In re Tax Appeal of Travelocity.Com., L.P. v. Director of Taxation.

***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Electronically Filed
Supreme Court
SCAP-13-0002896
17-MAR-2015
09:32 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI#I
---o0o---
In the Matter of the Tax Appeal of TRAVELOCITY.COM, L.P.,
Petitioners and Respondents/Appellees-Cross-Appellants,
vs.
DIRECTOR OF TAXATION, STATE OF HAWAIʻI,
Respondent and Petitioner/Appellant-Cross-Appellee.
SCAP-13-0002896
APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(T.A. NO. 11-1-0021 AND CONSOLIDATED CASES:
11-1-0022, 11-1-0023, 11-1-0026, 11-1-0027, 11-1-0029,
11-1-0030, 11-1-0031, 11-1-0032, 11-1-0033, 12-1-0287,
12-1-0288, 12-1-0289, 12-1-0292, 12-1-0293, 12-1-0294,
12-1-0295, 12-1-0297, 12-1-0299, and 12-1-0300)
March 17, 2015
RECKTENWALD, C.J., NAKAYAMA, McKENNA, AND POLLACK, JJ., AND
CIRCUIT JUDGE LEE, IN PLACE OF ACOBA, J., RECUSED
OPINION OF THE COURT BY POLLACK, J.
I. INTRODUCTION
This case considers whether the General Excise Tax
(GET) and the Transient Accommodations Tax (TAT) are assessable
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
on the relevant income of commercial entities operating under
business models that were not expressly considered by the
legislature when the applicable GET and TAT statutes were
originally enacted. The Director of Taxation, State of Hawaiʻi
(Director) retroactively assessed ten online travel companies
for unpaid GET and TAT for periods beginning between 1999 and
2001 and continuing until 2011, plus applicable penalties.
The online travel companies appealed the assessments
to the Tax Appeal Court (tax court), and the assessments were
consolidated into the present case. Both the online travel
companies and the Director moved for summary judgment. The tax
court ruled in favor of the Director with regard to the
assessment of the GET (GET Assessments), with penalties and
interest, but ruled in favor of the online travel companies with
regard to the assessment of the TAT (TAT Assessments).1 That
disposition was reflected in the tax court’s Final Judgment
Disposing of All Issues and Claims of All Parties (Final
Judgment), from which the online travel companies and the
Director seek review.
1
The Director sought interest and penalties with regard to both
the GET and TAT Assessments. The penalties were a 25% “failure to file”
penalty, pursuant to Hawaiʻi Revised Statutes (HRS) § 231-39(b)(1) (Supp.
1994), and a 25% “failure to pay” penalty, pursuant to HRS § 231-39(b)(2).
Interest on unpaid tax is assessable pursuant to HRS § 231-39(b)(4). As the
tax court found that the online travel companies were not liable for the TAT,
the court rejected interest and penalties as to the TAT Assessment.
- 2 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
We affirm the Final Judgment in part and vacate in
part in regard to the GET Assessments, affirm in regard to the
TAT Assessments, and remand the case to the tax court for
further proceedings consistent with this opinion.
II. BACKGROUND
In early 2011 and 2012, the Director made multiple
retroactive assessments against Expedia, Inc.; Hotels.com, L.P.;
Hotwire, Inc.; Travelocity.com LP; Site59.COM, LLC; Orbitz, LLC;
Trip Network, Inc.; Internetwork Publishing Corp.;
priceline.com, Inc.; and Travelweb LLC (collectively the Online
Travel Companies or OTCs, sometimes individually OTC). The OTCs
appealed the 2011 and 2012 assessments to the tax court and the
appeals were consolidated. All the non-dismissed assessments
are consolidated in the present case, and the amounts that would
be subject to the GET and TAT Assessments are stipulated.2
As noted, the Director and the OTCs both moved for
summary judgment, resulting in the Final Judgment. The Final
Judgment was filed “pursuant to and consistent with” eight
underlying orders.3 In the Director’s appeal, the Director
2
The Director’s retroactive assessment of the GET to the
operations of the OTCs resulted in collective taxes and penalties of
approximately $247 million. The Director’s assessment of the TAT to the same
operations of the OTCs that was rejected by the tax court would have assessed
approximately $430 million in taxes and penalties.
3
Five of the orders addressed the GET Assessments:
(continued. . .)
- 3 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
identifies as error the tax court’s grant of summary judgment in
favor of the OTCs in regard to the TAT Assessments, the denial
of summary judgment in favor of the Director on the TAT
Assessments, and the denial of the Director’s motion for
reconsideration.4
In their cross-appeal, the OTCs identify the following
as error: the tax court’s grant of summary judgment in favor of
(. . .continued)
(1) Order Denying [OTCs’] Motion for Partial Summary Judgment on
[GET] Assessments, filed February 8, 2013;
(2) Order Granting in Part and Continuing in Part [Director’s] Motion
for Partial Summary Judgment on [GET] Assessments, filed February
8, 2013;
(3) Order Denying [OTCs’] Motion for Reconsideration of the Order
Granting in Part and Continuing in Part [Director’s] Motion for
Partial Summary Judgment on [GET] Assessments, Entered February
8, 2013, filed April 1, 2013;
(4) Order Granting [Director’s] Motion for Partial Summary Judgment
on [GET] Assessments; Schedules 1-4, filed August 15, 2013; and,
(5) Order Granting [Director’s] Motion for Partial Summary Judgment
on Statutory Interest on Statutory Penalties, filed August 15,
2013.
Three orders addressed the TAT Assessments:
(6) Order Granting [OTCs’] Motion for Partial Summary Judgment on
[TAT] Assessments, Filed on August 31, 2012, filed February 8,
2013;
(7) Order Denying [Director’s] Motion for Partial Summary Judgment,
Filed on August 31, 2012, filed February 8, 2013; and,
(8) Order Denying [Director’s] Motion for Reconsideration Filed
November 7, 2012, filed February 8, 2013.
4
Additionally, the Director cites as error the tax court’s
determination that the TAT does not apply to the OTCs on the gross rental
proceeds derived from certain transactions with Hawaiʻi hotels, “without any
deductions whatsoever.”
- 4 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
the Director in regard to the GET Assessments, the court’s
denial of reconsideration of that grant, and the court’s
affirmance of penalties on the GET Assessments.5
This opinion will first provide the factual background
common to both appeals. Following the background, the
discussion will then address the separate appeals: the cross-
appeal by the OTCs in regard to the GET Assessments, followed by
the appeal by the Director in regard to the TAT Assessments.
A. The Assessed Transactions
The OTCs are organizations doing business with Hawaiʻi
hotel guests (transients) and Hawaiʻi hotels. They operate
websites where transients can research their destinations,
compare travel options, and make reservations with third-party
travel suppliers such as airlines, car rental companies, and
hotels. The OTCs do not own any hotels.
The OTCs sell room accommodations using a business
model that involves two different types of contracts: in the
first, the hotel grants the OTC the right to sell occupancy of a
hotel room to a transient, and in the second, the right to
occupy the hotel room is sold to the transient by the OTC. The
5
The OTCs do not identify as error the tax court’s order granting
interest on the penalties or the court’s denial of summary judgment in their
favor on the GET Assessments.
- 5 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Director’s GET and TAT Assessments are on transactions made
under this business model (Assessed Transactions).6
1. The OTC-hotel contracts
In a contract between an OTC and a hotel, the hotel
grants the OTC the right to offer room occupancy to the public
out of the hotel’s inventory. The hotel contractually delegates
to the OTC numerous “day-to-day” responsibilities the hotel
would otherwise perform itself, including the marketing,
pricing, tax collecting, payment processing, legal contracting,
accounting, and customer service functions. The OTCs maintain
that they do not have the right or the ability to control or
take possession of any hotel rooms; they do not buy, resell, or
rent rooms or blocks of rooms; and they bear no risk if they
fail to arrange room reservations at any hotel.
The OTC-hotel contract establishes the rate the hotel
will charge the OTC for a room (net rate). The net rate is
typically not a fixed amount, but floats, based on a discount
from the hotel’s “best available rate” offered to the public.
An OTC independently sets the price the transient is
charged for the room based on the net rate under the OTC-hotel
6
The OTCs also enter into transactions that the OTCs refer to as
“agency model transactions” and the Director refers to as “Hotel-Controlled
Sales,” in which the OTCs operate as a “traditional travel agent.” “Agency
model transactions” or “Hotel-Controlled Sales” are not at issue in this
case.
- 6 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
contract. That room price is made up of the net rate, plus two
other elements set by the OTC: a “mark up” and a “service fee.”
The mark-up added to the net rate equals the “retail rate” the
OTCs charge the transient for the room. In addition to the
mark-up, the OTCs charge transients a service fee. The OTCs set
the amount of the service fee.
2. The OTC-transient contracts
An OTC enters into a contract with a transient that
reserves the transient’s right to occupy a hotel room for a
certain period of time.7 In the Assessed Transactions,
transients obtain the right to occupy those hotel rooms by
transacting with the OTCs rather than with the hotels
themselves. The OTC-transient contract may also include terms
and conditions of the hotel.8
The OTC controls significant aspects of the
relationship with the transient from the time the transient logs
on to the OTC’s website until the transient checks in at the
hotel. For instance, it is typical that prior to check-in, the
only contact the transient has regarding the hotel reservation
7
The parties appear to use the term “reservation” as synonymous
with “paid reservation” to describe the booking made by the transient for the
right to occupy a hotel room for a certain period of time.
8
The Director asserts that there is no written contract between
the transient and the hotel. The answering brief of the OTCs did not dispute
this assertion; however, the declaration of a Travelocity.com LP employee
indicated that on “arrival at the hotel for check-in, the traveler will be
asked to . . . sign the hotel’s agreement and/or registration card.”
- 7 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
is with the OTC. Prior to check-in, the transient is considered
to be solely the OTC’s customer. Once the transient accepts the
OTC’s contract terms, the OTC processes the credit card
transaction as the merchant of record. The transient pre-pays
the OTC in full when the right to occupy a hotel room for a
certain period of time is reserved. The transient owes nothing
to the hotel at check-in.
The OTC does not disclose the individual amount of the
net rate, mark-up, service fee, or tax to the transient. In the
invoice to the transient, the OTC combines the taxes and service
fees into a single line item called “taxes and fees.”
Similarly, the OTC never discloses to the hotel the amount of
the mark-up, service fee, or total price paid by the transient.
Only the OTC knows all the individual amounts comprising the
total price paid by the transient, including the net rate, mark-
up, service fee, and taxes.
Upon completing the reservation, the OTC sends an
invoice or email confirmation to the transient. The hotel does
not confirm the reservation directly with the transient. The
OTC has its own cancellation policies the transient must accept
when the booking occurs. If the transient changes or cancels a
reservation, the OTC handles the change or cancellation. After
booking the reservation, the OTC provides continuing customer
- 8 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
support to the transient. The OTCs bear the risk of loss from
credit card fraud or bad debt.
In the Assessed Transactions, the OTCs collect the
room charge and taxes from the transients and control the monies
paid by the transients. The hotels contractually delegate to
the OTCs the responsibility to collect all amounts, including
taxes, from the transients. The OTCs thus collect all amounts
from the transient at the time the transient makes the
reservation with the OTC.
The hotel invoices the OTC for the hotel stay,
typically after the transient has checked out. Pursuant to the
hotel’s invoice, the OTC pays the hotel the net rate and the tax
(TAT and GET) that has been collected from the transient on the
net rate. The OTC is not an occupant and does not obtain a
right of hotel room occupancy. The transient is the occupant
and obtains a right to room occupancy, but the transient is not
a party to the payment of the net rate by the OTC to the hotel.
B. Contact between the parties and actions of the parties
prior to the 2011 Assessments
The parties dispute the import and extent of prior
knowledge and prior contacts of the parties in regard to the
OTCs’ potential tax liability for the GET and TAT on the
Assessed Transactions. The actions and contacts of the parties
- 9 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
prior to the 2011 Assessments that can be garnered from the
record are included here.
