Will They Come for You Next?

by Tom Yamachika, President, Tax Foundation Hawaii

A U.S. Supreme Court case decided in April shows us the extent to which some tax agencies will go in order to enforce their laws, even across state lines.

The case involves an inventor named Gilbert P. Hyatt. He lived in California and in the early 1990’s moved to Nevada. The California Franchise Tax Board (FTB), the agency that enforces the state’s income tax, said that Mr. Hyatt had lots of unfinished business before he moved, namely over $10 million in back taxes, penalties, and interest. Specifically, the FTB determined that Mr. Hyatt didn’t move to Las Vegas in 1991 as he claimed, but staged the move in order to avoid California tax on substantial royalties he earned between then and 1992, when FTB claims he moved. (Nevada doesn’t have an individual income tax.) FTB reached its conclusion after an extensive audit spanning more than a decade in which the FTB sent over 100 letters and demands for information to banks, utility companies, newspapers, medical providers, Hyatt’s attorneys, and two Japanese companies that held licenses to Hyatt’s patent, among others. Mr. Hyatt also claimed that the FTB rifled through his mail, combed through his garbage, and examined private activities at his place of worship. He also presented evidence that the FTB auditor had made disparaging comments about Mr. Hyatt and his religion, and was dead set on giving Mr. Hyatt a substantial assessment.

Mr. Hyatt sued the FTB in Nevada court, and a jury awarded him close to $500 million in damages and attorneys’ fees. FTB appealed to the Nevada Supreme Court, saying that even Nevada law protected its own tax collectors by providing that they would not be liable for more than $50,000. The Nevada Supreme Court reduced the award substantially but left the FTB exposed to damages in excess of $1 million.

Taking the case up to the U.S. high court, the FTB argued that a citizen of one state should not be allowed to sue another sovereign state in any circumstances. The Supreme Court allowed such a suit before, and the current court was divided 4-4 on whether to overrule the precedent.

By a 6-2 vote, however, the Court held that the Constitution required Nevada to afford the same liability protection to the California taxing agency as it would give to its own taxing agency. By giving the FTB exposure to greater liability than its own taxing agency, the Court said, Nevada had shown hostility and disrespect to California’s sovereign status as a state.

What does that mean for us in Hawaii? Hawaii Revised Statutes section 662‑15(2) immunizes state actors from liability for “[a]ny claim arising in respect of the assessment or collection of any tax.” It doesn’t matter if the actions were negligent or intentional, or even fraudulent. So, under the Supreme Court’s reasoning, if a tax agency worker from another state came to Hawaii where you lived, and the auditor told all your customers you were a tax cheat, rifled through your garbage, asked embarrassing questions of your friends and enemies, and even called you a “lazy Hawaiian,” you would not be able to take the auditor’s agency to task in Hawaii state court. The court would have to protect the auditor the same as a local tax office employee, and a local tax office employee can do no wrong.

Maybe it’s time for our legislature to take another look at the issue of whether, and to what extent, tax office workers are allowed to do whatever they please whenever they please. We need to protect the revenue, but we need to protect ourselves too.

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