TAXWatch: Just a Technical Change

Some of the bills making their way through our Legislature are sponsored by executive departments.  One such department, the Department of Taxation, is behind a few of them. One of them worth mentioning, introduced as SB 2922 and HB 2366, proposes to change some criminal penalties in our Transient Accommodations Tax (TAT) law to civil fines … and “to make various technical amendments,” as the bill summary states.

One of the amendments imposes personal liability on responsible officials of any company that is delinquent in its TAT payments.

Whoa!  That’s a technical change?

Business taxes are normally imposed on business entities, at both the federal and state levels.  If taxes aren’t paid, the tax agencies collect from the business assets, but generally don’t shake down the individuals associated with the businesses.

One significant exception to the rule is what we call “trust fund taxes.”  That’s where one person collects another person’s money that is due to the government.  The classic example is payroll withholding taxes. An employer has agreed to pay an employee a certain amount of money, but the law says part of it must be withheld and turned over to the government.  The part turned over is the employee’s money, but the employee never gets to touch it. Now, if it so happens that the employer needs to pay some other bills and uses employee money to do that, the government essentially views that act as theft, and will go after individuals who misappropriated that money to make the government whole.  (Note that under current law, the employee, who has done nothing wrong, is still credited with the tax withheld even though the government hasn’t received its money.)

Trust fund tax theory also applies to conventional sales taxes (different from our General Excise Tax).  States where sales tax is imposed on the customer, but the seller is required to collect and remit the tax, present the same fact pattern.  If the seller uses someone else’s money to pay its own bills, those states have no problem going after responsible officials of the seller for the unpaid tax.

In Hawaii, we adopted this principle and imposed “trust fund liability” with respect to the General Excise Tax (GET).  But under the GET law, there is no trust fund. The tax is imposed on the seller. So, it’s not possible for the seller to pay other creditors with someone else’s money.  Indeed, if Tomco, Inc. sells something for $100 and charges its customer $4 tax for a total price of $104, the whole $104 is considered Tomco’s money and Tomco is assessed tax on all of it.  If Tomco fails to remit the $4 to the government, responsible officials of Tomco are personally liable. Also, whether Tomco passed on the $4 to the consumer has no legal significance. Personal liability applies even if no tax is passed on.

It is this principle that the Department now wants to apply to the TAT as a “technical change.”  When asked why, the Department representatives said it was “for consistency [with the GET]” and “to be just another arrow in our quiver.”  Lawmakers of course want people and companies to pay their taxes, so they are moving the bill. Both the House bill and the Senate bill are now being considered by the opposite chambers.  Unless something very unusual happens, the bill will pass. The Governor can’t be expected to veto legislation that his own agency sponsored, so this bill will probably make it into law.

Although we at the Foundation think that blurring the lines between business liability and personal liability isn’t always a good idea, we don’t support or oppose bills.  We just let people know how the bills work so they can make the value judgments and take the action they deem necessary. Even if the bills are simply making “technical changes.”

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Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.