Timing Isn't Everything, It's the Only Thing (Part 1)

By Tom Yamachika, President, Hawaii Tax Foundation

In this week’s and next week’s articles, we will be looking at timing and how poor timing can lead to tremendously bad results in Hawaii's tax system.

For this week’s illustration, consider a taxpayer who has dutifully filed periodic G–45 general excise tax returns but hasn't filed the annual G–49 return. It's 2006. I am representing a client whose 2001 and 2002 general excise tax returns are being examined.

Innocently enough, the auditor says, "You know, I think a large part of your client's income was realized in 2002 rather than 2001. So I'm going to reclassify that income to 2002."

I respond, "Well, that means my client has overpaid tax in 2001, so we get a refund that can be used against the deficiency you are going to determine for 2002, right?"

"I'm just going to assess the deficiency for 2002," the auditor replies. "You can go ahead and file a refund claim for 2001." I'll bet the auditor was snickering under his breath.

Sure enough, the auditor assesses 2002. Because there is now a deficiency for this year, and the G–49 wasn't filed on time, the deficiency gets enhanced with interest and a 25% failure to file penalty.

In response to the 2001 refund claim I filed, I get a bland, computer-generated letter, saying that the REFUND IS DENIED. Why? There is a statute of limitation for Hawaii general excise tax. It provides several things. First, it tells the state that any additional tax needs to be assessed within three years from the due date of the return or the date the return is filed, whichever is later. However, this period starts to run only when the G–49 is filed. The G–45 periodic returns don't count. Thus, the auditor has no problem assessing additional 2002 tax in 2006. Second, there is a slightly different rule for refunds. When a return is filed, the refund claim must be filed within the same period -- three years from the later of when the return was due or when it was actually filed. But when no annual return is filed, or is filed more than three years after its due date, the refund claim has to be filed within three years after the tax was paid or when the tax return was due, whichever is later. The tax was paid in 2001. The return was due in 2002. The claim was filed in 2006. Bzzzzt! I now have the unpleasant task of telling my client that there was a reason the auditor insisted upon the timing difference, namely that he gets to assess tax, penalties, and interest on income my client already reported and paid tax on.

The moral of the story: Never forget that if you pay general excise tax, you need to worry about periodic returns and the annual return. People might think that returns are being filed monthly and the department of taxation is getting its money and nothing else needs to be done. That isn’t how Hawaii’s system works. The annual return is important because, first, the statute of limitations on assessing extra tax starts running only from the filing of the annual return; second, there are draconian sanctions adopted in 2010, including loss of any general excise tax exemptions, exclusions, or reduced rates, which kick in when the annual return is not filed within one year after it is due; and third, if annual returns had been filed on time the auditor in this illustration never would have gotten away with turning a timing difference into pure profit for the state as he did here.

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