Recently, an alert and concerned reporter, when visiting the offices of Senate Ways and Means Committee Chair Donovan Dela Cruz, spotted a whiteboard with 14 bill numbers written on it. All of the bills are supposed to be revenue raisers, so we thought it important to share them. (Yes, I know that a “dozen” is 12, but two of them were already dead when we got the list, and Donovan’s Fourteen doesn’t sound catchy. That’s my story, and I am sticking to it.)
So here they are, in order of bill number:
Closing the REIT Loophole? Real Estate Investment Trusts, or REITs, are allowed under federal tax law to pay no tax at the corporate level if they distribute their net earnings to their shareholders as dividends. The Feds receive one layer of federal tax. Our state generally conforms to the REIT law, but we tend to miss out because the REIT doesn’t pay state income tax and its shareholders are taxed on their dividends where they live, which generally isn’t in Hawaii. SB 301 proposes to fix this by treating REITs as regular corporations. Proponents say it closes a giant loophole. Opponents note that REITs have invested lots of money in Hawaii and passing an extra tax will cause them to pack up and leave.
Resort Fees as a Price of Lodging? Many resorts in the U.S. and other countries charge “resort fees” as the price of hotel amenities and services. Our Tax Department has taken the position that if the fees are mandatory for a guest staying the night, they are part of the room rate and subject to 10.25% Transient Accommodations Tax. SB 380 proposes to write into law that mandatory resort fees are subject to TAT. A similar bill passed last year without the word “mandatory,” meaning that meals, Internet service fees, in-room movies, and similar items would be subject to TAT. The Governor vetoed last year’s bill.
We Don’t Like the Timeshare Tax Formula, So Let’s Double It! TAT applies as well to timeshare owners occupying their own units. Because there is no room rate, it applies to half the average daily maintenance fee for a week. The Department is saying this amount is grossly inadequate, but it apparently never made use of a procedure in existing law to challenge the formula. SB 382, instead, applies the tax to 100% of the average daily maintenance fee. (This measure is dead, but its substance may appear in other bills.)
All Aboard for Single Sales Factor! When businesses operate in many states, it’s always a challenge to figure out how much business is taxable by each state. Most states take a weighted average of the property factor (how much property is in the state divided by how much property is everywhere), payroll factor, and sales factor and multiply it by net income from everywhere to yield net income taxable in the state. The classic formula, which Hawaii now has, is an equally weighted average. Most states have upweighted the sales factor, and 31 states ignore the other two factors, at least for some classes of taxpayers. The basic idea is that the formula would favor those who export. SB 394 would have Hawaii join the 31 states.
Conveyance Tax on Short Commercial Leases: Hawaii imposes conveyance tax when real property is sold or leased and the deed or lease is then recorded. We presently exempt leases of less than five years from the tax, although leases for more than one year need to be recorded. SB 395 would restrict the exemption to residential leases one year or less and would repeal the exemption altogether for commercial property. For leases the tax is applied to the present value of rent payable under the lease, capitalized at 6%.
We Got Online Sellers, Now Let’s Go for Their Marketplaces: Previously, online sellers could offer products to Hawaii customers without paying Hawaii tax. That gave them an advantage over local stores. Last year, following a state-friendly U.S. Supreme Court ruling, our state adopted a law requiring many of those businesses to register and pay general excise tax. The businesses then said they would pay tax on their own sales but wouldn’t if they were merely representing sellers didn’t have to pay tax to Hawaii. SB 396 solves that problem by taxing the marketplace provider as if it sold the product directly. This bill already has been sent to the Governor’s desk.
And Let’s Not Forget Income Tax: When our state adopted the law last year on the heels of the favorable Supreme Court decision, as described in the previous paragraph, the law applied to general excise tax only. SB 495 would create a similar law that applies to income tax. But wait – we have other tax types too, such as Franchise, Public Service Company, or Transient Accommodations, so what are we going to do about them?
You Foreign? You Withhold! When a nonresident sells real estate in Hawaii, our laws require withholding of 7.25% of the gross price. That way, it’s less likely that the owner would be able to skip town without paying state taxes, such as income tax on capital gains. Under current law, entities, such as corporations and partnerships, are exempt from withholding if they register with our DCCA even though they might have been formed in another state. SB 712 subjects foreign entities to this withholding scheme whether they registered with DCCA or not.
Online Travel Companies Beware, We’ll Get Our TAT Yet! Suppose an online travel company (OTC) sells a hotel room to a tourist for $150 a night and pays the local hotel $120. The hotel pays TAT on the $120. After years of litigation, the Hawaii Supreme Court ruled that the OTC doesn’t pay TAT on the $30 because it’s not a hotel or a hotel operator. SB 714 would require the OTC to pay TAT on the $30. It also contains the substance of SB 380 and SB 382, previously discussed. (This measure is dead, but its substance may appear in other bills.)
The “AirBnB Bill” Returns Yet Again: This bill is about “transient vacation rentals,” from bed and breakfast establishments to people just wanting to rent out a room in their house for a little extra money to help make ends meet. Those who do so are confronted with state laws imposing GET and TAT on the proceeds, and county zoning laws that often forbid TVR use in residential properties altogether. A bill passed in 2016 proposed to allow TVR platforms such as AirBnB and Flipkey to collect and pay over the state taxes, but the bill was vetoed because of county objections. This incarnation of the bill, SB 1292, would require the platforms to collect and pay over the tax and provides a citation process with monetary fines for hosts who do not register.
Do we Really Trust Foreigners to Pay Tax? Currently, we don’t tax Subchapter S corporations, but we do tax their shareholders. To ensure that non-Hawaii shareholders pay appropriate business taxes, we ask that they file a statement that they will file Hawaii returns and pay taxes. If they don’t, we withhold Hawaii tax at the company level. SB 1360 applies the same concept to partnerships, estates, and trusts, except we don’t give the out-of-state partners and beneficiaries the option. We will just withhold.
When the Certainties in Life — Death and Taxes — Happen at the Same Time: SB 1361 hikes the maximum estate tax rate to 20%, which would be tied for the highest state estate tax rate in the country. The rate would kick in for taxable estates over $10 million. This bill already has been sent to the Governor’s desk.
Jacking Up Conveyance Taxes Again: Conveyance tax is imposed whenever Hawaii real estate is sold or leased. SB 1362 proposes to hoist the tax on a condominium or single-family residence for which the owner is not eligible for a county homeowners’ exemption. For properties $2 to $4 million, the tax would go from 0.6% to 1%, an increase of 67%. For properties $4 to $6 million, the tax would go from 0.85% to 2%, an increase of 135%. For properties $6 to $10 million, the tax would go from 1.1% to 3%, an increase of 172%. For properties $10 million or more, the tax would go from 1.25% to 4%, an increase of 220%.
A Half Penny for the Keiki! We’ve written about this before. SB 1474 proposes a 0.5 percentage point increase in the GET in order to raise $200 million or so for K-12 schools and $50 million for the University of Hawaii. The bill has crossed over from the Senate, but Finance Chair Sylvia Luke has been quoted as saying that the bill won’t get a hearing in the House. This bill is probably dead.