Fritz v. Department of Taxation, and Why You Should Care

by Tom Yamachika, President Tax Foundation Hawaii

Over the past several months, there has been a court fight brewing that could have changed how the Department of Taxation lobbies for legislation.

That's right. Not only special interest groups and activists lobby for legislation. The Department does too. Every year, it introduces and strongly supports "Administration Bills." Many of these propose to make the Department's job easier, but at the expense of taxpayer rights. So it's important for taxpayers to keep tabs on how the Department is pushing these bills.

One example of the above kind of bill was HB 2396 / SB 2925 in last year’s legislative session. If a taxpayer files an amended federal income tax return or is adjusted by the IRS, current law allows an extra year for the Department to assess additional tax or for the taxpayer to claim a refund. The bill provided that only the Department, and not the taxpayer, could take advantage of this “bonus time,” which is usually needed because tax audits take a while to conclude. The Foundation was concerned that this legislation created a “one-way street,” or procedural trap, that could allow the State to retain money to which it was not entitled under law.

Peter Fritz, an attorney who used to work for the Department, tried to get the Department to disclose the letters, texts, and emails sent to legislators in 2009. "Can't do," the Department said. "Work product paid for by taxpayers normally needs to be made public, but policy deliberations can be withheld, and these communications are in that category." Fritz didn't agree, and asked the State Office of Information Practices (OIP) to rule on the matter. OIP ruled in Fritz's favor in 2011, ordering the Department to cough up the documents. The Department complied. But by the time it did so, it was years after the legislative session ended.

In the 2016 legislative session, Fritz tried again. The Department refused to provide documents relating to Administration Bills that it was then sponsoring, again relying upon the “deliberative process privilege” that the OIP had ruled in 2011 to be inapplicable. “Gotta do a case by case determination,” the Department said. Fritz filed suit. In January 2017, well after the ending of the 2016 session, the Department “voluntarily disclosed” the documents, although explicitly saying that it “reserved any and all rights to withhold any other documents from disclosure on any and all grounds.”

Those documents could have made a difference during session. When SB 2925, described above, was heard by the Senate Ways and Means Committee, then-Chair Jill Tokuda and Majority Leader J. Kalani English were particularly interested in whether the bill was a solution in search of a problem. When they pointedly asked the Department about it at the hearing, the Department representatives professed ignorance. The records later turned over, however, clearly showed that the Department was reacting to a case involving only one taxpayer. The legislation, by the way, ultimately died.

In the lawsuit, Fritz asked the court to take positive steps so that the Department can’t again play cat-and-mouse. The State, of course, maintained that once they turned over the documents, the suit can no longer exist because courts are there to decide actual controversies, not purely academic issues. The circuit court judge agreed with the State, and the lawsuit will soon be dismissed.

When the Department of Taxation states a position in a communication to the Legislature, the public is entitled to know what that position is. This is especially important with a complicated subject like taxation, where the public relies heavily on guidance and interpretations put out by the Department. (Other legislators do too.) And it is critical to have a fully informed debate when the Department tries to coax legislators to change the law in a way that would make its job easier at the expense of taxpayer rights and protections.

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