Tax Versus Judiciary

by Tom Yamachika, President, Tax Foundation Hawaii

While our Legislature is busily considering changes to our tax laws, the courts are also helping us work through the laws we already have.  There are two Hawaii Supreme Court cases pending that involve fights over the extent to which courts can get involved at all.

In Booking.com BV vs. Suganuma, the taxpayer sued under the Hawaii Administrative Procedures Act (HAPA) to invalidate a Department of Taxation administrative rule.  The Department insisted that the taxpayer wanted a declaratory judgment, and our Declaratory Judgment Act does not allow declaratory judgments in tax cases.  And then, for good measure, the Department audited the taxpayer and assessed $20 million in back general excise taxes based on the rule that the taxpayer was challenging; the taxpayer appealed that assessment to Tax Appeal Court, and that case is still pending.  The Circuit Court bought the Department’s jurisdictional argument and tossed out the taxpayer’s suit. 

The taxpayer, with support from the Foundation as amicus curiae (“friend of the court”), contends that the Department has no carte blanche exemption from HAPA rule challenges, and that its suit and the appeal challenging the Department’s assessment don’t preclude each other, at least when there is no final judgment on the merits in either case.  The Hawaii Supreme Court decided to take up the case.  Documents in this case are here on our website.

When the case was argued, another wrinkle developed.  The HAPA statute, which has been held to be jurisdictional, requires the suit to be brought where the taxpayer resides or has its principal place of business.  Taxpayer is a Dutch corporation headquartered in Amsterdam, however.  The court asked for supplemental briefing on this question and is now mulling the case over.

The second case, Tax Appeal of PM & AM Research, Inc., involves a taxpayer high on the tough luck list.  The taxpayer filed an appeal in Tax Appeal Court from a general excise tax assessment.  But, while the applicable law requires a taxpayer in this situation to send a copy of the notice of appeal to the Director of Taxation, the taxpayer sent the copy to the Administrative Appeals Office in the same room in the same building in Honolulu.  The Department seized on this difference and persuaded the Tax Appeal Court to toss the case out.  The taxpayer appealed to the Intermediate Court of Appeals.  The ICA noticed that Hawaii has a “pay to play” law regarding tax appeals; the first appeal is free but any appeal after that can be entertained only if the taxpayer pays the assessed tax in full.  The taxpayer hadn’t paid the tax in full, so the ICA dismissed the appeal.

The taxpayer, again with support from the Foundation as amicus curiae, argued that the pay to play law shouldn’t be applied to this situation.  The Tax Appeal Court’s decision didn’t really count as an appeal, the taxpayer argued, because the dismissal had the effect of saying, “You’re in the wrong place and I can’t decide the appeal,” rather than expressing an independent judgment on how much or little the taxpayer owes.  The Foundation argued that the appeal to the ICA shouldn’t count as a second appeal because that court also can’t express any judgment on how much tax the taxpayer owes, but only whether the Tax Appeal Court was correct in tossing the case.  We have the documents in this case here on our website.

The Hawaii Supreme Court decided to take up this case as well.  Briefing has been completed and a date for oral argument should be announced soon.

Although the issues in this case may seem dry and boring, they do have significant implications in the ability of our court system to operate as a check and balance against a zealous Department of Taxation.  Stay tuned for further updates.