Tax Workers’ “Get Out of Jail Free” Card

by Tom Yamachika, President, Tax Foundation Hawaii

You might not know this, but our tax workers enjoy all kinds of special privileges.

Suppose, for example, a tax auditor told all your customers you were a tax cheat, rifled through your garbage, asked embarrassing questions of your friends and maybe some enemies, and even called you a “lazy Hawaiian.”  Could you haul the auditor’s tushie into court to be vigorously sued?

Apparently, the answer is no.  Hawaii Revised Statutes section 662‑15(2) says that state actors are immune from liability for “[a]ny claim arising in respect of the assessment or collection of any tax.”

In more recent years, the Hawaii Supreme Court has been giving the tax office even more help and protection.

In a case called Medical Underwriters of California, 115 Haw. 180, 166 P.3d 353 (2007), a taxpayer associated with an insurance company was assessed 4% general excise tax, while the taxpayer contended that it was an insurance company and should be taxed under the special 0.15% rate that applies to an insurance solicitor or agent.  The taxpayer argued strenuously that it was licensed by the Department of Commerce and Consumer Affairs as an insurance company, so that the Department of Taxation should not be able to classify the company as something else.  Our supreme court rejected the argument, saying that the doctrine of equitable estoppel, which the taxpayer was trying to use, “may not be used in such a way as to hinder the state in the exercise of its sovereign power.”  The power to tax is a sovereign power; therefore, taxpayer loses.

In the 2019 decision Priceline.com, Inc. v. Director of Taxation, the court was faced with assessments against online travel companies for allegedly underpaid general excise tax for facilitating car rentals.  The companies noted that they already had endured punishing litigation over general excise tax for the same periods for facilitating hotel stays, and that litigation was resolved by final judgments already entered in the tax appeal court.  The court reasoned “that the actions of a specific government official may not deprive the State of Hawai‘i of its sovereign power to collect the taxes it is legally due,” and held that the termination of the hotel stay litigation did not preclude the car rental litigation, even though it was for the same tax and the same years.

That language is broad, perhaps several degrees broader than it needs to be.  It remains to be seen how far the Department of Taxation will push this get-out-of-jail-free card, and whether the courts will allow it to do so.  If, for example, the Department makes a deal with a taxpayer, such as allowing the taxpayer to settle five years of back taxes by paying four of them in full and skipping the fifth, is the Department going to be able to come back a few years later and say that they didn’t like the deal and the taxpayer needs to cough up the money for the fifth year too? 

We don’t think that any agency should be allowed that much latitude.  There is a fundamental difference between saying that the government can be spared from acts of a well-meaning employee having unintentional or inadvertent consequences, and saying that the government can get a do-over on decisions it makes purposefully and intentionally.  Yes, the government needs revenue and it relies on the Department of Taxation to collect it, but it needs to remember that the Department needs to do so fairly and not tyrannically.  Government is supposed to wield only as much power as the people give to it, and needs to respect where that power came from.