a

narrow ‘operate or manage’ definition it used elsewhere.”            The

Director asserts that the verb “involves” is important because,

as with “operator,” the “legislature chose a very broad and

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expansive term.”42     The Director claims that the activities of

the OTCs are all functions “that hotels would traditionally

perform themselves in furnishing their hotel rooms to

transients.”    The Director argues that as “parties to the rental

contract with the transient,” the OTCs are “extensively

‘involved in the actual furnishing’ of hotel rooms” and the

“hotel does not have any involvement in the consumer

transaction.”

            The Director further argues that this court and others

have broadly construed the key term “furnishing.”            Citing to

Territory v. Hu Seong, 20 Haw. 669 (Haw. Terr. 1911), the

Director contends that “‘furnish’ is a comprehensive term and

includes many different ways by which an article may be supplied

or delivered by one person to another.”          The Director cites to

cases from other jurisdictions involving a hotel room tax in

which the OTCs were defendants that the Director contends

interpreted “furnishing” in a similarly expansive manner in

favor of the taxing authority.

      42
            The Director cites eleven activities conducted by the OTCs as
constituting involvement: (1) furnishing transients the contractual right to
occupy hotel rooms, (2) being the Merchant of Record on the credit card
transaction, (3) setting the price of the room, (4) operating a vast hotel
reservation network, (5) advertising and marketing the availability of hotel
rooms, (6) entering into legal contracts with hotels and transients, (7)
collecting tax and rental payments from transients, (8) assuming the risk of
bad debts, (9) issuing transaction receipts to transients, (10) processing
cancellations and refunds, and (11) providing 24-hour customer support “and
more.”

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           According to the Director, “the TAT statute, [HAR],

and Hawaiʻi case law make clear that ‘actual’ furnishing refers

to services that are provided which lead to ‘actual occupancy’

of accommodations as opposed to fees received in lieu of

occupancy, such as cancellation fees, or services incidental to

occupancy (such as food and beverage).”         The Director maintains

that an interpretation of the word “actual” to be “the person

who really delivers and hands over the accommodations to the

transient” would “render[] meaningless the second half of the

‘operator’ definition since it would be redundant of the first

half.”

  b.     The Director argues that all proceeds the OTCs received
               from transients are subject to the TAT

           The Director next examines the definition of the term

Gross Rental Proceeds to conclude that “the OTC does not get to

deduct the amount it pays the hotel pursuant to the OTC-Hotel

Contracts when determining the OTC’s TAT liability.”           The

Director observes that the term “gross receipts” has been held

to mean “‘all receipts’ with no deductions, as opposed to ‘net

receipts,’” and the TAT applies to the compensation the OTCs

receive for the “furnishing of” transient accommodations.

           The Director states that “HRS § 237D-2 currently

levies a 9.25% TAT ‘on the [Gross Rental Proceeds] derived from

furnishing transient accommodations.’”         The Director contends

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that--analogous to the legislature’s use of the expansive term

“involves” in the definition of “operator”--the use of the term

“derives” in the imposition of the tax is also expansive.            The

Director reasons that the TAT “is imposed upon the gross

proceeds ‘derived’ from transient accommodations” and “[g]ross

proceeds would include the total price the transient pays the

OTCs for the right to occupy the room.”

          Second, the Director argues that the “well-established

. . . pyramiding of taxes in Hawaiʻi” indicates that “the TAT

statute underscores that there can be two operators for a single

hotel stay.”   The Director maintains that the TAT statute

“plainly and unambiguously imposes the tax on ‘every operator’

(not ‘the operator’) and defines operator as meaning ‘any

person’ (not ‘the person’) involved in the actual furnishing of

transient accommodations.”      The Director contends that, in the

Assessed Transactions, “both the OTCs (under the second half of

the ‘operator’ definition) and the hotel (under the first half)

are operators,’ and each is independently subject to TAT.”

          Lastly, the Director notes again that the TAT and GET

statutes are in pari materia and therefore the TAT “taxes

‘operators’ such as the OTCs for the ‘gross’ amounts they

receive from transients ‘without any deductions’ and regardless

of any tax payments remitted to the State by the hotels to

satisfy the hotels’ separate tax obligations.”

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      2.    The OTCs’ arguments regarding the TAT Assessment

           In response, the OTCs make the following arguments:

they are not operators of hotels, and therefore they are not

subject to the TAT; their compensation is not Gross Rental

Proceeds “derived from actually furnishing transient

accommodations” and thus not subject to the TAT; and ambiguities

in the TAT statute must be construed in their favor.

     a.    The OTCs argue they are not ‘operators’ of hotels

           The OTCs contend that HRS § 237D-2 imposes the TAT

“only on ‘operators’ of hotels” engaged in a business “which

involves the actual furnishing of transient accommodation.”                The

OTCs reason that “to be an ‘operator,’ one must be able to

transfer possession of hotel rooms to travelers, whether as one

who has . . . possession of [] the hotel . . ., or as one who

otherwise engages in a business that ‘involves the actual

furnishing’ of rooms.”