Attorney-client privilege logs in the record indicate
some OTCs were in discussions with their counsel regarding
“excise tax,” “hotel occupancy taxes,” and “state tax accrual”
from 2001.
The record contains an email dated April 7, 2004, from
an ostensible employee of the State of Hawaiʻi to a person
apparently involved in the state government of Florida that
indicated that Hawaiʻi could not “impose our TAT on an internet
company’s retained portion of payment for a hotel rental.”9
In June 2006, the record indicates that members of the
Department of Taxation (Department) convened an internal meeting
to discuss the issue of taxing OTCs.10
In March 2007, employees of the Department met with a
representative from one of the OTCs. A member of the Department
testified that the conclusion reached at the meeting was “the
Department was not going to pursue a case at that time,” and
that conclusion was “probably communicated” to the OTCs’
representative. A declaration by the OTCs’ representative
9
The OTCs maintain that the email was written by a Hawaiʻi
Department of Taxation Administrative Rules Specialist responding to an
inquiry from the Florida Department of Revenue. The record does not indicate
when the OTCs first became aware of this email.
10
The record does not indicate when the OTCs first became aware of
the 2006 meeting.
- 10 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
confirms that the meeting took place. The representative
testified that he was informed that “we were certainly not
subject to TAT” but “we may be subject to a GET or use tax.”
Testimony by former Department Director Kurt Kawafuchi (Director
Kawafuchi) does not contradict this assessment of the meeting
and suggests that the Department may have invited a request for
a private letter ruling that the OTCs did not owe the TAT. The
OTCs did not request such a ruling.
In 2008, the Department began investigating the
potential assessment of the GET and TAT against the OTCs. In
May 2008, the Director sent information requests to the OTCs for
transactional data.
In July 2008, a meeting was held involving the
Governor’s office and representatives from the Department and
the OTCs. Another meeting involving representatives of the OTCs
and the Department’s outside counsel took place in August 2008.
On August 21, 2008, the OTCs were apparently informed that the
Department’s requests for transactional data were on hold
pending a request to the OTCs for information regarding tax
litigation in other jurisdictions. The OTCs were informed that
the Director’s review of the litigation materials would take
some time and that there was no expectation for the OTCs to
provide the transactional data as long as the OTCs were in
discussion with the Department.
- 11 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
In 2008, however, the matter was dropped. Director
Kawafuchi testified that the matter ultimately was elevated to
the Governor’s level and the “Governor decided not to pursue a
case.” The OTCs’ representative declared he spoke with Director
Kawafuchi in November 2008 and was informed that the TAT inquiry
would not go forward. The OTCs’ representative also declared
that it was communicated to him that “the recommendation that
the Department not go forward was unanimous among members of
[the Department] leadership team” and that the Governor “had
decided that the State would not pursue the [TAT] matter against
the OTCs.” The representative further declared that the
Department would “get back” to him regarding a possible GET
audit but that the Department “never contacted” him.
In a letter dated October 9, 2009, the Attorney
General of the State of Hawaiʻi (Attorney General) responded to a
request from the Senate President and the Speaker of the House
relating to OTCs and the Hawaiʻi GET and TAT (2009 Attorney
General Letter).11 The letter stated that the Department
“determined that it did not wish to pursue and would not support
litigation against the OTCs.” The reasons provided in the
letter for that determination were that the TAT “did not apply
to [OTCs] because the OTCs are not operators” and the GET “would
11
The record does not indicate when the OTCs became aware of the
October 9, 2009 letter to the Senate President and the Speaker of the House.
- 12 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
probably also not be applicable due to the sourcing of the
income outside of Hawaii.” “In addition, the [Department]
believed it may have had substantial litigation hazards in
showing that the majority of OTCs had sufficient presence in
Hawaii to establish substantial nexus as a prerequisite to the
imposition of state taxes.”
Director Kawafuchi, who was copied on the letter,
testified that he did not write the letter and could not
remember if he reviewed it before it went out. Director
Kawafuchi testified that he disagreed with the letter’s
conclusion that the Department may have difficulty proving that
the OTCs had sufficient presence in Hawaiʻi to establish
constitutional nexus; he testified that the OTCs “have nexus in
the State of Hawaii.”
On October 13, 2009, the Rules Office of the
Department prepared a memorandum to file that concluded that the
OTCs were not subject to the TAT because they are not operators
and the Department was not likely to succeed in assessing the
OTCs for the GET because current Hawaiʻi nexus and sourcing laws
are uncertain.12
The Director suggests that some of the conclusions
generated by the Department between 2007 and 2009 were due to
12
The record does not indicate when the OTCs became aware of the
October 13, 2009 memorandum to file.
- 13 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
misrepresentations by the OTCs. The voluminous sealed records
that provide factual support for the Director’s assessment of
the Assessed Transactions were not available to the Director
when the Department initially considered taxing the OTCs in 2007
through 2009. The implication from the Director is that the
Department’s current position is the result of the information
that was gathered during pretrial discovery relating to this
case.
C. Standards of review
This court reviews an award of summary judgment de
novo, under the same standards applied by the trial court.
Therefore, “summary judgment is appropriate if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law.” Fujimoto v. Au,
95 Hawaiʻi 116, 136, 19 P.3d 699, 719 (2001) (alteration omitted)
(quoting Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw.
85, 104, 839 P.2d 10, 22 (1992)).
Where the appeal is from the Tax Appeal Court, it is
well settled that, in reviewing the findings of fact, “a
presumption arises favoring its actions which should not be
overturned without good and sufficient reason. The appellant
has the burden of showing that the decision of the Tax Appeal
- 14 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Court was ‘clearly erroneous.’” Weinberg v. City & Cnty. of
Honolulu, 82 Hawaiʻi 317, 322, 922 P.2d 371, 377 (1996); see
Kamikawa v. United Parcel Serv., Inc., 88 Hawaiʻi 336, 338, 966
P.2d 648, 650 (1998). When the facts are undisputed and the
sole question is one of law, the decision of the Tax Appeal
Court is reviewed “under the right/wrong standard.” Kamikawa,
88 Hawaiʻi at 338, 966 P.2d at 650 (quoting Weinberg, 82 Hawaiʻi
at 322, 922 P.2d at 377).
III. DISCUSSION OF THE GET ASSESSMENTS
A. Introduction
The GET is imposed by Hawaiʻi Revised Statutes (“HRS”)
Chapter 237; HRS § 237-13 provides as follows:
There is hereby levied and shall be assessed and collected
annually privilege taxes against persons on account of
their business and other activities in the State measured
by the application of rates against values of products,
gross proceeds of sales, or gross income, whichever is
specified, as follows:
. . .
(6) Tax on service business.
(A) Upon every person engaging or continuing within
the State in any service business or calling
including professional services not otherwise
specifically taxed under this chapter, there is
likewise hereby levied and shall be assessed
and collected a tax equal to four per cent of
the gross income of the business . . . .
HRS § 237-13 (Supp. 1999) (emphases added). A service business
“includes all activities engaged in for other persons for a
consideration which involve the rendering of a service,
including professional services, as distinguished from the sale
- 15 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
of tangible property or the production and sale of tangible
property.” HRS § 237-7 (Supp. 1999) (emphasis added).13 Gross
income includes rental income. HRS § 237-3 (1993).14 Thus, the
GET is imposed on the gross income derived from the sale of
services or rental income resulting from all services activities
that occur within the state.
B. The tax court’s statements regarding the GET
At the summary judgment hearing, the tax court found
that the GET applied to gross income resulting from the Assessed
Transactions and granted the Director’s motion for summary
13
HRS § 237-7 defines “Service business or calling” as including
all activities engaged in for other persons for a
consideration which involve the rendering of a service,
including professional and transportation services, as
distinguished from the sale of tangible property or the
production and sale of tangible property. “Service
business or calling” does not include the services rendered
by an employee to the employee’s employer.
14
HRS § 237-3 defines “Gross income” and “gross proceeds of sale”:
“Gross income” means the gross receipts, cash or accrued,
of the taxpayer received as compensation for personal
services and the gross receipts of the taxpayer derived
from trade, business, commerce, or sales and the value
proceeding or accruing from the sale of tangible personal
property, or service, or both, and all receipts, actual or
accrued as hereinafter provided, by reason of the
investment of the capital of the business engaged in,
including interest, discount, rentals, royalties, fees, or
other emoluments however designated and without any
deductions on account of the cost of property sold, the
cost of materials used, labor cost, taxes, royalties,
interest, or discount paid or any other expenses
whatsoever.
HRS § 237-3 (1993) (emphases added).
- 16 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
judgment as to the assessment of the tax.15 The tax court found
that the GET is a tax upon the privilege of engaging in business
activity in this state. The tax court reasoned that the
Director may levy the GET upon “the privilege of engaging in a
very lucrative business activity that exists and thrives upon
Hawaiian transient accommodations.”
The court next considered whether the OTCs’ GET
liability would be affected by HRS § 237-18(g) (GET Apportioning
Provision). The GET Apportioning Provision states:
Where transient accommodations are furnished through
arrangements made by a travel agency or tour packager at
noncommissioned negotiated contract rates and the gross
income is divided between the operator of transient
accommodations on the one hand and the travel agency or
tour packager on the other hand, the tax imposed by this
chapter shall apply to each such person with respect to
such person’s respective portion of the proceeds, and no
more.
HRS § 237-18(g) (1993) (emphasis added). Applicability of the
GET Apportioning Provision to the Assessed Transactions would
result in the OTCs and the hotels each being responsible for GET
assessment upon their respective portion of the proceeds, rather
than the liability of the OTCs being based upon the entire
proceeds paid by the transient to the OTCs.
The tax court found that the OTCs’ revenues from the
Assessed Transactions are combined and collected in a single
15
The tax court elected not to make any findings of fact or
conclusions of law, pursuant to Hawaiʻi Rules of Civil Procedure (HRCP) Rule
52(a).
- 17 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
payment that includes the net rate, services charges, mark-up,
and taxes, and the court also found that the OTCs only remit to
the hotel a portion of the payment after retaining a mark-up and
a service fee. The court ruled that “if there is an increase or
expansion of the cost so there is a markup or some other cost
that is added to a particular product,” then the entire amount
becomes subject to the GET. Accordingly, the court determined
that the entire payment from the transient customer to the OTC
is subject to the GET. Thus, the tax court concluded that the
Assessed Transactions did not fall within the GET Apportioning
Provision.
Consequently, the tax court granted summary judgment
in favor of the Director in regard to the GET Assessments and
the application of statutory interest. The tax court filed a
minute order that explained the court’s rationale in affirming
the Director’s determination that both a “failure to file” and a
“failure to pay” penalty applied to the GET Assessments.
As to the failure to file a tax return, the tax court
found that the OTCs did not introduce any evidence that Hawaiʻi
law or Department guidance failed to put them on notice that
they were required to file GET returns and no evidence that any
- 18 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
OTC taxpayer was advised by a tax advisor or attorney that it
was not required to file a return.16
Second, the court found that the OTCs failed to
demonstrate a subjective belief that they did not need to file
GET returns and also failed to introduce any evidence into the
record that any OTC was aware that the Department agreed that
the OTCs were not required to file GET returns. To the
contrary, the court noted that an OTC attorney testified that
former tax Director Kurt Kawafuchi indicated that the OTCs may
have GET liability. As such, the court found that “the [OTCs]
are charged with the same knowledge as their [attorney].”
Third, the court found no evidence that the OTCs were
aware of the 2009 Attorney General Letter. Accordingly, the
court affirmed the Director’s assessment of the failure to file
penalty.
The tax court next discussed its affirmance of the
Director’s assessment of the failure to pay penalty. The tax
court rejected the OTCs’ argument that the Director was
personally required to make an affirmative finding of negligence
or intentional disregard of the law in order to apply the
16
The OTCs asserted the attorney-client privilege on certain
matters in regard to the application of penalties on the GET Assessments.
