Legislative Update: What Made It Through the 2019 Session
Here are some of the bills that crossed the finish line for this session. We also mention a couple that got caught by the business end of the Governor’s veto pen.
REITs Dodge the Bullet Again
Real estate investment trusts, under federal law, are certain corporations that invest in real estate. They pay no corporate income tax, but their shareholders are supposed to pay tax on the dividends. This, however, doesn’t happen if the tax involved is state tax and the REIT shareholder lives out of state. In that case, the REIT does business and makes money here, the company doesn’t pay income tax, and the shareholders pay income tax to their home states. Some folks saw this as a tax loophole and urged passage of SB 301, a fix in the law that would make the REITs taxable here like any other corporation. The Governor thought there was too much risk that investments into Hawaii would dry up as a result.
SB 301 Status: VETO
Want to Collect Tax for Transient Vacation Rentals? No Dice
SB 1292 would have required large transient accommodations brokers, and permits all other transient accommodations brokers, to register as tax collection agents to collect and remit general excise and transient accommodations taxes on behalf of operators and plan managers using their services. Seems like a straightforward withholding tax bill? Not so to the counties, who are trying (so they say) to enforce their zoning laws that in some instances prohibit or restrict transient rentals. The bill collects the tax for the State (note that the tax is due whether the business is legal or not) but does not provide for information sharing with the counties. The counties argued, and apparently the Governor agreed, that signing the bill would be tantamount to the State condoning illegal activity.
SB 1292 Status: VETO
What follows is a selection of bills that have become law. They are presented in no special order.
Online Sellers Beware! We’re Going After You…for Income Tax!
Under U.S. constitutional law, a certain amount of connection between a potential taxpayer and a State is needed before the State has power to impose tax. South Dakota v. Wayfair Corp., 138 S. Ct. 2080 (2018), upheld a South Dakota law saying that nexus is established for sales tax purposes with $100,000 in sales or 200 separate transactions. We passed a similar law last year, applying it to our General Excise Tax with lightning speed. Act 41, SLH 2018 (HRS § 237-2.5). Why stop at sales tax? This year’s SB 495 applies the same standard to establish nexus for income tax. The tax press says Hawaii is the first state to do this.
SB 495 Status: Act 221, SLH 2019
And Let’s Not Forget Marketplace Facilitators!
The bill discussed immediately above establishes the responsibility of an online seller to pay tax. But what if the online seller is selling someone else’s product, and that someone is out of state? SB 396 addresses the issue. Under this bill, the online seller acting on behalf of someone else is a marketplace facilitator, and the facilitator is considered the retailer in the transaction and must pay the GET. If the facilitator takes or processes product orders but doesn’t handle the money, the facilitator must submit a detailed report to the Department about who sold what to whom and for how much.
SB 396 Status: Act 2, SLH 2019
Conformity to the IRC, With a Break for Nonprofits
Hawaii income tax law usually conforms to much of the federal Internal Revenue Code. That normally helps both the taxpayer and the State. The taxpayer doesn’t have to do tax returns two radically different ways, and the State can easily piggyback on an IRS audit when the IRC and state law are similar. Last year, the State refused to conform to a TrumpTax provision denying business deductions for employee parking expenses but forgot to snuff out a similar provision requiring nonprofits to pay tax when they provide employee parking benefits. This year’s bill, SB 1130, fixes that effective for taxable years beginning in 2019. The bill also clarifies the Hawaii applicable exclusion amount for estate tax and conforms to federal provisions relating to Qualified Opportunity Zones (at least the ones located in Hawaii).
SB 1130 Status: Act 69, SLH 2019
So, What Really Is a Resort Fee?