           The OTCs contend that “actually furnishing”

accommodations means to “physically deliver possession of a

hotel room.”   “[T]o actually furnish something means

considerably more than just furnishing. . . . It [i]s like in

the capacity of handing someone a key.         [That person would be]

actually furnishing it.”      The OTCs argue that this

interpretation of “operator” is confirmed by the definition of

“gross proceeds”: “by . . . expressly limiting TAT liability to

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only the portion allocated to the operator, and not the portion

allocated to the travel agency.”          The OTCs contend that they are

“‘travel agencies’ under Hawaiʻi law” and thus not subject to the

TAT.

             The OTCs also maintain this interpretation of

“operator” is supported by the Department’s rules.              The OTCs

assert that the rules specifically reject that term’s

“[a]pplication to travel agents.”           The OTCs conclude that the

“TAT Statute and Rules both confirm that the ‘operator’ of a

transient accommodation must be one who physically possesses the

property.”      The OTCs argue that because they are not operators,

they are not subject to the TAT.          The OTCs contend they act

“only as an intermediary between the traveler and the hotel.”

   b.      The OTCs argue that the Director misinterprets the TAT
                 statute to improperly expand its scope

             The OTCs contend that the Director misconstrues the

TAT statute to incorrectly extend its reach.             First, the OTCs

argue that the Director improperly expands the TAT from being

assessable against “a business which involves the actual

furnishing of transient accommodations” to assess any business

that is involved in a process that leads to the furnishing of

transient accommodations by a third party.            Second, the OTCs

argue the Director’s “notion of multiple operators,” is contrary

to “all governing authority.”          Third, the OTCs dispute the

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Director’s reliance on statutes and court decisions from other

jurisdictions.       Lastly, the OTCs conclude that there is no

evidence to establish that they actually furnish transient

accommodations.

   c.       The OTCs argue that a statutory definition of “travel
               agent” confirms that they are not operators

             In a separate argument as to why the OTCs are not

operators as that term is defined by the TAT, the OTCs contend a

statutory definition of “travel agent” confirms that they are

not operators.       The OTCs claim that the record establishes that

the OTCs act as intermediaries.          “[T]he TAT’s definition of

[Gross Rental Proceeds] expressly acknowledges that a ‘travel

agency’ remains a ‘travel agency’ when operating” on a

noncommissioned basis.        Thus, the OTCs conclude that a travel

agency is not transformed into an operator.

  d.      The OTCs argue their income is not Gross Rental Proceeds

             The OTCs state that the TAT can only be imposed on

Gross Rental Proceeds derived from furnishing transient

accommodations.       The OTCs maintain that their compensation is

for their “online services” and not for the furnishing of

transient accommodations.

             Additionally, the OTCs contend that the TAT is not a

“pyramiding tax.”       The OTCs argue that the Director’s claim that

“the TAT is a pyramiding tax . . . fails to cite any authority

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for that assertion . . . [and] rests on the bald assertion that

the TAT is modeled after the GET and the GET is considered a

pyramiding tax.”       The OTCs argue the TAT statute expressly

applies to only one entity--the operator of the hotel that

actually furnishes the transient accommodations.

   e.    The OTCs argue ambiguities in the TAT statute must be
                     construed in their favor

          Lastly, the OTCs argue that their construction of the

TAT is reasonable.      Therefore, even if the Director’s

construction were also reasonable, “any ambiguity in a taxing

statute must be strictly construed against the taxing authority

and in favor of the taxpayer.”

                        D.   Discussion of the TAT

          The TAT is imposed by HRS Chapter 237D; HRS § 237-2

provides as follows:

          (b) There is levied and shall be assessed and collected
              each month a tax of:

               . . .

               (3)     7.25 per cent for the period beginning on January
                       1, 1999, and thereafter; on the gross rental or
                       gross rental proceeds derived from furnishing
                       transient accommodations.

          (b) Every operator shall pay to the State the tax imposed
              by subsection (a), as provided in this chapter.

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HRS § 237D-2 (emphases added).         Thus, the TAT is assessed on the

Gross Rental Proceeds43 derived from furnishing transient

accommodations and is payable by “operators.”

 1.    “Actual” within the definition of “operators” is ambiguous

            The OTCs are liable for the TAT on Gross Rental

Proceeds derived from the Assessed Transactions if they are

“operators” under HRS § 237D-2(b).           An “operator” is “any person

operating a transient accommodation, whether as owner or

proprietor or as lessee, sublessee, mortgagee in possession,

licensee, or otherwise, or engaging or continuing in any service

business which involves the actual furnishing of transient

accommodation.”       HRS § 237D-1 (emphasis added).

            Thus, the statute provides for two types of operators.

It is not disputed that the OTCs are not owners or proprietors

of any of the hotels in the Assessed Transactions, nor do the

      43
            “Gross Rental Proceeds” means

            gross receipts, cash or accrued, of the taxpayer received
            as compensation for the furnishing of transient
            accommodations and the value proceeding or accruing from
            the furnishing of such accommodations without any
            deductions on account of the cost of property or services
            sold, the cost of materials used, labor cost, taxes,
            royalties, interest, discounts, or any other expenses
            whatsoever. . . .