The court noted that it did not draw any inference from the OTCs’ assertion
of the attorney-client privilege, but the court declined to rule on the
validity of that assertion.
- 19 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
failure to pay penalty. The tax court found that it was
sufficient that the Director delegated the responsibility of
making such a finding and that such delegation was evident in
the fact that the penalty was assessed.
C. The parties’ GET arguments on appeal17
The OTCs appeal the tax court’s grant of summary
judgment in favor of the Director on the issue of the OTCs’
liability for the GET, the court’s denial of reconsideration of
that grant, and the court’s affirmance of penalties on the GET
Assessments.
1. The OTCs’ arguments regarding the GET Assessments
The OTCs argue that the GET only applies to revenue
generating activities within the State of Hawaiʻi and their
activities do not occur in Hawaiʻi; that their services are not
used or consumed in Hawaiʻi; that if the GET applies to the
Assessed Transactions, then the GET Apportioning Provision also
applies; and that rules of statutory interpretation indicate
that any ambiguity in the GET Apportioning Provision must be
construed in their favor.
17
Both parties used extensive emphases in their briefs, and
multiple types of emphases were used (e.g., underlining, bold, italics, bold
italics, underlined bold italics). Therefore, in the sections summarizing
the parties’ briefs in both the GET and TAT appeals, removed emphases will
not be indicated.
- 20 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
a. The OTCs argue the GET applies only to revenue-generating
activities performed “in the State”
The OTCs argue that the Assessed Transactions are not
subject to the GET tax because the GET applies only to revenue-
generating business activities performed “in the State” and
their activities do not occur within Hawaiʻi. The OTCs contend
that the “in the State” limitation within the GET refers to the
“physical, geographical location” where “the particular
activity” that generates income is performed. The OTCs further
contend that “this Court never has held an out-of-state business
liable for GET on income generated by activity performed outside
of the territorial limits of Hawaiʻi.”
The OTCs cite first to this court’s decision in In re
Tax Appeal of Grayco Land Escrow, Ltd., 57 Haw. 436, 449, 559
P.2d 264, 266 (1977), for the holding that the GET “is measured
. . . by the income realized by the particular activity engaged
in by the taxpayer within the state.” The OTCs next point to In
re Tax Appeal of Baker & Taylor, Inc., 103 Hawaiʻi 359, 82 P.3d
804 (2004), in which the OTCs maintain that this court held a
“mainland company liable for GET on books it sold and delivered
to customers in Hawaiʻi.” Third, the OTCs contend that In re Tax
Appeal of Heftel Broadcasting Honolulu, Inc., 57 Haw. 175, 554
P.2d 242 (1976), upheld the assessment of the GET against a
mainland company that rented films to a Hawaiʻi broadcaster
- 21 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
because “the presence and rental of CBS’ films in Hawaiʻi
constituted ‘economic activity’ sufficient to meet the ‘instate
business activity’ requirement of the statute.” Lastly, the
OTCs rely on In re Tax Appeal of Subway Real Estate Corp. v.
Director of Taxation, 110 Hawaiʻi 25, 39, 129 P.3d 528, 542
(2006), in which a mainland company was held liable for the GET
on its activities of “‘signing and maintaining the leases and
subleases for each Subway shop’ in Hawaiʻi, from which it derived
economic benefit.”
Particularly, as to service businesses, the OTCs argue
that in each case, this court has held that the GET applies only
to services the putative taxpayer has performed “in the State.”
The OTCs contend that in Ramsay Travel, Inc. v. Kondo, 53 Haw.
419, 495 P.2d 1172 (1972), this court upheld the imposition of
the GET on travel agencies because their business activity was
conducted exclusively within the State of Hawaiʻi and the
agencies were physically in Hawaiʻi. The OTCs argue that in HC&D
Moving & Storage Co. v. Yamane, 48 Haw. 486, 405 P.2d 382(1965), this court upheld the GET against a Hawaiʻi taxpayer,
noting that the taxpayer’s activities were “performed entirely
and solely within the State.”
In further support of their argument, the OTCs refer
to the Department’s rules, which impose the GET on business and
other activities of “every person engaging or continuing within
- 22 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
the State in any service business.” (Quoting Hawaiʻi
Administrative Rules (HAR) § 18-237-13-06.05(b)(1)).
The OTCs also cite to Tax Information Releases (TIRs),
guidance documents issued by the Department, in support of their
argument that “in the State” is a physical and geographic
limitation. The OTCs claim that the TIRs make clear that a
travel agency performing its services outside Hawaiʻi is not
liable for the GET, even when the arranged travel occurs within
Hawaiʻi. The OTCs assert that their argument is further
supported by a 1965 State Attorney General Opinion (1965 AG
Opinion).18
The OTCs argue that, by “concluding that the GET
reaches activities both in the State and outside the State, the
Tax Court stripped the ‘in the State’ limitation of any meaning,
improperly rendering it mere surplusage” and unconstitutionally
vague. The OTCs further contend that interpreting a vaguely
constructed statute in favor of creating liability would violate
the principle that statutes imposing taxes must be construed in
favor of the taxpayer.
18
The OTCs argue that the 1965 AG Opinion suggests that a person
contracting with or employed by a mainland travel agency that accompanies a
tour group to Hawaiʻi is not subject to the GET because “the privilege of
doing business is being exercised outside the [S]tate of Hawaiʻi, and that
which is being done in Hawaiʻi is in aid or furtherance of the business being
done outside Hawaiʻi.” The OTCs maintain that they are entitled to the same
tax treatment as an out-of-state travel agency.
- 23 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
b. The OTCs argue that their services are not “used or
consumed” in Hawaiʻi
As an independent reason that the Assessed
Transactions are not subject to the GET, the OTCs assert that
the tax court erred in upholding application of the GET on
services that are not used or consumed in Hawaiʻi, citing an
exception for services exported out of the state under HRS
§ 237-29.53(a) and referencing the “Conformity to Constitution,
Etc.,” an exception established by HRS § 237-22(b). The OTCs
assert that their services are not consumed in Hawaiʻi, but
rather, in whatever out-of-state location the transient is
located at the time of purchase.
c. The OTCs argue that if the GET applies to the Assessed
Transactions, the GET Apportioning Provision also applies
The OTCs maintain that the GET Apportioning Provision
was intended to eliminate the effect of “pyramiding” in certain
circumstances.19 The OTCs assert that the GET Apportioning
Provision “avoids multiple taxation on the same gross proceeds”
when travel agents and tour packagers arrange room reservations
on a noncommissioned basis. Thus, the OTCs contend that even if
they are liable for the GET, they are liable only for their
19
“Pyramiding” is an informal term referring to multiple tax
assessments on different persons or entities on the same or related revenue
and is an accepted feature of certain implementations of the GET. See In re
Tax Appeals of Busk Enters., Inc., 53 Haw. 518, 497 P.2d 908, 910 (1972);
Subway, 110 Hawaiʻi at 34, 129 P.3d at 537.
- 24 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
“respective portion of the proceeds, and no more,” because they
are travel agents using noncommissioned negotiated contract
rates. (Quoting the GET Apportioning Provision). The OTCs
claim that the 1965 AG Opinion and the Department’s
documentation--including TIR 91-8, Announcement No. 2011-27, and
published Department instructions for filing a GET return--
confirm that even in-state travel agencies operating under the
merchant model are liable for the GET only to their mark-up and
no more.
The OTCs assert that although “travel agent” is not
defined by the GET statute, they fall “squarely” within the
definition of “travel agent” under HRS § 486L-1 as they act as
“an intermediary between a person seeking to purchase travel
services and any person seeking to sell travel services.”
Further, the OTCs maintain that they “have held themselves out
as” and are “understood by the industry to be” travel agencies.
The OTCs also contend that the transactions between the OTCs and
the hotels are noncommissioned, and the rates at which hotels
allow OTCs to arrange room reservations are negotiated between
the hotels and the OTCs. Thus, the OTCs conclude that the
Assessed Transactions fall within the GET Apportioning
Provision.
The OTCs contest the tax court’s two stated reasons
for non-applicability of the GET Apportioning Provision. First,
- 25 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
the OTCs note that the “GET Statute expressly contains the anti-
pyramiding provision, which necessarily means it applies in the
general excise tax arena.” Second, the fact that the travel
agency adds its own margin and service fee to the contractual
net rate does not render the GET Apportioning Provision
inapplicable. The OTCs maintain that the tax court’s ruling is
“contrary to the plain language of the Statute and the
Department’s own guidance[] and improperly renders the anti-
pyramiding provision a nullity.”
d. The OTCs argue that any ambiguity in the GET Apportioning
Provision must be resolved in their favor
The OTCs contend if the applicability of the GET
Apportioning Provision is ambiguous, “where there are competing
reasonable constructions, the resulting ambiguity must be
strictly construed against the taxing authority and in favor of
the asserted taxpayer.”
2. The Director’s arguments regarding the GET Assessments
In response, the Director argues the following: (1)
because the OTCs conduct “business and other activities in the
State,” they are subject to the GET; (2) there is no legal
authority for the OTCs’ “consumed or used” test; (3) the OTCs
are not subject to the GET Apportioning Provision; and (4) the
assessed penalties are correct in all respects.
- 26 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
a. The Director argues that the OTCs do business “in the
State” and are thus subject to the GET
The Director characterizes the GET as “a ‘privilege
tax’ that is ‘based on the fact that the party chose to engage
in business activity within the state’ and ‘is justified on the
ground that companies conducting business enjoy the protections
and benefits given by the state.’” The Director contends that
the GET statute is especially broad in scope, evincing an
intention to tax virtually every economic activity imaginable
and virtually all transactions with economic gain or benefit.
The Director contends that this court had upheld the application
of the GET in analogous circumstances, citing to Grayco, Subway,
Heftel Broadcasting, and Baker & Taylor.
b. The Director argues the OTCs must pay GET on their gross
income without any deduction
The Director contends the OTCs owe the GET on the
total gross income from the Assessed Transactions without any
deductions “whatsoever” because the OTCs have “independent GET
obligations.” (Quoting HRS § 237-3(a)). The Director argues
that the GET Apportioning Provision does not apply to the OTCs
because the provision requires three elements, “none of which
are found in [the Assessed Transactions].”
First, the Director argues that the OTCs “are not
functioning as travel agents” because they do not “act as []
intermediar[ies],” but rather, act as direct sellers of Hawaiʻi
- 27 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
hotel rooms to transients. The Director contends that under the
OTC-hotel contracts, Hawaiʻi hotels grant the OTCs control over
their inventory and the right to offer room occupancy to the
public. “The contracts provide that the OTCs, not the hotels,
control the relationship with the transients . . . .”
Transients “obtain the right to occupy those hotel rooms by
transacting with the OTCs rather than with the hotels.” “The
OTCs collect all amounts, including rent and taxes, from the
transients when the transients make the reservation with the
OTCs.” The Director argues that the fact that the OTCs are
registered as travel agents under HRS § 468L-2 and hold
themselves out as online travel agencies does not prove that the
OTCs function as travel agents in the Assessed Transactions.
Second, the Director argues that in the Assessed
Transactions, the gross income is not divided. “Under the OTC-
Hotel Contracts, OTCs pay hotels as they do any other creditor.
The transient’s payment to the OTCs is not ‘pooled’ or ‘divided’
with the hotel . . . .” The Director contends that “the OTCs do
not divide income with hotels by virtue of paying the hotels for
room occupancy later sold to transients.” Thus, the Director
concludes that “[r]ather than being in a legal relationship such
as a partnership or joint venture where revenues are divided,”
the OTCs’ relationship with the hotels is at “arm’s length.”