Hotels both here and in other states and countries have been charging their guests “resort fees.” A resort fee is supposed to be a payment for amenities provided to guests of the hotel. But some hotels made it so difficult to decline the fee that tax authorities, including ours, concluded that such a fee could be a disguised part of the room rate, which in Hawaii is subject to the Transient Accommodations Tax (TAT), a 10.25% tax on transient accommodation rentals. Last year, the Legislature concluded that the State was getting shorted because it wasn’t getting the appropriate taxes on resort fees. It passed a bill to fix the issue but ran into problems by saying that EVERYTHING charged to a tourist is a resort fee. The bill was vetoed. This year, SB 380 clarifies that “mandatory” resort fees are subject to the TAT, effective July 1st. The Department recently posted a Tax Information Release announcing proposed rules to define what a mandatory resort fee is.
SB 380 Status: Act 20, SLH 2019
You Show Me a K-1, I’ll Show You a Withholding Obligation
Currently, S corporations doing business in Hawaii have an obligation to withhold Hawaii income tax on distributive shares of income credited to their nonresident shareholders-unless the shareholders file documentation obligating themselves to file Hawaii tax returns and to pay tax on those earnings. SB 1360 applies a similar withholding obligation to nonresidents who receive a Schedule K-1 showing passthrough income from partnerships or trusts. The bill took effect in 2019, but the Department of Taxation tells us they aren’t ready to enforce it. Department of Taxation Announcement 2019-08says that the “Department intends on requiring withholding under Act 232 no sooner than taxable years beginning after December 31, 2019.” So, don’t worry about it for this year.
SB 1360 Status: Act 232, SLH 2019
It’s Now Even More Expensive to Die Here
One of the most straightforward bills, and one of the earliest to be signed into law, was SB 1361, which adds a new 20% tax bracket for taxable estates over $10 million. This ties us with Washington state as the state imposing the highest estate tax rate. Note that we are talking about a Hawaii taxable estate over $10 million, not a Federal taxable estate over $10 million; Hawaii has a unified credit of only $5.49 million.
SB 1361 Status: Act 3, SLH 2019
Inching Up Support for Lights, Camera, and Action
Hawaii now provides a movie, television, and digital media production credit for productions that shoot here and help our local economy and talent pipelines. The credit was limited by a $35 million statewide limit. Some were concerned that with Hawaii Five-0 and Magnum, P.I. shooting here now, there wouldn’t be enough left in the $35 million to accommodate a feature film as well (think “Pirates of the Caribbean,” “Jurassic Park”), and wanted the statewide cap lifted entirely. SB 33, apparently a compromise deal, hoisted the cap to $50 million.
SB 33 Status: Act 275, SLH 2019
Dust Off Those Ancient Houses!
The Legislature established in SB 1394 a new tax credit that would provide a 30% tax credit for expenses to substantially rehabilitate a certified historic structure. Don’t worry about this one breaking the bank, however; payout of this credit is limited to $1 million statewide.
SB 1394 Status: Act 267, SLH 2019
Shades of Act 221-the Research Credit Has Returned!
Those of us who’ve been around the block a few times may remember Act 221 of 2001, a series of incentives for high tech development here in Hawaii that helped to develop the industry immensely, but at great cost to the state treasury. One of the incentives enacted back then was a souped-up version of the federal credit for increased research activities, known as Section 41. While the federal credit was based on an increase in research spending from one year to the next, the Hawaii credit was based on pure spending, if it was in Hawaii. In 2013, our lawmakers changed the Hawaii credit to one mirroring the federal credit. In SB 1314, we bring back the Act 221 version of the research credit. Key additions include shifting certification responsibility to DBEDT instead of DOTAX, and an annual aggregate cap of $5 million. This law sunsets at the end of 2024.
SB 1394 Status: Act 261, SLH 2019
Can’t Tax Tourist Rental Cars Only? Then Whack Everyone
In 2018, Act 215 enacted a surcharge on car rentals for those who didn’t have Hawaii drivers’ licenses. Thus, the tax was $5 per day on “tourists” and $3 per day on “locals.” This year, someone figured out that the surcharge was unconstitutional because it discriminated against interstate commerce. (It’s okay to give a “kamaaina discount” but you can’t do that if you’re a government.) With SB 162, the discrimination is cured-everyone pays the $5, effective July 1st.
SB 162 Status: Act 174, SLH 2019