            The words [Gross Rental Proceeds] shall not be construed to
            include the amounts of taxes imposed by chapter 237 or this
            chapter on operators of transient accommodations and passed
            on, collected, and received from the consumer as part of
            the receipts received as compensation for the furnishing of
            transient accommodations.

      HRS § 237D-1.

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OTCs acts as lessee, sublessee, mortgagee in possession, or

licensee of any hotel.       Therefore, the first statutory

definition of operator does not apply to the OTCs.

            An operator may also be any person “engaging or

continuing in any service business which involves the actual

furnishing of transient accommodation.”           Id. (emphasis added).

It is undisputed the OTCs are engaging or continuing in their

respective service businesses.         Thus, the only remaining

question is whether, in the Assessed Transactions, the OTCs are

“involve[d] [in] the actual furnishing of transient

accommodation.”      Id.

            As relevant to the Assessed Transactions, “transient

accommodations” means:

            the furnishing of a room, apartment, suite, or the like
            which is customarily occupied by a transient for less than
            one-hundred eighty consecutive days for each letting by a
            hotel, apartment hotel, motel, condominium property regime
            or apartment . . . that provides living quarters, sleeping,
            or housekeeping accommodations, or other place in which
            lodgings are regularly furnished to transients for
            consideration.

Id.   The parties do not dispute that the accommodations in the

Assessed Transactions are transient accommodations.

            “Involve” means “to draw in as a participant: Engage,

Employ” or “to oblige, to become associated: Embroil, Entangle,

Implicate.”     Webster’s, supra, at 1191.        It also means “to

include as a necessary circumstance, condition, or consequence;

imply; entail.”      The Random House College Dictionary 703 (rev.

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unabr. ed. 1979) [hereinafter Random House].           Thus, an entity is

“involved” in the “actual furnishing of transient

accommodations” if it is drawn in as a participant, or included

as a necessary circumstance, to the actual furnishing of

transient accommodations.

            The term “furnish” means “to provide or supply with

what is needed, useful, or desirable: Equip.”           Webster’s, supra,

at 923; see also Random House, supra, at 536 (defining “furnish”

as “to provide or supply”).       In Hu Seong, this court held that

“the word ‘furnish’ is a comprehensive term and includes many

different ways by which an article may be supplied or delivered

by one person to and accepted by another.”44          20 Haw. at 671.

Thus, the TAT statute contemplates that the operator must engage

or continue in a service business that delivers or provides

transient accommodations.

            It is plain that the OTCS are “involved” in

“furnishing” transient accommodations.          That is, the OTCs are

both drawn in as participants and included as a necessary

circumstance in the Assessed Transactions, and they engage or

      44
            Hu Seong found that the term encompassed “supply,” “provide,”
“shipment” and “delivery,” “sale and delivery,” “provide for use,” “to give
away,” “to let one have,” “to sell,” “to find,” to “obtain or procure,” but
would not encompass “a sale without actual delivery.” Hu Seong, 20 Haw. at
671.

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continue in a service business that delivers or provides

transient accommodations in the Assessed Transactions.

            However, the TAT definition of operator also includes

the term “actual.”     That is, the business must involve the

“actual furnishing of transient accommodation.”           HRS § 237D-1

(emphasis added).     “Actual” means “[e]xisting in fact, real.”

Black’s Law Dictionary, supra, at 42.         “Existence in fact” and

“realness” would seem to be an inherent quality of being

involved in the furnishing of transient accommodations, but if

that were true, “actual” would be superfluous.           “Actual” might

also imply some physical presence,45 but the entity operating the

physical premises is not dispositive.         For example, the

Department’s rules would appear to continue to assess the TAT on

the owner-operator of the transient accommodation, even if a

management company directed the day-to-day operations from the

premises.46

      45
            Physical presence appears to be analogous to the use of the term
“actual” in a related statute; HRS § 486K-1 defines a “Hotelkeeper” or
“keeper” to includes “any individual, firm, or corporation actually operating
a hotel.” HRS § 486K-1 (1993) (emphasis added).
      46
            The Department’s rules that define “operator” provide the
following illustrations:

            Example 1. Mr. Paul owns three apartment units and is
            engaged in the activity of furnishing transient
            accommodations. As owner and operator, Mr. Paul is liable
            for the tax imposed by this chapter.

            Example 2. The facts are the same as in Example 1, except
            that Mr. Paul engages XYZ Corporation, a firm engaged in
            the property management business, to manage and rent out
                                                              (continued. . .)

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            Therefore, the term “actual” is ambiguous in the

context of the definition of operator.

                         2.    Defining “actual”

            This court presumes that every word of a statutory

definition has meaning and effect; therefore, we must look to

sources other than the plain meaning of the statute in order to

determine the meaning of “actual” within the definition of

operator.    Camara v. Agsalud, 67 Haw. 212, 215-16, 685 P.2d 794,

797 (1984).

            Where the words of a law are ambiguous, this court

examines the context in which the ambiguous words are placed,

and examines the reason and spirit of the law and the cause that

induced the legislature to enact it.47         HRS § 1-15; McKnight, 131

Hawaiʻi at 388, 319 P.3d at 307.