- 28 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Third, the Director contends that the OTCs’ income in
the Assessed Transaction is not consistent with noncommissioned
negotiated contract rates. The Director argues that the
legislative history indicates that the GET Apportioning
Provision “was added to address the legislature’s concern that
tour packages presented a unique problem in that it might be
‘impossible’ for the Director to determine what portion of the
total package price is attributable to each travel component for
tax purposes.” The Director states that noncommissioned
negotiated contract rates should only apply to agreements
between a hotel and tour packager under which the hotel room
price is set at a “fixed dollar amount” or a “sum certain.” In
contrast, the Director maintains that the OTC-hotel contracts
involve room rates that are “‘floating’ ‘net rate’ amounts”;
“the ‘net rate’ is a formula and the dollar amount fluctuates.”
D. The parties’ arguments regarding interest and penalties on
the GET Assessments
The tax court affirmed the Director’s assessment of a
25% “failure to file” penalty and a 25% “failure to pay”
penalty, authorized under HRS §§ 231-39(b)(1) and 231-
39(b)(2)(A), respectively.
1. The OTCs’ arguments regarding penalties
The OTCs argue that the failure to file penalty should
not be imposed where the taxpayer proves its inaction was “due
- 29 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
to reasonable cause and not due to neglect.” The OTCs argue
Hawaiʻi case law does not limit reasonable cause to reliance on
advice of a competent accountant or attorney. Further, the OTCs
cite to federal case law for the proposition that “where the law
is unsettled or ambiguous, such that it does not give notice of
the requirement to file a return, the circumstances of the case
speak for themselves and there is reasonable cause for failure
to file as a matter of law.” The OTCs represent that because
they “voluntarily approached the Department to discuss potential
liability,” and because the former Director and Attorney General
advised them that the Department had concluded the OTCs likely
were not liable for GET, they had reasonable cause to not file
GET returns.
In regard to the failure to pay penalty, the OTCs
argue that the failure to pay penalty requires an affirmative
determination by the Director that the failure to pay was due to
negligence or intentional disregard of rules. The OTCs contend
that there is no evidence that the Director made such a
determination. With no support in the record, the OTCs contend
that the failure to pay penalty is “baseless.”
2. The Director’s arguments regarding penalties
The Director asserts it is “indisputabl[e]” that the
OTCs were on notice of potential GET liability and that the
OTCs’ discussions with the Department in 2007 and 2008 are
- 30 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
“legally irrelevant” and based upon “factual
misrepresentations.” The Director contends that the penalties
assessed by the Department are “prima facie correct in all
respects” and that the burden is on the taxpayer to overcome the
presumption of proper assessment. Based upon the OTCs’ failure
to offer any evidence in support of that burden, the Director
asserts that the tax court correctly affirmed the penalties
assessed by the Director on the unpaid GET. The Director
further disputes that the failure to pay penalty cannot be
imposed absent an affirmative determination by the Director that
a failure to pay was due to negligence or intentional disregard
of rules.
E. Discussion of the GET
The GET is imposed on the gross income derived from
the sale of services or rental income resulting from all
services activities that occur within the state. HRS § 237-13.
1. The Assessed Transactions are subject to the GET
This court has previously stated that the GET statute
“evidences the intention of the legislature to tax every form of
business, subject to its taxing jurisdiction, not specifically
exempted from its provisions.” Grayco, 57 Haw. at 443, 559 P.2d
at 270. In enacting the GET, “the legislature cast a wide and
tight net.” In re Tax Appeal of Island Holidays, Ltd., 59 Haw.
307, 316, 582 P.2d 703, 708 (1978); see In re Tax Appeal of C.
- 31 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Brewer & Co., 65 Haw. 240, 247, 649 P.2d 1155, 1156 (1982).
“Read as a whole,” the GET taxes “virtually every economic
activity imaginable.” Pratt v. Kondo, 53 Haw. 435, 436, 496
P.2d 1, 2 (1972); see C. Brewer & Co., 65 Haw. at 244, 649 P.2d
at 1158 (noting that the legislative design was “to reach
virtually all transactions with economic gain or benefit”).
The GET is a privilege tax assessed “based on the
privilege or activity of doing business within the State and not
on the fact of domicile.” Grayco, 57 Haw. at 447, 559 P.2d at
272. It “is a gross receipts tax on the privilege of doing
business in Hawaiʻi.” Baker & Taylor, 103 Hawaiʻi at 365, 82
P.3d at 810; accord Subway, 110 Hawaiʻi at 32, 129 P.3d at 535.
“[I]t is a tax imposed upon entrepreneurs for the privilege of
doing business” that “applies at all levels of economic activity
from production or manufacturing to retailing . . . and to
virtually all goods and services.” In re Tax Appeal of Cent.
Union Church Arcadia Ret. Residence, 63 Haw. 199, 202, 624 P.2d
1346, 1349 (1981). It is assessed when the taxpayer avails
itself of the “protection, opportunities, and benefits” afforded
by the State of Hawaiʻi. Heftel Broad., 57 Haw. at 182, 554 P.2d
at 248 (emphasis added); accord Baker & Taylor, 103 Hawaiʻi at
365, 82 P.3d at 810.
The Director is not required to acquiesce to a
taxpayer’s chosen form of accounting practices and nominal
- 32 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
distinctions when making a determination of liability for
taxation. “Though it may be axiomatic that a taxpayer can order
its affairs in any manner not proscribed by law to minimize the
impact of taxation, the Director is by no means bound by its
accounting practices.” C. Brewer & Co., 65 Haw. at 246, 649
P.2d at 1158-59 (citation omitted). “It is also fundamental
that [the Director] can look at the substance rather than the
form of a transaction in fixing tax liability.” Id.
“Actualities and consequences of a commercial transaction,
rather than the method employed in doing business, are
controlling factors in determining such liability.” In re
Taxes, Kobayashi, 44 Haw. 584, 590, 358 P.2d 539, 543 (1961).
“To hold otherwise would permit the schemes of taxpayers to
supersede legislation in the determination of the time and
manner of taxation.” Kobayashi, 44 Haw. at 590, 358 P.2d at 543(quoting Higgins v. Smith, 308 U.S. 473, 477 (1940)).
The OTCs assert that the statutory phrase “in the
state” means a “physical geographical limitation” and that
Grayco, Subway, Baker & Taylor, and Heftel Broadcasting so hold.
However, our case law does not support the contention that the
taxpayer must have a physical presence in the state.
In Grayco, the taxpayer was a California corporation
with its principal place of business in California. Grayco, 57
Haw. at 438, 559 P.2d at 267. The taxpayer was not licensed to
- 33 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
do business in Hawaiʻi pursuant to HRS Chapter 237, nor did it
have a place of business or any employees in Hawaiʻi. Id. The
taxpayer held legal title to land in Hawaiʻi as trustee for
certain beneficial owners in California. Id. at 439, 559 P.2d
at 269. The taxpayer executed agreements of sale in California
for subdivided lots of the land in Hawaiʻi, received principal
and interest payments in California, and distributed those
payments to the beneficiaries. Id. at 441, 445, 559 P.2d at
269, 271. The Director assessed the taxpayer for the interest
income. Id. at 442, 559 P.2d at 269.
This court found that the “initial and primary issue”
in Grayco was whether the trustee, as legal title holder to and
vendor of the subdivided property, was “engaging or continuing
within the State in any business, trade or activity.” Id. at
443, 559 P.2d at 270 (alteration omitted) (quoting HRS § 237-
13(10)). We held, “It is clear that the taxable event in this
case was the receipt of interest income derived from the sale of
land located in Hawaiʻi under agreements of sale . . . .” Id. at
454, 559 P.2d at 276. Accordingly, we found there was
sufficient business activity by the taxpayer in this State to
justify the privilege tax. Id. at 449, 559 P.2d at 273.
Additionally, we noted that the taxpayer benefited not only from
roads, police and fire protection of the State, but also
- 34 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
utilized the State’s recording offices, laws, courts, and “other
opportunities, protection and benefits of the State.” Id.Further, the Director in Grayco looked through the
taxpayer’s contractual edifice to assess the taxpayer. “The
fact that [the beneficial owner] is under a duty to pay all
taxes assessed on the property pursuant to the trust agreement
is . . . of no effect. The trust agreement between the various
parties is not binding on the taxing authority or determinative
of the tax consequences.” Id. at 456, 559 P.2d at 277. “To
hold otherwise would create havoc for the taxing authorities.”
Id. Accordingly, this court found that the taxpayer, as trustee
and legal owner of the property in question, was liable for the
assessment of the general excise tax.
In Subway, the Director assessed the taxpayer for
income arising from sublease agreements for properties located
in Hawaiʻi. Subway, 110 Hawaiʻi at 27, 129 P.3d at 530. The
taxpayer had no employees or offices in Hawaiʻi. Id. at 31, 129
P.2d at 534. Under the sublease agreement, all sublease rent
was paid directly by the sublessee to the landlord; none of the
income went to the sublessor taxpayer. Id. at 27, 129 P.2d at
530.
Nonetheless, this court held that under the
anticipatory assignment doctrine, the taxpayer could not “be
excused from its liability for GET by channeling the sublease
- 35 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
payments directly to the landlords.” Id. at 33, 129 P.2d at
536. “To permit Taxpayer to do so would directly subvert the
overall scheme of HRS chapter 237 to tax ‘all levels of economic
activity.’” Id. (quoting Cent. Union Church, 63 Haw. at 202,
624 P.2d at 1349).
This court found that the subleasing taxpayer derived
certain benefits, including, inter alia, the power to prohibit
the landlord from leasing to competitors, the right to assign
subleases without the landlord’s consent, and the capacity to
enforce provisions of the sublease agreement. Id. at 34, 129
P.2d at 537. Thus, we concluded that “inasmuch as [the
t]axpayer gained or economically benefitted from the subleasing
transactions at issue, . . . the Director’s assessment and
imposition of the GET for [the t]axpayer’s subleasing activities
was proper.” Id.
In Baker & Taylor, a Delaware corporation, with its
principal place of business in North Carolina, contracted to
sell books and other education materials to Hawaiʻi customers.
Baker & Taylor, 103 Hawaiʻi at 362, 82 P.3d at 807. Title to the
books and other materials passed to the customer outside of
Hawaiʻi. Id. The taxpayer had no office in Hawaiʻi, no
employees based in Hawaiʻi, and no real property in Hawaiʻi. Id.
at 361-62, 82 P.2d at 806-07. The taxpayer argued that as title
to the goods passed outside of Hawaiʻi, the transactions were not
- 36 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
subject to the GET. Id. at 364, 82 P.3d at 809. This court
disagreed. Id. at 367, 82 P.3d at 812.
We found that the taxpayer was “not a passive seller
of goods to Hawaiʻi consumers.” Id. at 366, 82 P.3d at 811.
Rather, the taxpayer “engaged in active solicitation in Hawaiʻi
by sending employee representatives to meet potential and
current purchasers of its products.” Id. at 366, 82 P.3d at
811. Further, the sales “were made pursuant to a contract that
[the taxpayer] obtained through bidding with the State” for the
business, and the taxpayer provided “software and training for
purchasing and cataloging its materials in Hawaiʻi.” Id.Accordingly, we found that it was “evident that in engaging in
such activity,” the taxpayer received the “benefits and
protection of the laws of the state, including the right to
resort to the courts for the enforcement of its rights.” Id.(quoting Int’l Shoe Co. v. Wash., 326 U.S. 310, 320 (1945)).
Thus, the court concluded there was “sufficient ‘business and
other activities in the State’ to impose the general excise tax”
on the sales transactions and that the taxpayer was liable for
the GET assessed. Id. at 367, 82 P.3d at 812.
In Heftel Broadcasting, the Director assessed the GET
against out-of-state corporations that had license agreements
providing telecast rights for films to a local corporation.
