GRIH: Will state Tax Department stick to its guns on restaurant tax?

Restaurants Getting Cooked

by Tom Yamachika, President, Tax Foundation Hawaii

A number of restaurants are in a pinch recently.  Here’s what happened to them.

A few years ago, the COVID-19 pandemic began.  In the initial months of the pandemic, many governments including ours locked down the populace.  People who were shut in couldn’t spend money like they usually could, and businesses of all stripes suffered.

Because of the national impact of the pandemic, various relief programs were enacted by the federal government and helped ease the pain of individuals and businesses throughout the State.  Four federal programs in 2020, for example, did much to alleviate the suffering caused by the national economic catastrophe:  the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL) program, Federal Pandemic Unemployment Compensation (FPUC), and Pandemic Unemployment Assistance (PUA).  Some of these programs offered grants, or loans that were forgiven later, which normally result in income to the recipient of those benefits.

At the end of 2020, the Department of Taxation published Tax Information Release 2020-06 (“TIR 2020-06”) in which the department concluded that despite a lack of any statutory exemption, our General Excise Tax (GET) would not be imposed on these federal benefits “in light of the severity of the economic impact of the COVID-19 pandemic.” 

In 2021, the federal government granted further relief to affected individuals and businesses, and in the American Rescue Plan Act it provided two more significant programs for affected businesses:  the Restaurant Revitalization Fund (RRF) program, and the Shuttered Venu Operators Grant (SVOG) program.  The RRF program was structured as a reimbursement program in that although it provided a funding amount to affected restaurants on the basis of their historic sales, the government specified certain categories of expenses on which the monies were to be spent, and informed the restaurants that unspent monies, or monies not spent on the proper expenses, needed to be returned to the federal government.

In May 2022, we published an article calling on the Department to make up its mind about these programs.  However, no guidance came out in 2022.

In 2023, however, as KITV reported, the Department started targeting restaurants and similar businesses that had received benefits under RRF.  The department said that those benefits were taxable and demanded back GET taxes from the businesses although the restaurants already had spent the money (which they were required to do under the federal program).  Some of these restaurants already had received benefits under PPP, which, under TIR 2020-06, were not subject to GET.

When KITV asked the Department to explain why, they said “PPP loans were not considered income, as they were used to pay employees or rent.  But the RRF was considered replacement income and so would count toward a business’ bottom line.”

For affected businesses, it is an unwanted big tax bill right in the middle of the businesses’ attempts to get back on their feet after being clobbered by the pandemic.

And the Department’s position does not seem to be well founded.  The explanation it gave for the difference in GET treatment between PPP and RRF money does not seem to be true.  And even if it were, the Department itself expressed a rationale for exempting the proceeds – that the pandemic caused severe economic effects so federal programs giving relief from those effects should not be GET taxable – that seems to apply to RRF just as it does to PPP.  To be consistent, uniform and fair, as its own mission statement demands, RRF should get the same treatment as PPP.  And if the Department itself doesn’t recognize this, perhaps lawmakers could take steps to correct the injustice.