(. . .continued)

            the apartment units. Although the apartments are managed
            and rented out by XYZ Corporation, as the owner operator,
            Mr. Paul is liable for the tax imposed by this chapter.

HAR § 18-237D-1-05(c) (effective 1988) (emphasis added).
      47
            It is recognized that “a cardinal rule of construction [is] that
a statute imposing taxes is to be construed strictly against the government
and in favor of the taxpayers and that no person and no property is to be
included within its scope unless placed there by clear language of the
statute.” In re Tax Appeal of Hawaiian Tel. Co., 61 Haw. 572, 578, 608 P.2d
383, 388 (1980). However, the rule of strict construction with regard to
taxing statutes is resorted to only “as an aid to construction when an
ambiguity or doubt is apparent on the face of the statute, and then only
after other possible extrinsic aids of construction available to resolve the
ambiguity have been exhausted.” Bishop Trust Co. v. Burns, 46 Haw. 375, 399-
400, 381 P.2d 687, 701 (1963). Based on our resolution of the meaning of
“actual,” we do not resort to the rule of strict construction with regard to
taxing statutes.

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                     a. Legislative intent of the TAT

             The TAT was created by the legislature in 1986.            See

1986 Haw. Sess. Laws. Act 340, § 1 at 758-64.          The legislative

history indicates that the legislature enacted the TAT in order

to recompense the counties for infrastructure costs incurred by

tourists and visitors that are borne by the counties.            The

Conference Committee Report on H.B. 2508-86, the bill enacting

the TAT, stated as follows: “It is the intent of your Committee

that a portion of such revenues be appropriated for the

promotion, stimulation and development of visitor assistance

programs which may include . . . grants to the counties for the

construction of recreational and other infrastructure to enhance

visitor satisfaction.”     Conf. Comm. Rep. No. 70-86, 1986 House

Journal, at 962; No.66-86 1986 Senate Journal, at 765.            The

legislature noted that the distribution of tax revenues

generated by the TAT would “assist the industry and the

counties.”    S. Stand. Comm. Rep. No. 651-86, in 1986 Senate

Journal, at 1076.

             Comments made by the legislators state this purpose

more clearly.    “[W]e have provided as a direct result of

revenues to be realized by [the TAT], additional funds in the

budget for tourism promotion and grants-in-aid to the counties.”

1986 House Journal, at 828 (statement of Rep. Kiyabu).            “The

bill that finally emerged from the Conference Committee would

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provide money that can be made available to the counties to

improve tourist-related infrastructure.”          1986 House Journal, at

830 (statement of Rep. Pfiel).

            Each year, more than a million visitors -- a population
            equal to or greater than the number of residents in Hawaii
            -- use our roads, our parks, our water, and every other
            public facility and service, and in my estimation, without
            paying their “fair share” of the cost. . . . In effect,
            only half of those making demands on government services
            are paying the taxes which make those services possible.
            Simply, that has not been fair.

1986 House Journal, at 828 (statement of Rep. Kamaliʻi) (emphasis

added).    The legislature reconfirmed this purpose in 1990:48

            Your Committee also notes that tourism is the largest
            industry in Hawaii, and many of the burdens imposed by
            tourism falls on the counties. Increased pressures of the
            visitor industry mean greater demands on county services.
            Many of the costs of providing, maintaining, and upgrading
            police and fire protection, parks, beaches, water, roads,
            sewage systems, and other tourism related infrastructure
            are being borne by the counties.

            Upon further consideration, your Committee has amended this
            bill in order to share the TAT revenues with the counties.

Conf. Comm. Rep. No. 207, 1990 House Journal, at 845, 1990

Senate Journal, at 845-46 (emphasis added).           Thus, the

legislature determined the cost borne by the counties should be

recovered by a tax imposed on tourists:

            Since 1959 when Hawaii became a state of our union we have
            had the people of the State of Hawaii carry the burden in
            making improvements for the infrastructure of all the
            counties through real property taxes, state income taxes,
            other revenue measures that tax the people of the State of

      48
            See 1990 Haw. Sess. Laws Act 185, §§ 1-4, at 394-96. Act 185
amended HRS Chapter 237D to provide for an exact percentage distribution to
the Counties and amended the requirements for returns and payments. These
amendments are not relevant to the current discussion. Act 185 also amended
the definition of Gross Rental Proceeds to exclude the imposition of the TAT
itself, as discussed, infra.

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          Hawaii and the people of this state have carried the burden
          of improving the State of Hawaii in every area so that we
          can allow our visitors who come to Hawaii to enjoy the
          amenities that we now have at the present time. And we
          pledge to continue to improve our infrastructure our
          amenities so that more people can come to Hawaii.

          The 5 percent is the additional tax we are considering for
          the rooms. I believe that this is a fair burden of taxes
          that must be shouldered by our visitors who visit the State
          of Hawaii.

          . . .

          I think it is fair for the visitors to help shoulder the
          burden with the rest of the people of the state. The
          people of the state have given us a message that now is the
          time to levy a room tax of some kind . . . .

