The Doomsday Rules in the General Excise Tax

by Tom Yamachika, President, Tax Foundation Hawaii

Now that the economy is down and tax revenues are in the tank, we are now seeing cases of our Department of Taxation using some particularly nasty provisions in the tax code.

In 2010, lawmakers enacted Act 155, which the Department named the “General Excise Tax Protection Act.”

The Act has two draconian provisions. The first says that if you don’t file your GET annual return within a year after it’s due, you lose the benefit of all exemptions, deductions, and reduced rates. This means, for example, that if I had wholesaling income of $1 million and didn’t file my annual return within a year after it was due, even though I paid the $5,000 in tax when it was due, I could now owe $40,000 more.

The consequences are severe, but the idea is not new. The federal tax code says that if you are a non-resident alien or a foreign company, you’re not entitled to take deductions, credits, or other tax benefits unless you file a return. Federal regulations specify a “doomsday date” after which the tax benefits are disallowed. The federal law has been around for a while so there are court cases as well as regulations and rulings giving us guidelines on when the full force of these provisions can be applied. Not so with the state provision, which has been in existence only ten years.

Indeed, one feature of the GET that isn’t found in the federal system is that periodic (monthly, quarterly, or semiannual) returns are required, with the same information called for in the annual returns, but the periodic returns don’t count for purposes of this doomsday provision. Many states with a sales tax also require submitting detailed information with a periodic return, but no annual return is required in those states so some taxpayers are genuinely surprised to find that we have an annual return requirement with severe consequences in addition to the doomsday provision (for example, the statute of limitations never starts to run) if it is not followed.

The second provision in the GET Protection Act says that if GET is owed by a business entity and the entity doesn’t pay it, the department can go after “responsible officials“ of the company, basically meaning anybody who could’ve signed a company check, and collect the tax as a personal debt of any of those individuals.

Again, the provision is harsh but is not new. The payroll tax has had a similar provision for decades. So, the many precedents under payroll tax should be useful in giving us an idea of how this provision should be applied.

Of special interest is the “willfulness” requirement. It says that a company’s GET debt can’t fall upon you as an individual unless you made a conscious decision to pay another creditor before paying the State. For example, if you paid the tax shown on the company returns and more was assessed later, you aren’t responsible to satisfy the assessment out of your personal assets — unless you, now knowing about the back tax assessment, then pay another bill (rent, electricity, etc.) while leaving the deficiencies unpaid. Those with check signing authority could easily be put into a very tough situation if they don’t know how this law works.

When the economy is down and cash is tight, businesses might be tempted to pay other priority items. After all, if you don’t pay your taxes the water isn’t shut off, the lights don’t stop working, and the Internet connection doesn’t go dark. (At least not right away.) But, as we see here, the Department has some very scary tools to make sure that taxes keep getting paid. The best we can do is know how the tools work and make sure they are being used responsibly and not arbitrarily.