Why an Annual GET Return?

by Tom Yamachika, President, Tax Foundation Hawaii

For those of you who pay GET, here’s a quick quiz.  Let’s say you are a monthly filer.  How many returns do you have to file to report one year of business activity?

The answer is thirteen.  Twelve will be monthly returns on Form G-45.  One will be an annual reconciliation return on Form G-49.  If your answer was twelve, take your “F” and go to the back of the class.

Don’t underestimate the significance of the annual reconciliation return!  Here are some reasons why:  First, the three-year statute of limitations that the Department has to assess any additional tax never starts running until the annual return is filed.  Second, all exemptions, deductions, reduced rates, and other “tax benefit” items can all be disallowed unless the annual return is filed within a year after it is due.  Third, if the annual return isn’t filed the statutes of limitations start behaving crazily. 

What do I mean by that?  Consider this case, which is one of the first I had when I was representing taxpayers.  My taxpayer’s auditor, at the time kind of an unknown guy, would go on to become one of the Department’s “ace” auditors and top producers (see how scary that sounds in a non-sales context?) and would be significantly promoted before retiring from the Department.  My taxpayer was being audited for the years XX1, XX2, and XX3, between seven to ten years ago.  It had filed all required monthly returns, but no annuals.  The auditor innocuously said, “I don’t have an issue with the total amount of income reported.  But I think $x of the year XX2 income belongs in XX3.  So I am going to assess you for year XX3.”  

At this time I was still pretty green in terms of tax experience, so I thought, well, that would give the client an overpayment for year XX2.  So, I replied, “That looks fine to me.  But I’ll file a refund claim for year XX2.”

“Go right ahead,” the auditor replied.

A few days after receiving the assessment for year XX3 (which included more than a trivial amount of penalties and interest), I had the client file a claim for a refund for year XX2.  “Six of one, half a dozen of the other,” I was thinking.  “It’ll work out.”

About a week later, I got a tersely worded, computer-generated letter.  There would be no refund for year XX2.  When no annual return has been filed, there is another part of the statute of limitations that kicks in and says that any claim for refund has to be filed within three years after payment of the money.

Needless to say, the client was furious.  (Even though the client could have avoided the problem entirely if he had filed annual returns.)

So what is it about the annual return that gives it such outsized significance?  Taxpayers in other states file twelve monthly returns instead of thirteen, and they don’t have to go through these kinds of headaches.  If there is some kind of accounting adjustment at the end of the year, they can just pull out the proper month’s return and amend it.  Is there some other significant information that appears on an annual return that can’t be disclosed on one of the monthlies?  Not really.  So why don’t we just make life easier for everyone and get rid of it?

Nah.  That would be too simple.  First there have to be studies, and blue-ribbon commissions, and a few expert reports.  Maybe then someone will begin to think about this as an actual beneficial idea.