1986 Senate Journal, at 654-55 (statement of Sen. Yamasaki)

(emphases added).

          The mechanism that the legislature determined would be

most appropriate was referred to as a “hotel room tax.”            See

1986 House Journal, at 826 (statement of Rep. Ikeda) (referring

to the TAT as a “hotel room tax”); id. at 828 (statement of Rep.

Kamaliʻi) (same); id. at 830 (statement of Rep. Pfiel) (same);

id. at 830 (statement of Rep. Isbell) (“[I]t should be very

clear that it is the room itself that has a 5% charge to the

tourist . . . .”); see also 1986 Senate Journal, at 652, 658

(statements of Sen. Soares) (referring to a “hotel room tax” and

a “tourist tax”); id. at 655 (statement of Sen. Yamasaki)

(referring to “the additional tax we are considering for the

rooms”); id. at 655-58 (statements of Sens. Kawasaki and Cobb)

(referring to a “tourist tax”); id. at 657 (statement of Sen.

Abercrombie) (referring to “a hotel room tax, a tourist tax”).

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           The legislative history indicates that the “hotel room

tax” was not a tax on the hotels, but instead, was a mechanism

to tax visitors by assessing the cost of their hotel room to

correlate to costs associated with visitor use of infrastructure

and county services.

i.      Intent is reflected in the structure chosen for the tax

           The intent of the legislature to tax transient

visitors through the mechanism of a hotel room tax is reflected

in the structure of the tax that was developed.           The TAT was

originally proposed not as a separate tax, but as a special rate

and application of the GET.       See H. Stand. Comm. Rep. No. 586-

86, 1986 House Journal, at 1260, 1261 (proposing to amend

HRS § 237-13(6) to apply a nine percent GET on “the gross

proceeds of sale or gross income received”).           Critically, the

proposal was later changed to a separate tax, styled as the TAT.

See H.B. 2805-86 H.D.1, S.D.1, 13th Leg., Reg. Sess. (1986).

           The reason given for the change from a special

application of the GET to a separate TAT was to protect the

hotel industry from excessive taxation.          The committee report

for H.B. 2805-06 H.D.1, S.D.1 states as follows:

           The purpose of this bill is to provide for a general excise
           tax on transient accommodations of 9 per cent, and to amend
           the provisions concerning the application of the general
           excise tax to reimbursements.

           Your Committee agrees with the Committee on Finance of the
           House of Representatives that the time has come to impose a
           tax on transient accommodations; however, it does not agree
           that the rate should be as high as 9 per cent, nor that the

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          vehicle for imposing the tax should be the general excise
          tax but instead should be a separate tax.

          The reason for a separate tax on transient accommodations
          is to lessen the income loss of transient accommodation
          operators. Presently, under the general excise tax, if a
          person prices an item at $100, the person generally charges
          $104 in order to pass on the 4 per cent general excise tax.
          However, the general excise tax is on gross collections,
          which means the person must pay 4 per cent on $104, or
          $4.16. This means that for every $100 transaction a person
          loses 16 cents. If the general excise tax itself was
          increased to 8 per cent, then on a $100 price, the person
          would charge $108, pay taxes on $108 or $8.64 in taxes, and
          lose 64 cents. By creating a new transient accommodations
          tax at a 4 per cent rate and providing that the general
          excise tax passed on and collected is not included in the
          gross proceeds which are taxed under this tax and similarly
          providing that the gross proceeds subject to the general
          excise tax do not include collections under the new tax,
          the amount of the loss is reduced to 32 cents per $100—
          total tax paid of $8.32 composed of the general excise tax
          of $4.16 and the transient accommodations tax of $4.16. The
          savings under the two tax system to the industry is
          appreciable for businesses making thousands of dollars a
          year. In this manner, the State is able to tax the
          industry for the benefit of the State, while at the same
          time minimizing the impact of the tax on the industry.

S. Stand. Comm. Rep. No. 651-86, 1986 Senate Journal, at 1076

(emphases added); see also Conf. Comm. Rep. No. 70-86, 1986

House Journal, at 961-62, 1986 Senate Journal, at 764-65

(echoing much of the same language).        Thus, the legislative

history of the TAT indicates the intent to “minimiz[e] the

impact of the tax” on the hotel and visitor industries.            S.

Stand. Comm. Rep. No. 651-86, 1986 Senate Journal, at 1076.

          Comments during debate on the measure reinforce this

conclusion.   “This bill imposes a separate tax of 5% on tourist

accommodations charges.     In this way, the tax does not fall on

the corporate hotel industry or pyramid in its collection.              It

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  is a simple and clean tax.”      1986 House Journal, at 828

  (statement of Rep. Kamaliʻi) (emphasis added).

ii.     Subsequent amendments indicate that the TAT is effectively
                     a tax on net rental proceeds

            The legislative history of the amendments indicates

  the legislature’s continuing focus to minimize the impact of the

  tax on Hawaiʻi visitors and the hotel industry.

            The TAT, originally enacted in 1986, 1986 Haw. Sess.