Heftel Broad., 57 Haw. at 176, 554 P.2d at 244. The out-of-
- 37 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
state corporations were not physically present in Hawaiʻi nor
engaged in any activity in Hawaiʻi, other than owning and renting
film prints and their telecast rights and shipping the films to
the local corporation. Id. All of the licensing agreements
were consummated outside of Hawaiʻi. Id. at 177, 544 P.2d at
245. The threshold issue was whether the transactions had taken
place “in the State.” Id. at 179, 544 P.2d at 246. This court
concluded as follows:
These telecast rights were wholly consumable and only
consumable in Hawaii within specific time limits. . . . So
even though the agreement was consummated on the mainland,
it was done so with the intent that performance would occur
almost entirely in Hawaii. Furthermore, unlike a sale of
goods that takes place on the mainland with the goods being
transported here, the license arrangement continued into
this State wherein it was a source of income to the
licensor.
Id. at 180-81, 554 P.2d at 246-47 (emphases added) (footnotes
omitted). Thus, we were “of the opinion that regardless of the
fact that all activities in the consummation of the agreement
between the parties herein occurred on the mainland, [the
taxpayer] was engaged in local ‘business’ within the meaning of
chapter 237.” Id. at 181, 544 P.2d at 247.
Here, it is clear that the taxable event is the
receipt of income by the OTCs under agreements with transients
to provide accommodations in Hawaiʻi hotel rooms. Like the
taxpayer in Subway, the OTCs receive income by virtue of selling
the right to occupy hotel rooms located in Hawaiʻi. The OTCs
- 38 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
have previously contracted to have access to that right through
the OTC-hotel contracts, in a manner analogous to the
subleasor/subleasee agreements present in Subway. As in Subway,
the OTCs gain and economically benefit from the transactions at
issue. Just as transients are Hawaiʻi consumers when they
purchase hotel rooms directly from a hotel, they remain Hawaiʻi
consumers when they purchase a Hawaiʻi hotel room from an OTC.
As in Baker & Taylor, the OTCs are not passive sellers
of services to Hawaiʻi consumers. The OTCs actively solicit
customers for Hawaiʻi hotel rooms and actively solicit hotels to
contractually provide the right to sell on their website the
right of occupancy of hotel rooms.
Similar to Heftel Broadcasting, it is clear the
occupancy rights that the OTCs are selling to transients are
wholly consumable and only consumable in Hawaiʻi. Even though an
OTC’s agreement with a transient may take place outside of
Hawaiʻi, the agreement is effected with the intent that
performance would occur entirely in Hawaiʻi. Further, the OTC-
transient agreement, in which an OTC provides a Hawaiʻi hotel
room to the transient, is similar to the licensing agreements in
Heftel Broadcasting, in that the transient accommodation
agreements continue into this State where it is a source of
income to the OTCs. Finally, it is clear that the OTCs
- 39 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
constructively benefit through the transients’ use and benefit
from state services--including use of the roads and access to
police, fire, and lifeguard protection services. Thus, it is
inescapable that there are sufficient “business and other
activities in the State” to impose the GET on the gross income
resulting from the Assessed Transactions.20
2. The GET Apportioning Provision applies to the Assessed
Transactions
As noted, the GET “evidences the intention of the
legislature to tax every form of business, subject to the taxing
jurisdiction, not specifically exempted from its provisions.”
Grayco, 57 Haw. at 443, 559 P.2d at 270. Similarly, the
receipts of taxation are likewise described in expansive terms.
Gross income means in relevant part:
the gross receipts, cash or accrued, of the taxpayer
received as compensation for personal services and the
gross receipts of the taxpayer derived from trade,
business, commerce, or sales and the value proceeding or
accruing from the sale of tangible personal property, or
service, or both, and all receipts, actual or accrued as
hereinafter provided . . . .
HRS § 237-3 (1993) (emphasis added). Thus, under the definition
of gross income provided by HRS § 237-3, the GET would be
assessed on the gross income received by the OTCs from the
20
In light of our opinion that the OTCs are liable for the GET, we
do not address the OTCs’ claim that it was error for the tax court to deny
their motion for reconsideration of the order granting summary judgment in
favor of the Director on the GET issue. Further, as it is clear that the
Assessed Transactions are business transactions that continue in the state,
the OTCs’ argument that their services are not “used or consumed in the
State” is rejected.
- 40 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
transient for the provision of Hawaiʻi hotel rooms. However, the
“inherent pervasiveness” of the GET, with its expansive
definition of income, is mitigated by limited categories of
income-reducing provisions. Cent. Union Church, 63 Haw. at 202,
624 P.2d at 1349. As stated previously, the GET Apportioning
Provision divides income between hotel operators and a “travel
agency and tour packager”:
Where transient accommodations are furnished through
arrangements made by a travel agency or tour packager at
noncommissioned negotiated contract rates and the gross
income is divided between the operator of transient
accommodations on the one hand and the travel agency or
tour packager on the other hand, the tax imposed by this
chapter shall apply to each such person with respect to
such person’s respective portion of the proceeds, and no
more.
HRS § 237-18(g) (emphases added).21 Accordingly, if the income
resulting from the provision of the transient accommodation may
be divided between the hotel as “the operator of the transient
accommodation on the one hand” and the OTCs as the “travel agent
or tour packager on the other hand,” then the GET may only be
imposed on the OTCs’ “respective portion” of the gross income--
that is, the gross income less the “net rate.”
However, for the GET Apportioning Provision to apply
to the Assessed Transactions, three requirements must be met.
21
It is undisputed that the hotels are “operators” under HRS §
237D-1 (1993). See infra Part IV for discussion of HRS Chapter 237D, which
establishes the TAT. It is also not a matter of dispute that the
accommodations provided in the Assessed Transactions are “transient
accommodations” as defined by HRS § 237D-1.
- 41 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
First, the OTCs must operate as a travel agency or tour packager
in the Assessed Transaction. Second, the gross income resulting
from the Assessed Transactions must be divided between the
travel agency or tour packager and the operator. Third, the
Assessed Transactions must furnish transient accommodations
under noncommissioned contract rates.22
a. The OTCs operate as travel agencies
Although the term “travel agency” is not defined
within HRS Chapter 237 and has not been construed by our case
law, this court applies the ordinary meaning of words. HRS § 1-
14 (1985); Saranillio v. Silva, 78 Hawaiʻi 1, 10, 889 P.2d 685,
694 (1995). In the ordinary sense, an “agency” is “an
establishment engaged in doing business for another,” Webster’s
Third New International Dictionary 40 (unabr. 1993) [hereinafter
Webster’s], or “a business that provides a particular service.”23
“Travel agency” is “an office or enterprise engaged in selling,
arranging, or furnishing information about personal
transportation or travel.” Webster’s, supra, at 2433. A travel
agency is “an agency engaged in selling and arranging
22
Regardless of the applicability of the GET Apportioning Provision
to the Assessed Transactions, the hotels are liable for the GET on the net
rate received by the hotels from the OTCs, which the parties do not dispute
that the hotels should pay and have paid.
23
Agency, Merriam-Webster, http://www.merriam-
webster.com/dictionary/agency (last visited Aug. 20, 2014).
- 42 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
transportation, accommodations, tours and trips for travelers.”24
Thus, the ordinary usage of “travel agency” as an enterprise
that “engages in doing business,” “provides,” or “sells” does
not preclude the travel agency from entering into direct
contractual privity with the traveler. The activities of the
OTCs are therefore in accordance with the ordinary and commonly
understood meaning of “travel agency” as an enterprise engaged
in arranging and selling travel services.25
Even if the ordinary usage of “travel agency” is not
dispositive, see HRS § 1-14, and it is assumed to be ambiguous,
the meaning may be sought by examining the context within which
the words appear. HRS § 1-15 (1985). Here, the conclusion that
the OTCs perform as travel agencies is supported by examination
of this term in the context of the GET Apportioning Provision.
In context, the term “travel agency” is paired with
“tour packager”; accordingly, we look to the use of the term
“tour packager” to determine if it assists in the understanding
24
Travel Agency, Merriam-Webster, http://www.merriam-
webster.com/dictionary/travel%20agency, (last visited Sept. 17, 2014).
25
This is in accord with the conclusion of the tax court in regards
to the TAT. The tax court concluded as follows:
And I think that because there is no definition of “travel
agency,” that a common notion of travel agency is very
close to what the OTCs performed.
. . . . [W]hile there may be technical distinctions between
a travel agency and an OTC, for the purpose of what our
legislature was looking at, I viewed the term “travel
agency” to be somewhat generic.
- 43 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
of “travel agencies.” The term “tour packager” is also not
expressly defined by statute, nor is a definition provided by
common dictionaries.
An aid to understanding the meaning of “tour packager”
is provided by other definitions in the HRS and HAR. For
instance, the term “tour packager” appears within the definition
of “carrier”: a “carrier” is “a person who engages in
transportation, and does not include a person such as a freight
forwarder or tour packager who provides transportation by
contracting with others, except to the extent that such person
oneself engages in transportation.” HRS § 239-2 (Supp. 1998)
(emphasis added) (defining “carrier”). Thus, under HRS § 239-2,
a tour packager that provides a transient with transportation
services is not precluded from entering into direct contractual
privity with the transient.
Similarly, for purposes of the rental motor vehicle
and tour vehicle tax, “a wholesaler, tour packager, or travel
agent whose business and service may include arranging the
rental vehicle transportation for a person shall not be deemed a
lessor, unless the wholesaler, tour packager, or travel agent
actually rents or leases (as defined in section 18-251-1-04) the
vehicle.” HAR § 18-251-1-02(b) (effective 1992) (emphasis
added). Likewise, “tour vehicle operator” is defined to the
exclusion of “wholesalers, tour packagers, and travel agents
- 44 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
whose business and service may include arranging the
transportation of persons via tour vehicles, unless the
wholesaler, tour packager, or travel agent owns, manages,
operates, or dispatches tour vehicles. HAR 18-251-1-06(b)
(effective 1992 & 1993) (emphasis added). Thus, the
Department’s rules pertaining to the rental motor vehicle and
tour vehicle tax expressly contemplate that either a tour
packager or a travel agent may directly enter into contractual
privity with a transient seeking to rent or lease a vehicle.
A further aid in understanding the term “tour
packager” is provided by the Department’s TIR 91-8, which
discusses the application of the GET Apportioning Provision and
provides the following example:
Example 2 – A tour packager sells a tourist a tour of
Honolulu for $50. Included in this tour are stops at a
pineapple cannery (cannery) and the Arizona Memorial
Visitor Center (Visitor Center). The tour packager pays a
bus company $30 for transportation, pays the cannery $5 for
a tour, and pays the Visitor Center $5 for admission to the
Visitor Center.
TIR 91-8 at 2 (July 8, 1991) (emphasis added).26 TIR 91-8 goes
on to describe the tax effect of the various payments and the
amount that is taxed to the tour packager. Id. However, what
is significant is that because the tour packager makes all
payments to the vendors for the activities collectively sold to
26
The TIRs are available at http://tax.hawaii.gov/legal/tir.
- 45 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
the tourist, the TIR seems to describe an entity that is in
direct contractual privity with the tourist.
Thus, the term “travel agency or tour packager” is not
inconsistent with an entity, which is in direct contractual
privity with a consumer of transient accommodations, from
applying the GET Apportioning Provision to the proceeds derived
from that contract. It follows that the ordinary definition of
travel agency, reinforced by the treatment of “tour packager” as
that term is used in related statutes, the Department’s rules,
and the Department’s published guidance, indicates that, for the
purposes of the GET Apportioning Provision, the OTCs operate as
travel agencies in the Assessed Transactions. This conclusion
is further sustained in the context of the analysis of “gross
income is divided” and “noncommissioned negotiated contract
rates.”
b. The gross income resulting from the Assessed Transaction is
divided
The second requirement for application of the GET
Apportioning Provision is that the gross income is divided
between the operator of transient accommodations on the one hand
and the travel agency or tour packager on the other hand.
