Protest Payments
by Tom Yamachika, President, Tax Foundation Hawaii
One of the worst kept secrets in Hawaii law is that there is a statute allowing for payments under protest. The good news is that it provides a basis for the courts to get involved if there is some question as to the legitimacy of any fee or tax imposed by any state agency (not just the Department of Taxation). The law was enacted in 1907, more than a century ago, and it has a few quirks surrounding it that can spell big problems for people who don’t know about it and what it does.
High on the tough luck list is Captain Andy’s Sailing. The good captain helmed a catamaran that was based in Port Allen on Kauai and gave commercial tours and fishing trips. One not-so-fine day, he learned that the Department of Land and Natural Resources was going to charge him 2% of his gross receipts for an Ocean Recreation Management Area permit to sail in the area. That didn’t land very well because he was already paying 1.85% of his gross receipts to the State Department of Transportation as a commercial use fee. So, he decided to sue in federal court to have the DLNR permit and fee declared unconstitutional as an impermissible tonnage duty, and won in federal court. Captain Andy’s Sailing, Inc. v. Johns, 195 F. Supp. 2d 1157 (D. Haw. 2001).
However, the good captain couldn’t sue the State or any of its agencies in federal court because of the Eleventh Amendment. So, he sued in state court to get back the money he had been paying to DLNR while the litigation was ongoing – a little more than $40,000. And that is where he ran into problems. Why? Because lawsuits against the State for allegedly illegal taxes, fees, or charges must use the payment under protest mechanism if there is no law providing for an appeal. The way that mechanism works is that a person who has a disagreement with the State over the applicability or legality of a fee needs to pay that fee to the State with something in writing detailing the reasons why the fee is illegal. Then, within 30 days after paying the fee, the payor needs to sue in court. If the disputed payment is a tax, the payor sues in Tax Appeal Court. Otherwise, the payor sues in regular state court (Circuit Court for the $40,000 amount at issue there). When that happens, the payee agency is supposed to set that money aside while the court figures out if the exaction is legal. The problem that the good Captain ran into is that his payments to DLNR were not accompanied by any kind of written protest. Which meant that the state court couldn’t decide the issue of legality and DLNR got to keep the $40,000. Captain Andy’s Sailing, Inc. v. Department of Land and Natural Resources, 113 Haw. 184, 150 P.3d 833 (2006). Too bad, so sad!
It turns out that the payment under protest mechanism is one of three independent ways to get into court when you have a tax dispute. It can be used, for example, if the Department of Taxation has sent out a final assessment of tax and the 30 days within which to appeal the assessment to court has come and gone. The good news is that the taxpayer can get into court even after missing the deadline. The bad news is that the taxpayer has to pay the tax in dispute.
And, last but not least, it is possible to blow the appeal by paying too early. There is a case, Grace Business Development Corp. v. Kamikawa, 92 Haw. 608, 994 P.2d 540 (2000), which says that it’s too early, and the suit needs to be dismissed, unless the agency has made some kind of formal determination, such as a notice of assessment or a ruling, indicating that it has made up its mind about what to do about the taxpayer before it.
The moral of the story here is that there is a way to challenge payments made to state agencies that are thought to be illegal. But the law allowing that challenge has tricks and traps in it, so people attempting to use it should do so carefully.