  Laws. Act 340, § 1 at 758-63, was amended to include the TAT

  Apportioning Provision in 1988.       See 1988 Haw. Sess. Laws Act

  241, § 2 at 424-25.     The legislature did not provide explicit

  statements explaining its intent in enacting the TAT

  Apportioning Provision.     However, the GET and TAT Apportioning

  Provisions, although passed in different bills, were passed in

  the same session of the Hawaiʻi legislature.         See 1988 Haw. Sess

  Laws Act 167, § 1 at 292-93 (amending the GET); Act 241, § 2 at

  424-25 (amending the TAT).

            The Committee reports for Act 241, amending the TAT,

  indicate that the “application of the [TAT] is presently

  patterned after the [GET].”      H. Stand. Comm. Rep. No. 198, 1987

  House Journal, at 1178.     Similarly, when the legislature amended

  the GET to include the GET Apportioning Provision codified at

  HRS § 237-18(g), the senate committee stated, “Your Committee

  finds that this bill provides equitable treatment for operators

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of transient accommodations under the general excise tax law.”

S. Stand. Comm. Rep. No., 914, in 1987 Senate Journal, at 1286.

The GET Apportioning Provision expressly references the TAT

Apportioning Provision: “As used in this subsection, the words

‘transient accommodations’ and ‘operator’ shall be defined in

the same manner as they are defined in section 237D-1.”            HRS

§ 237-18(g).

            Based on the similar construction of the GET and TAT

Apportioning Provisions, enactment by the same legislature, and

recognition by the legislature of the parallels between the two,

it is clear that the legislature consciously crafted the two

provisions in conjunction with one another.          Accordingly, the

same purpose is attributed to the TAT Apportioning Provision as

was expressed by the legislature in its concurrent enactment of

the GET Apportioning Provision: to protect the hotel and visitor

industry from the TAT being unfairly assessed on grossed up

revenues.

            In addition to adding the TAT Apportioning Provision,

Act 241 also specified that the Gross Rental Proceeds exclude

amounts charged for the GET.      See 1988 Haw. Sess. Laws. Act 241,

§ 2 at 424.    The exclusion of the GET from Gross Rental Proceeds

was intended to prevent additional taxation on the privilege of

doing business in Hawaiʻi.

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          Your Committee believes that the charge for doing business
          in Hawaii is already imposed under the [GET] which is a tax
          on gross proceeds. It is already acknowledged that the
          [TAT] is an additional tax imposed on a particular type of
          activity. Therefore, your Committee feels that the
          transient accommodations tax should not be imposed on the
          basis of the room charge plus any amount passed-on due to
          the . . . tax.

H. Stand. Comm. Rep. No. 198, 1987 House Journal, at 1178

(emphasis added).

          The definition of Gross Rental Proceeds was further

amended in 1990 to specify that it excludes any amount collected

for the TAT.   See 1990 Haw. Sess. Laws. Act 185, §3 at 395.               The

Department objected to the exclusion of the TAT collected from

the transient in calculating the TAT because of what the

Department perceived as a transformation of the TAT into a tax

on net room rate.

          [S]ection 3 of [the bill] provides that the words “gross
          rental” or “gross rental proceeds” shall not be construed
          to include the transient accommodations tax imposed upon
          and passed on by operators of transient accommodations to
          occupants thereof. This provision is contrary to the
          definition of such words provided under section 2 of [the
          bill]. The proposal changes the entire concept of the
          [TAT] from that of a tax on gross rentals to a tax on net
          rentals. It is clear from the committee reports of the
          1986 Legislature that it meant to tax any passed-on tax as
          gross income. This provision should be deleted.

Department Testimony on S.B. No. 1712, S.D. 3, H.D. 1, Relating

to Transient Accommodations (March 31, 1982) (emphasis added).

            By enacting the 1988 and 1990 amendments to the

definition of Gross Rental Proceeds, the legislature indicated

that the TAT was not merely assessed on a gross room rate.              By

creating a TAT Apportioning Provision, the legislature made it

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clear that, where a travel agency or tour packager had made the

room arrangements for the transient, the TAT was not to be

charged on the gross rate paid by the transient but only on the

Gross Rental Proceeds allocated to or distributed to the

operator.    Further, the GET and the TAT were expressly excluded

from the TAT calculation.       Taken together, the amendments

indicate that the TAT is a tax to be paid by the transient based

only on the cost attributed to the hotel room that is allocated

to the operator.     That is, the TAT was to be based on a room

rate paid by the transient and allocated to the operator, less

any amount distributed to a travel agency or tour packager, and

excluding any GET or TAT.       Thus, notwithstanding that the

nomenclature for the assessable proceeds--“Gross Rental” or

“Gross Rental Proceeds”--remained unchanged, the statutory

definition excludes certain amounts.

            With the intention of the legislature in mind, we turn

to the TAT Apportioning Provision to determine how its operation

might instruct this court’s interpretation of “actual” within

the definition of “operator.”

   b.   In context with the intent of the legislature, the TAT
        Apportioning Provision helps to define “operator”

            The exclusions contained within the definition of

Gross Rental Proceeds include the TAT Apportioning Provision:

            Where transient accommodations are furnished through
            arrangements made by a travel agency or tour packager at
            noncommissionable negotiated contract rates and the gross

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            income is divided between the operator of transient
            accommodations on the one hand and the travel agency or
            tour packager on the other hand, [Gross Rental Proceeds] to
            the operator means only the respective portion allocated or
            distributed to the operator, and no more.