The term “divided” is not defined by statute. Under
general principles of statutory construction, courts endeavour
to give words their ordinary meaning unless the statute requires
- 46 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
a different interpretation. HRS § 1-14; Saranillio, 78 Hawaiʻi
at 10, 889 P.2d at 694. Further, if the term “divided” is
ambiguous, “[t]he reason and spirit of the law, and the cause
which induced the legislature to enact it, may be considered to
discover its true meaning.” HRS § 1-15.
Dictionary definitions would indicate that the income
resulting from the Assessed Transactions may be “divided.”
“Divide,” as a verb, means “to separate into two or more parts.”
Webster’s, supra, at 663. Thus, based on a dictionary
definition of “divide,” it does not appear that the term
precludes application of the GET Apportioning Provision to the
Assessed Transactions.
In context, the term “divided” or “gross income is
divided” appears in five other subsections of HRS § 237-18,
other than the GET Apportioning Provision set forth in
subsection (g). See HRS § 237-18(a)-(b), (e)-(f), and (h)
(2001). The legislative history for these subsections indicates
that the legislature did not intend the verb “divide” to signify
any type of unique accounting practice between the parties
identified in each subsection. In the history of HRS § 237-18
and its precursors in the Laws of Hawaiʻi and the Revised Laws of
Hawaiʻi, the first appearance of the term “divided” was in
subsection (a), enacted in 1949, which offers special tax
treatment for operators of coin-operated devices.
- 47 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Where a coin operated device produces gross income which is
divided between the owner or operator of the device, on the
one hand, and the owner or operator of the premises where
the device is located, on the other hand, the tax imposed
by this chapter shall apply to each such person with
respect to the person’s portion of the proceeds, and no
more.
HRS § 237-18(a) (1993) (emphasis added). HRS § 237-18(a) serves
the same purpose between an operator of a coin-operated device
and the owner of the premises as does the GET Apportioning
Provision between a travel agency and the hotel operator.
HRS § 237-18(a) has remained unchanged since its
enactment. See 1949 Haw. Sess. Laws Act 252, § 1 at 300. The
legislative history does not indicate that the legislature
placed any special meaning on the term “divided.”27 Further, it
seems likely that the relationship between the “owner or
operator” of a coin operated device and the “owner or operator
of the premises where the device is located” would have an arms-
length, contractual relationship. Thus, in the context of HRS §
237-18(a), the phrase “gross income is divided” does not
specify, require, or preclude a certain type of business
relationship or revenue-division agreement.
27
See S. Stand. Comm. Rep. No. 530, in 1949 Senate Journal, at
1368-69 (“This bill provides that in the case gross income from coin-operated
machines is divided between the owner of the machine and the owner of the
premises. . . .”); H. Stand. Comm. Rep. No. 926, in 1949 House Journal, at
2218 (“This bill provides that where the gross income derived from the
operation of a coin operated device is divided between the owner or operator
of such device, on the one hand, and the owner or operator of the premises
where such device is located, on the other hand, the general excise tax shall
. . . be imposed on each such person’s portion of the proceeds . . . .”).
- 48 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
The 1951 legislature added subsections (b) and (e) to
HRS § 237-18. 1951 Haw. Sess. Laws Act 165, § 4 at 294-95.
Subsection (b) addresses an entertainment venue where gate
receipts are divided between the person furnishing or producing
an event and the promoter.28 Subsection (b) has a similar effect
as the GET Apportioning Provision; although the promoter is
responsible for the GET on the “whole of the proceeds,”
liability between the producer and the promoter is limited by
subsection (b) to one application of the GET.
Subsection (e) concerns commissions by insurance
agents or real estate brokers.
Where insurance agents . . . or real estate brokers or
salespersons . . . produce commissions which are divided
between such general agents, subagents, or solicitors, or
between such real estate brokers or salespersons . . . the
tax levied . . . shall apply to each such person with
respect to the person’s portion of the commissions, and no
more.
HRS § 237-18(e) (emphasis added). Thus, subsection (e) has
generally the same purpose between insurance agents or real
28
Subsection (b) provides:
Where gate receipts or other admissions are divided between
the person furnishing or producing a play, concert,
lecture, athletic event, or similar spectacle . . . on the
one hand, and a promoter . . . offering the spectacle to
the public, on the other hand, the tax imposed by this
chapter . . . shall apply only to the promoter measured by
the whole of the proceeds, and the promoter shall be
authorized to deduct and withhold from the portion of the
proceeds payable to the person furnishing or producing the
spectacle the amount of the tax payable by the person upon
such portion.
HRS § 237-18(b) (emphasis added).
- 49 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
estate agents as does subsection (g) between a travel agency and
the hotel operator.
The legislative history for the 1951 amendment does
not indicate that the legislature placed any unique or special
meaning on the term “divided,” but it does indicate that the
legislature found the term synonymous with “split” or
“splitting.”29 Thus, the 1951 amendment provided two
significantly different economic relationships--a
promoter/producer relationship and a relationship between
insurance agents or between real estate brokers--and defined
both categories of relationships as “dividing” or “splitting”
their income.
Subsection (f) provides special GET treatment for
“tourism related services”:30
29
The report of the House Standing Committee stated that the 1951
amendment “relat[ed] to the splitting of gate receipts” and the “splitting of
commissions between insurance agents or between real estate brokers.” H.
Stand. Comm. Rep. No. 369, in 1951 House Journal, at 501. The House
Committee also indicated the 1951 amendment addressed the situation when an
insurance agent “receiv[ed] part of a commission.” Id. Similarly, the
Senate Committee Report noted, “The bill relates to the application of the
[GET] to commissions split between real estate brokers, or between insurance
agents, gate receipts or other admissions split between promoters and
performers . . . .” S. Stand. Comm. Rep. No. 394, in 1951 Senate Journal, at
893.
30
“Tourism related services” means:
catamaran cruises, canoe rides, dinner cruises, lei
greetings, transportation included in a tour package,
sightseeing tours not subject to chapter 239, admissions to
luaus, dinner shows, extravaganzas, cultural and
educational facilities, and other services rendered
directly to the customer or tourist, but only if the
providers of the services other than air transportation are
(continued. . .)
- 50 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Where tourism related services are furnished through
arrangements made by a travel agency or tour packager and
the gross income is divided between the provider of the
services and the travel agency or tour packager, the tax
imposed by this chapter shall apply to each such person
with respect to such person’s respective portion of the
proceeds, and no more.
HRS § 237-18(f) (emphasis added). Subsection (f) has the same
purpose between a travel agency and a provider of tourism
related services, as does subsection (g) between a travel agency
and the hotel operator. Subsection (f) was added in 1986 to
prevent the Department from “grossing up”31 the income of
tourism-related service providers.
Your Committee after reviewing the law in this area agrees,
with reservation, that under the reasoning of the general
excise tax law the need for a gross up provision or the
ability to gross up is required. On the other hand, the
use of gross up in the area of certain tourism-related
services does not serve the interests of the State in
encouraging tourism. . . . This amendment provides for a
split of the gross proceeds from tourism-related services
between the travel agency or tour packager and the tour
provider. For example, if the tour provider furnished
tickets to the travel agency for $80 which normally sell
for $100, the tour provider will only be taxed on the $80
received. The travel agency or tour packager will be taxed
on the commission it receives.
Conf. Comm. Rep. No. 70-86, in 1986 House Journal, at 962, 1986
Senate Journal, at 765-66 (emphases added). Thus, when HRS §
(. . .continued)
subject to a four per cent tax under this chapter or
chapter 239.
HRS § 237-18(f).
31
“Gross up” or “grossing up” is not defined by statute or in the
legislative history. In context, it appears to mean the practice of the
Department to assess an entity for the GET on imputed income for certain
transactions that is greater than the income resulting from the transaction
reported by the taxpaying entity.
- 51 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
237-18 was amended to add subsection (f), the legislature
recognized a class of transactions between travel agencies and
providers of tourism-related services that it wanted to provide
preferential tax treatment, and the use of the term “gross
income is divided” did not connote any unique type of business
relationship or accounting practice.
Subsection (h) of HRS § 237-18 addresses
transportation services.
Where the transportation of passengers or property is
furnished through arrangements between motor carriers, and
the gross income is divided between the motor carriers, any
tax imposed by this chapter shall apply to each motor
carrier with respect to each motor carrier’s respective
portion of the proceeds.
HRS § 237-18(h) (2001) (emphasis added). This section was added
in a special session of the legislature following the terrorist
attacks of September 11, 2001. 2001 Haw. 3rd Spec. Sess. Laws
Act 9, § 3 at 28-29.32
Your committee finds that the visitor industry’s
significant contributions to Hawaii’s economy have been
dealt a severe blow as a result of the aftermath of the
terrorist[] actions of September 11, 2001. If Hawaii’s
visitor industry is to recover in a timely manner,
immediate action must be taken to increase the marketing of
Hawaiʻi as a preferred destination.
H. Stand. Comm. Rep. No. 3, in 2001 3rd Spec. Sess. Senate
Journal, at 100; S. Stand. Comm. Rep. No. 3, in 2001 3rd Spec.
32
The legislative history does not specifically discuss the
addition of subsection (h) but notes that the bill was designed to “support
the State of Hawaii as a visitor destination.” H. Stand. Comm. Rep. No. 3,
in 2001 3rd Spec. Sess. Senate Journal, at 100; S. Stand. Comm. Rep. No. 3,
in 2001 3rd Spec. Sess. Senate Journal, at 53.
- 52 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Sess. Senate Journal, at 53. Thus, the legislature identified
transportation as an element of the Hawaiʻi visitor industry that
needed protection and provided special tax treatment to motor
carriers that divide income derived from the collaborative
transportation of passengers or property.
Based on the variety of situations and business
relationships set forth by the subsections of HRS § 237-18 in
which “gross” or other income “is divided,” the phrase “gross
income is divided” merely signifies that there must be an
economic transaction between the two entities identified by the
subsections of HRS § 237-18 in which income derived from that
transaction is shared or otherwise split. That is, when
entities identified within HRS § 237-18 subsections (a), (b),
(e), (f), (g), or (h) participate in an economic transaction of
the type therein described and the income derived from that
transaction is split between these entities, the entities’
income is divided.
Guidance provided by the Department also indicates
that a vendor-vendee relationship is not precluded from
“dividing” income, as contended by the Director. Example Two of
TIR 91-8, discussed supra, does not express whether the tour
packager is in an arm’s-length transaction with the cannery, bus
company, and the Visitor Center or whether the tour packager is
in some type of joint venture or partnership, but in context, an
- 53 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
arm’s-length transaction seems more plausible. See TIR 91-8 at
2. Thus, the tour packager in Example Two “divided” its
“income” for purposes of income-dividing under HRS § 237-18(g),
notwithstanding that the transactions are at arm’s length,
standard retail transactions.
The first example in TIR 91-8 produces a similar
conclusion:
Example 1 – XYZ Travel, a Hawaiʻi corporation based in
Honolulu assembles package tours consisting of air travel
from the mainland to Hawaiʻi, a lei greeting, ground
transportation from the airport to the hotel, hotel
accommodations, certain meals, and admissions from
independent vendors and suppliers, paying vendors and
suppliers a total of $500 per customer or tourist.
TIR 91-8 at 1. Example 1 goes on to state that XYZ Travel
resells the package for $600 and that XYZ Travel is liable for
GET on its $100 profit. Id. However, the example does not
suggest that XYZ Travel is in a joint venture or partnership
with each of the other parties involved in the transaction.
Thus, the phrase “gross income is divided” in HRS §
237-18(g) identifies an economic transaction between the OTC and
the hotel in which accommodations are provided to a transient
and the income from that transaction is shared or split between
the hotel and the OTC.33 Thus, in the Assessed Transactions,
33
Further, the record indicates that the OTC’s purchase of the
right to transfer occupancy to the transient and the transfer of that right
to the transient is effectively a simultaneous transaction. Thus, the
Director’s argument that the OTCs do not divide income with hotels “by virtue
of paying the hotels for room occupancy later sold to transients,” is not
(continued. . .)