HRS § 237D-1 (emphasis added).        The elements of the TAT

Apportioning Provision are nearly identical to the elements of

the GET Apportioning Provision of HRS § 237-18(g).49            As in the

GET, the operation of the TAT Apportioning Provision requires

the involvement of two entities: an “operator of transient

accommodations on the one hand and the travel agency or tour

packager on the other hand.”       Thus, a single entity cannot fill

both the role of operator of transient accommodations “on the

one hand” and the travel agency or tour packager “on the other

hand.”

            However, the TAT Apportioning Provision differs from

the GET Apportioning Provision in a crucial aspect.            The GET

Apportioning Provision provides that “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) (emphasis added).        That is, the GET Apportioning

Provision divides the taxable base into two portions and holds

“each” responsible party liable for their respective portion.

      49
            In the elements of the GET and TAT Apportioning Provisions, the
only difference is that the GET Apportioning Provision refers to
“noncommissioned” negotiated contract rates, whereas the TAT Apportioning
Provision uses the term “noncommissionable.” Based on the analysis to
follow, any difference in the meaning of the two terms is not relevant.

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            In contrast, the TAT Apportioning Provision defines

the tax amount as “only the respective portion allocated or

distributed to the operator, and no more.”50           HRS § 237D-1

(emphasis added).     Thus, the TAT Apportioning Provision takes

the gross amount paid by a transient and divides it into two

portions: one assessable under the TAT, and one that is not.                As

a result, whereas the GET Apportioning Provision holds both

parties liable for the GET, the TAT Apportioning Provision

provides that only the operator is liable for the TAT.

            If the OTCs are operators, the OTCs cannot apply the

TAT Apportioning Provision to split their Gross Rental Proceeds

with the hotels.     This is because neither party has asserted the

hotels are travel agents or tour packagers; thus, the hotels

cannot fill the role of “travel agent or tour packager on the

      50
            The GET Apportioning Provision provides as follows:

            Where . . . 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) (emphasis added).   The TAT Apportioning Provision
provides as follows:

            Where . . . 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,
            [Gross Rental Proceeds] to the operator means only the
            respective portion allocated or distributed to the
            operator, and no more.

HRS § 237D-1 (emphasis added).

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other hand.”    Hence, if an OTC is considered the “operator . . .

on the one hand,” then there is no legitimate entity to fill the

position of “travel agency . . . on the other hand.”

             As stated by the Director, “Where there is no ‘travel

agent’ in the transaction, as is the case in the [Assessed

Transactions], the [TAT Apportioning Provision] does not apply.”

Because the elements of the TAT Apportioning Provision would not

have been satisfied if the OTCs are operators, then the Assessed

Transactions would not fall within the TAT Apportioning

Provision.    Accordingly, the entire amount paid to an OTC by a

transient would be Gross Rental Proceeds subject to the TAT,

except for the taxes already included.51

             The parties do not dispute that the hotels owe the TAT

on their Gross Rental Proceeds that derive from furnishing the

transient accommodations in the Assessed Transactions.52            Thus,

if the meaning of “actual” within the definition of “operator”

encompasses the OTCs, then the TAT would be assessed twice:

      51
            As noted, the legislature enacted the TAT Apportioning Provision
to protect operators who do not know the actual cost of the room charged to
the transient. Here, the OTCs have actual knowledge of the cost charged to
the transient; thus, the application of the TAT Apportioning Provision by an
OTC would be inappropriate. Thus, application of the TAT Apportioning
Provision to define the Gross Rental Proceeds of an OTC would also be
contrary to the intent of the legislature for this additional reason.
      52
            As stated by the Director, “Because they act as “operators” in
[Assessed Transactions], the OTCs owe TAT on “gross rental proceeds . . .
without any deductions.” So too does the hotel on its “gross rental proceeds
. . . without any deductions” that it receives from the OTCs pursuant to the
OTC-hotel Contracts.” (Emphasis added).

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first, against the OTCs based on the room rate plus the mark-up

and service charges, and second, against the hotel on the net

rate collected for the room.

            The legislature determined that visitors should be

assessed to pay for providing, maintaining, and upgrading county

infrastructure and services.      The primary justification for the

TAT was to enable the visitor to pay to the state their “fair

share” of the costs incurred by the county for providing

infrastructure and services.      1986 House Journal, at 828

(statement of Rep. Kamaliʻi).     The mechanism the legislature

created for that purpose was a tax based on the transient’s cost

of the hotel room, limited to the proceeds allocated to the

operator, to be remitted to the State by the transient’s hotel.

The TAT was designed to charge the visitor through the

assessment against the cost of the hotel room; therefore, to

more than double the TAT assessment would be contrary to the

intent of the legislature that correlated the tax to the hotel

room use.   Plainly, the impact of a tourist’s use of county

infrastructure and services does not vary upon whether the room

is booked through the OTC or through the hotel directly; the

legislature did not intend that the TAT should be applied once

or twice depending on the method the transient selected to

reserve accommodations.

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             As stated, the legislature repeatedly demonstrated its

intent to minimize the impact of the TAT on the tourist industry

by taking the following steps: establishing the TAT in 1986 as a

separate tax from the GET; amending the law in 1988 to include

the TAT Apportioning Provision that assessed only the operator

and not the travel agency or packager; excluded the GET from the

definition of Gross Rental Proceeds so that the TAT would not be

calculated based upon an amount that included the GET; and

amending the TAT again in 1990 to ensure that the amount due was

not calculated based on an amount that included the TAT charged.

Together, the legislative history of the TAT demonstrates clear

intent to preserve the TAT as a “simple and clean tax” that does

not “fall on the corporate hotel industry or pyramid in its

collection.”    1986 House Journal, at 828 (statement of Rep.

Kamaliʻi).

             Considering that the legislature intended the TAT to

be a tax upon the transient, assessed on the cost of a hotel

room, and collected through the mechanism of the operator, it is

clear that the legislature did not intend that the TAT would be

assessed in full on multiple operators.

             Thus, defining “actual” to mean “[e]xisting in fact”

or “real,” Black’s Law Dictionary, supra, at 42, would result in

double application of the TAT, contrary to the intent of the

legislature.    Consequently, the legislature must have intended a

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different meaning for the term.       See McKnight, 131 Hawaiʻi at

388, 319 P.3d at 307 (“[W]e must read statutory language in the

context of the entire statute and construe it in a manner

consistent with its purpose.” (quoting State v. Wells, 78 Hawaiʻi

373, 376, 894 P.2d 70, 73 (1995)).

           c.     “Actual” indicates a single “operator”

          Based on the continuing intent of the legislature to

tax visitors for their use of county infrastructure and services

by assessing the cost of transient accommodations that is

allocated to the operator, to utilize the hotels as the vehicle

for collecting that tax, and to minimize the impact of the TAT

on the hotel and visitor industry, only a single taxable event

as to the TAT occurs when a transient accommodation is furnished

to a visitor.   It follows then, that a single operator is

associated with the furnishing of transient accommodations.

Applying the principle of pari materia, “actual” as part of

“actually furnish,” within the definition of operator, indicates

a single entity as fulfilling this role.         Thus, an operator may

be an “owner or proprietor or as lessee, sublessee, mortgagee in

possession, licensee, or otherwise” or, if such person is not

present, then the operator may be a person “engaging or

continuing in any service business which involves the actual

furnishing of transient accommodation[s].”         See HRS § 237D-1.

The definition of operator in HRS § 237D-1 does not contemplate

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or allow for multiple operators when a transient accommodation

is furnished.

             Here, the hotels in the Assessed Transactions are

acknowledged by all parties to be an operator within the meaning

of the use of that term as provided by HRS § 237D-1; thus, for

purposes of the TAT Assessments, only the hotels are operators

in the Assessed Transactions.        Therefore, the OTCs are not

operators and the TAT is not applicable to the OTCs in the

Assessed Transactions.53

                   E.   Penalties on the TAT Assessments

             As we find that the OTCs are not operators, the

determination of the tax court as to the TAT is affirmed, and

the applicability of the penalties to the TAT Assessments is not

presented.

                            V.      CONCLUSION

             The Final Judgment is affirmed in part and vacated in

part, in accordance with the following:

             (1)    The Order Granting in Part and Continuing in
                    Part [Director’s] Motion for Partial Summary
                    Judgment on [GET] Assessments, filed
                    February 8, 2013, is affirmed in regard to
                    the application of the GET and vacated in
                    light of the application of the GET
                    Apportioning Provision; the matter is
                    remanded to the tax court for recalculation;
                    and

      53
            In light of this conclusion, we do not specifically address the
Director’s fourth point of error. See supra note 4.

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          (2)   The Order Granting [Director’s] Motion for
                Partial Summary Judgment on [GET] Assessments;
                Schedules 1-4, filed August 15, 2013, is affirmed
                in regard to the application of the failure to
                file and failure to pay penalties and vacated in
                light of the application of the GET Apportioning
                Provision; the matter is remanded to the tax
                court for recalculation.

          The Final Judgment is affirmed in all remaining

aspects, and the case is remanded to the tax court for further

proceedings consistent with this opinion.

Paul Alston                             /s/ Mark E. Recktenwald
Tina L. Colman
Pamela W. Bunn                          /s/ Paula A. Nakayama
Ronald I. Heller
for Travelocity.com, L.P.,              /s/ Sabrina S. McKenna
et al.
                                        /s/ Richard W. Pollack

Hugh R. Jones                           /s/ Randal K.O. Lee
Girard D. Lau
Kimberly Tsumoto Guidry
Warren Price III
Kenneth T. Okamoto
Robert A. Marks
Gary Cruciani
Steven D. Wolens
for Director of Taxation,
State of Hawaiʻi

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