- 54 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
gross income is divided, as that term is used in the GET
Apportioning Provision.
Further, HRS § 237-18 illustrates the legislature’s
intent to protect certain categories of business transactions
from the pyramiding effect of the GET and thus adds to the
understanding of the term “travel agencies.” Notably, the
legislature repeatedly sought to protect tourism-related
industries in three separate provisions: tourism-related
services in HRS § 237-18(f), the furnishing of transient
accommodations in subsection (g), and the furnishing of
transportation services by motor carriers in subsection (h).34
In light of the special tax treatment that the legislature
sought to provide to transactions between travel agencies and
hotel operators in HRS § 237-18(g), the term “travel agency”
should not be given a constrained interpretation that would
frustrate the legislative intent to protect the tourism
industry.
(. . .continued)
determinative of the applicability of the GET Apportioning Provision to the
Assessed Transactions.
34
Other industries the legislature sought to provide special tax
treatment include sugar cane hauling and harvesting. HRS § 237-18(d).
- 55 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
c. The Assessed Transactions supply transient accommodations
at noncommissioned negotiated contract rates
Finally, in order to qualify for the GET Apportioning
Provision, the Assessed Transactions must supply transient
accommodations under noncommissioned contract rates. The
definition of noncommissioned negotiated contract rates is also
not provided by HRS § 237-18(g). It is clear that the room
rates are specified by contract, and the parties do not dispute
that the rates were negotiated. Thus, the disputed term would
appear to be “noncommissioned.”
A “commission” is normally understood to be a “fee
paid to an agent or employee for a particular transaction,
usu[ally] as a percentage of the money received by the
transaction.” Black’s Law Dictionary 327 (10th ed. 2014). A
“noncommissioned” rate, then, would suggest an amount of money
paid to an entity or person other than an agent or an employee.
It would seem to be dispositive that the OTCs did not function
as an agent or employees of the hotels in the Assessed
Transactions to find that the rate is “noncommissioned.”
The legislative history of the GET Apportioning
Provision provides additional guidance. The GET Apportioning
Provision was originally added to HRS § 237-18 in 1988. See
1988 Haw. Sess. Laws. Act 167, § 1 at 293. In explaining the
- 56 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
addition, the conference committee report defined the problem
the legislation was intended to address.
Your Committee finds that in the case of the tour packager
and the operator of transient accommodations, in many
instances the tour packager blocks out a number of rooms
and acts as a wholesaler of those rooms to the members of
the tour. The tour packager packages the rooms as part of
a tour which may include ground transportation, meals, and
entertainment. Although it is clear that the tour packager
is in business to make money, neither the operator of
transient accommodations or others involved in the tour
know what the mark-up of the tour packager is. In these
instances the Department . . . is imposing the general
excise tax on the operator based on the cost of the room
and not on the price for which the operator sold the rooms
to the tour packager.
Conf. Comm. Rep. 94-88, in 1988 House Journal, at 803, 1988
Senate Journal, at 698 (emphasis added). Thus, the problem
identified by the legislature was that the GET was imposed on
the operator for the marked-up cost of a room, even though the
hotel did not know what the marked-up cost was. The committee
report explains that the Department based this tax imposition on
its treatment of a roughly analogous situation: a commissioned
transaction.
[I]n the case of transient accommodations, the cost of
commissions is attributable to the gross income of the
operator without deduction. In a commission operation the
hotel may offer a 10 per cent commission to a travel agent.
The hotel then may collect $100 from the agent and return
$10 to the agent or the agent may collect $100 and return
only $90 to the hotel. In both situations the hotel must
pay the general excise tax on the $100 room rental. Both
the hotel industry and the department agree that this is
proper.
Id. (emphasis added). However, when the transaction was not
commissioned and the hotel could not know the actual room rate
- 57 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
charged to the transient, the committee found that treatment
unfair:
In the case before your Committee in this bill, the hotel
does not know what the actual price the $100 room is sold
for by the tour packager. The rooms may be sold to the
tour packager for $90 and the tour packager may resell the
rooms for $90, $100, or any price in between or even less
than $90. Many of the largest tour packagers operate out
of New York and Japan, and the hotel industry has no means
of knowing what the mark-up of these packagers is. The
Department . . . is grossing up the revenues of the hotel
to $100 in the preceding example, by treating this as a
commission operation. In this instance, it appears unfair
for the [D]epartment to gross up the amount of revenue
received by the hotels, and your Committee finds that this
bill will solve that problem and disallow gross up in this
instance.
Id. (emphases added).
To summarize, the Conference Committee Report
indicates that when hotels paid an agent for the room on a
commission basis, the room rate was readily definable, and all
the parties agreed that it was “proper” for the hotel to pay the
GET on the gross room rate. But in the case of a
noncommissioned tour packager, the hotel had “no means of
knowing” what the packager’s mark-up was, and thus it was
undetermined what the actual room rate was. Under these
circumstances, the committee found it was “unfair” for the
Department to charge the GET on the “grossed up” room rate.
Viewed in the context of its legislative history, the GET
Apportioning Provision appears to have been implemented in part
to protect hotels from paying the GET on a higher room rate than
could be conveniently demonstrated that the transient had
- 58 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
actually paid. Instead, GET liability is placed on “each . . .
person with respect to such person’s respective portions.” HRS
§ 237-18(g). Thus, the GET Apportioning Provision protects
persons who meet its requirements from paying the tax on more
than their share of the proceeds received from providing
transient accommodations.
This case is analogous to the situation envisioned by
the 1988 legislature in which the “rooms may be sold to the tour
packager for $90 and the tour packager may resell the rooms for
$90, $100.” Conf. Comm. Rep. 94-88, in 1988 House Journal, at
803, 1988 Senate Journal, at 698. Here, the OTCs purchase the
right to sell the right of occupancy to a transient, complete
the sale to a transient, and the hotels have “no means of
knowing” what the OTCs’ mark-up is. It is undisputed that the
hotels are not providing the OTCs with a commission; rather, the
hotels receive payment according to their contract with the OTCs
for the rooms rented after they invoice the OTCs. Thus, the
OTCs provide transient accommodations at noncommissioned
negotiated contract rates.35
35
In postulating that “tour packagers” bought and then sold the
room, the committee report indicates that contractual privity can exist
between transient and a travel agent or tour packager seeking to apply the
GET Apportioning Provision. See Conf. Comm. Rep. 94-88, in 1988 House
Journal, at 803, 1988 Senate Journal, at 698.
- 59 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
d. Summary of the elements of the GET Apportioning Provision
The Assessed Transactions meet each of the three
elements of the GET Apportioning Provision. Thus, HRS § 237-
18(g) applies to the Assessed Transactions such that the GET is
assessable on the gross income of each person providing
transient accommodations in accordance with the respective
portion of the proceeds of each.36 Accordingly, when travel
agencies and hotel operators contract to provide transient
accommodations to a transient, the GET Apportioning Provision
provides that the GET is imposed on the travel agency and hotel
operator on the respective portion of the gross income allocated
or distributed to each, and no more.37
36
Although the tax court declined to make findings of fact or
conclusions of law, the court reasoned that the GET Apportioning Provision
did not apply to the Assessed Transaction because the contractual rate was
variable and because, as the OTCs added the mark-up and service fee, value
was added to the transaction; thus, in adding value to the transaction, the
OTCs fell within the intent of the GET to pyramid. However, a
“noncommissioned negotiated contract rate” is not restricted to a fixed rate,
the income received by the OTCs and the hotels in the Assessed Transactions
is consistent with a “noncommissioned negotiated contract rates” inasmuch as
the income is not a commission and is according to rates under contracts that
are negotiated, and the legislative history of the GET Apportioning Provision
indicates the provision’s applicability. Thus, the tax court’s analysis in
this regard is in error.
37
The OTCs have conceded that their respective portion of the gross
proceeds includes both the margin and their service fee, arguing that if the
GET Apportioning Provision applies to the Assessed Transaction, “GET
liability would . . . extend to the amount the OTC retains, i.e., its margin
and service fee.”
- 60 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
F. Penalties on the GET Assessments
1. Failure to file
The “failure to file” penalty is authorized by HRS
§ 231-39(b)(1), which provides, in relevant part:
In case of failure to file any tax return required to be
filed on the date prescribed therefor . . . unless it is
shown that the failure is due to reasonable cause and not
due to neglect, there shall be added to the amount required
to be shown as tax on the return . . . not exceeding
twenty-five per cent in the aggregate.
HRS § 231-39(b)(1) (Supp. 1994) (emphasis added). “Thus, it is
clear that the penalty is to be imposed unless the failure to
file is ‘due to reasonable cause and not due to neglect.’”
Grayco, 57 Haw. at 457, 559 P.2d at 278. “‘Reasonable cause’
has been interpreted to mean no more than the exercise of
ordinary business care and prudence. However, a mere showing of
absence of willful neglect is insufficient to avoid the
penalty.” Id. (citations omitted). “The issue is one of fact
and the burden of proving reasonable cause is on the taxpayer.”
Id.; see also In re Tax Appeal of E-Z Serve, Inc., 65 Haw. 283,
284, 651 P.2d 469, 470 (1982) (stating that the failure to file
penalty “is a matter which turns on a finding of fact”). A
finding of fact will not be overturned on appeal unless it is
clearly erroneous. Diamond v. Dobbin, 132 Hawaiʻi 9, 24, 319
P.3d 1017, 1032 (2014).
To meet its burden of proof in regard to a failure to
file, “appellants must show the presence of other supporting
- 61 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
circumstances, in addition to its honest belief, that it was not
responsible for the tax.” Grayco, 57 Haw. at 459, 559 P.2d at
278-79. “It is generally recognized that the presence of
certain factors, in addition to the honest belief of the
taxpayer, constitutes reasonable cause for the failure to file a
return, e.g., the advice of a competent accountant or attorney;
or reliance on the statements of an [agent of the taxing
authority].” Id. at 459, 559 P.2d at 279 (emphasis added)
(citations omitted). Thus, there must be both “other supporting
circumstances” and “honest belief.” In Grayco, the taxpayer
contended that it was justified in failing to file a return
because it reasonably believed that it was not responsible for
the tax and that tax liability was uncertain. Id. at 458, 559
P.2d at 278. Grayco held, “Absent reliance on competent counsel
or the Director or his representative, Grayco’s erroneous belief
that it had no taxable income that would necessitate the filing
of a return, was not reasonable cause.” Id. at 459, 559 P.2d at
279 (emphasis added).
Here, the tax court determined the OTCs failed to
demonstrate a fact that indicated a dispute as to whether they
were required to file GET returns and the OTCs failed to
demonstrate that they were aware of any Department or AG letter,
opinion, or communication to the contrary. The determination of
the tax court that the OTCs failed to meet their burden to
- 62 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
demonstrate their honest belief that they were not responsible
for filing GET returns was not clearly erroneous and is
therefore affirmed.
However, as the failure to file penalty was assessed
on the gross income resulting from the Assessed Transactions
without application of the GET Apportioning Provision, the
actual dollar award is clearly erroneous and must be
recalculated based on each OTC’s respective portion of the gross
income derived from providing transient accommodations, as
apportioned under HRS § 237-18(g).
2. Failure to pay
The “failure to pay” penalty is authorized by HRS
§ 231-39(b)(2)(A), which provides in relevant part:
If any part of any underpayment is due to negligence or
intentional disregard of rules (but without intent to
defraud), there shall be added to the tax an amount up to
twenty-five per cent of the underpayment as determined by
the director.
HRS § 231-39(b)(2)(A) (emphasis added). While it is clear that
“there shall be added” a failure to pay penalty, it is not clear
from the statute whether the Director must affirmatively
demonstrate the existence of such negligence or intentional
disregard, or whether the taxpayer seeking to avoid the penalty
must show that the failure was not due to negligence or
- 63 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
intentional disregard of the rules.38 In contrast, in the
“failure to file” provision, discussed supra, the burden on the
taxpayer is made clear by the language that “unless it is shown
that the failure is due to reasonable cause and not due to
neglect, there shall be added” a penalty. HRS § 231-39(b)(1)
(emphasis added).
The Director implies the application of the failure to
pay penalty is mandatory and asserts the provision implies
discretion as to the amount of the underpayment penalty, not as
to whether to apply the penalty or whether negligence or
intentional disregard of the rules was present.
However, whether or not the imposition of the failure
to pay penalty is mandatory is irrelevant in this case because
once made, the assessment enjoys a presumption of validity.
Irrespective of which party prevails in proceedings before
a state board of review, or any equivalent administrative
body established by county ordinance, the assessment as
made by the assessor, or if increased by the board, or
equivalent county administrative body, the assessment as so
increased, shall be deemed prima facie correct.
HRS § 232-13 (1993) (emphasis added); see also In re Tax Appeal
of Valley of Temples Corp., 56 Haw. 229, 232, 533 P.2d 1218,
38
The failure to pay penalty was originally enacted in 1967 as an
amendment to Revised Laws of Hawaiʻi (RLH) § 115-43. See 1967 Haw. Sess.
Laws, Act 134, § 1, at 123-34, HRS Tables of Disposition, at 11. The
committee reports related to 1967 Act 134 do not make any statements relevant
to assigning the burden to show or disprove negligence or intentional
disregard of the rules. See H. Stand. Comm. Rep. No. 916, in 1967 House
Journal, at 835; S. Stand. Comm. Rep. No. 644, in 1967 Senate Journal, at
1144.
- 64 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
1220 (1975) (“The assessment made by the State’s assessor is
deemed to be prima facie correct.”).
An assessment is a “[d]etermination of the rate or
amount of something, such as a tax or damages” or the
“[i]mposition of something, such as a tax or fine, according to
an established rate; the tax or fine so imposed.” Black’s Law
Dictionary, supra, at 139. Thus, the term “assessment” is
equivalent to a determined and imposed tax. HRS § 231-39(b)
provides that interest and penalties “shall be added to and
become a part of the tax imposed by such tax or revenue law, and
collected as such.” HRS § 231-39(b) (emphases added). Thus,
HRS § 231-39 is a taxing statute and the application of interest
and penalties is an assessment. In re Taxes Maui Agric. Co., 34
Haw. 515, 531 (Haw. Terr. 1938) (discussing the effect of a
taxpayer refusing or neglecting to file a real property tax
return and stating, “And in any such case a penalty . . . is
imposed to be added by the assessor to the amount of any
assessment made by him, which penalty becomes a part of the
assessment.” (emphasis added)).39
39
That interest and penalties are part of the “assessment” is
consistent with federal law. Section 6201 of the Internal Revenue Code
defines the Internal Revenue Service’s (IRS’s) authority for assessment and
collection of taxes to include civil penalties. The IRS is specifically
required to assess “all taxes (including interest, additional amounts,
additions to the tax, and assessable penalties) imposed by this title.” 26
U.S.C. § 6201(a) (2010).
- 65 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
In light of the statutory mandate that the
Department’s assessments are prima facie correct, it is clear
that the legislature intended an evidentiary presumption that
the failure to pay was due to negligence or intentional
disregard of the rules by the taxpayer,40 and it is the
taxpayer’s burden to prove otherwise. As such, the assessments
of the Department, including penalties for failure to pay due to
negligence or intentional disregard of the rules, are prima
facie correct and the burden is on the taxpayer to prove
otherwise.
The Director’s assessments enjoy a presumption of
validity that places the burden on the taxpayer seeking to avoid
the failure to pay penalty to prove that such failure was not
due to negligence or intentional disregard of the rules.
Therefore, “assessment notices, lists, and records are deemed to
be prima facie proof that assessments were determined in
compliance with carefully prescribed procedures.” Valley of
Temples, 56 Haw. at 232, 533 P.2d at 1220. “In attacking [an
assessment], we are mindful that the taxpayers have the burden
to show clearly the invalidity claimed by overcoming the
presumption that the tax assessor has faithfully performed his
40
We express no opinion as to the respective burdens of the
Director and the taxpayer when the Director asserts that the failure to pay
was due to fraud. See HRS § 232-19(b)(2)(B).
- 66 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
duty.” In re Taxes of Ewa Plantation Co., 47 Haw. 41, 50-51,
384 P.2d 287, 292 (1963).
The OTCs do not argue that they presented any evidence
rebutting the presumption of negligence or establishing a
genuine issue of material fact that would preclude summary
judgment, nor do they point to any such evidence in the record.
Thus, the determination of the tax court that “there are no
genuine issues of material facts on the question of penalties
for failure to pay general excise taxes” was not clearly
erroneous and is therefore affirmed.
However, as the failure to pay penalty was assessed on
the gross income resulting from the Assessed Transactions
without application of the GET Apportioning Provision, the
actual dollar award is clearly erroneous, and the case is
remanded for recalculation based on each OTC’s respective
portion of the gross income of the Assessed Transactions, as
apportioned under HRS § 237-18(g).
IV. DISCUSSION OF THE TAT ASSESSMENTS
A. Introduction
The TAT is imposed by HRS Chapter 237D; HRS § 237-2
provides as follows:
(a) There is levied and shall be assessed and collected
each month a tax of:
. . .
(3) 7.25 per cent for the period beginning on January
1, 1999, and thereafter; on the gross rental or
- 67 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
gross rental proceeds derived from furnishing
transient accommodations.
(b) Every operator shall pay to the State the tax imposed
by subsection (a), as provided in this chapter.
HRS § 237D-2 (Supp. 1998) (emphases added). Thus, the TAT is
assessed on the “gross rental or gross rental proceeds,” (Gross
Rental Proceeds) derived from furnishing transient
accommodations and is payable by “operators.”
In their motions for summary judgment, both the
Director and the OTCs made arguments regarding the assessment of
the TAT upon the Assessed Transactions, and, separately, the
assessment of a “failure to file” penalty and a “failure to pay”
penalty.
B. The tax court’s in-court statements regarding the TAT
Assessments
At the summary judgment hearing, the tax court heard
arguments and made statements regarding the TAT.41 The court
first analyzed the statutory definition of operator:
“Operator” means any person operating a transient
accommodation, whether as owner or proprietor or as lessee,
sublessee, mortgagee in possession, licensee, or otherwise,
or engaging or continuing in any service business which
involves the actual furnishing of transient accommodation.
HRS § 237D-1 (1993). The tax court recognized two definitions
provided by the statute.
41
The tax court did not make findings of fact or conclusions of
law, pursuant to Hawaiʻi Rules of Civil Procedure (HRCP) Rule 52(a).
- 68 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Under the first definition, the tax court examined the
terms “owner, proprietor, lessee, sublessee, mortgagee in
possession, [or] licensee.” The court observed that these are
“all individuals or entities that have some form of ownership
interest.” Thus, the court found that the “first half of the
operator definition deal[s] with entities who have some type of
ownership interest.”
Under the second statutory definition, the court found
that the reference to “engaging or continuing in any service
business which involves the actual furnishing of transient
accommodation” signified that the operator was “a non-owner or
some entity or person that does not have an ownership interest
but has another connection to the property.”
The court found that the TAT was enacted to tax the
tourist industry and that the OTCs were “travel agents.”
Accordingly, the lack of a “connection” to the hotel property
indicated to the tax court that the OTCs were not operators.
The court further examined the operation of an
apportioning provision within the definition of Gross Rental
Proceeds (TAT Apportioning Provision). The TAT Apportioning
Provision provides as follows:
Where transient accommodations are furnished through
arrangements made by a travel agency or tour packager at
noncommissionable negotiated contract rates and the gross
income is divided between the operator of transient
accommodations on the one hand and the travel agency or
tour packager on the other hand, . . . [G]ross [R]ental
- 69 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
[P]roceeds to the operator means only the respective
portion allocated or distributed to the operator, and no
more.
HRS § 237D-1. The court found that the TAT did not “envision”
pyramiding because the legislature split the gross revenues
between a travel agency and an operator and specified that
revenues that were assessable for the TAT meant only the
respective portions “allocated or distributed to” the operator.
The tax court concluded that the TAT only applied to
the net rate that is distributed to the hotels. Based on that
conclusion, the tax court granted the motion for summary
judgment filed by the OTCs and denied the motion filed by the
Director. The court reiterated its conclusion when it denied
the Director’s motion for reconsideration: “[T]he hotel as an
operator under the TAT law pays the TAT on the revenue the hotel
generates for transient accommodations. No pyramiding is
permitted under the law. The OTCs are not hotel operators and
therefore are not subject to TAT . . . .” Thus, influenced in
part by its reading of the TAT Apportioning Provision, the tax
court found that the OTCs were not operators.
C. The parties’ TAT arguments on appeal
The Director appeals the tax court’s grant of summary
judgment in favor of the OTCs on the issue of the OTCs’
liability for GET, the court’s denial of reconsideration of that
- 70 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
grant, and the court’s denial of the Director’s motion for
reconsideration.
1. The Director’s arguments regarding the TAT Assessments
The Director argues that the OTCs function as TAT
“operators” and are subject to the TAT on all proceeds received
from transients.
a. The Director argues that as TAT “operators,” the OTCs are
liable for the TAT
The Director argues that the OTCs are liable for the
TAT because they function as “TAT operators.” The Director
focuses on the definition of the word operator:
“Operator” means any person operating a transient
accommodation, whether as owner or proprietor or as lessee,
sublessee, mortgagee in possession, licensee, or otherwise,
or engaging or continuing in any service business which
involves the actual furnishing of transient accommodation.
HRS § 237D-1 (emphases added). The Director contends that the
OTCs function as TAT “operators” under the second definition by
“engaging or continuing in any service business which involves
the actual furnishing of transient accommodations.”
The Director maintains that the legislature chose a
“very broad definition” of operator for the TAT and “rejected a
narrow ‘operate or manage’ definition it used elsewhere.” The
Director asserts that the verb “involves” is important because,
as with “operator,” the “legislature chose a very broad and
- 71 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
expansive term.”42 The Director claims that the activities of
the OTCs are all functions “that hotels would traditionally
perform themselves in furnishing their hotel rooms to
transients.” The Director argues that as “parties to the rental
contract with the transient,” the OTCs are “extensively
‘involved in the actual furnishing’ of hotel rooms” and the
“hotel does not have any involvement in the consumer
transaction.”
The Director further argues that this court and others
have broadly construed the key term “furnishing.” Citing to
Territory v. Hu Seong, 20 Haw. 669 (Haw. Terr. 1911), the
Director contends that “‘furnish’ is a comprehensive term and
includes many different ways by which an article may be supplied
or delivered by one person to another.” The Director cites to
cases from other jurisdictions involving a hotel room tax in
which the OTCs were defendants that the Director contends
interpreted “furnishing” in a similarly expansive manner in
favor of the taxing authority.
42
The Director cites eleven activities conducted by the OTCs as
constituting involvement: (1) furnishing transients the contractual right to
occupy hotel rooms, (2) being the Merchant of Record on the credit card
transaction, (3) setting the price of the room, (4) operating a vast hotel
reservation network, (5) advertising and marketing the availability of hotel
rooms, (6) entering into legal contracts with hotels and transients, (7)
collecting tax and rental payments from transients, (8) assuming the risk of
bad debts, (9) issuing transaction receipts to transients, (10) processing
cancellations and refunds, and (11) providing 24-hour customer support “and
more.”
- 72 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
According to the Director, “the TAT statute, [HAR],
and Hawaiʻi case law make clear that ‘actual’ furnishing refers
to services that are provided which lead to ‘actual occupancy’
of accommodations as opposed to fees received in lieu of
occupancy, such as cancellation fees, or services incidental to
occupancy (such as food and beverage).” The Director maintains
that an interpretation of the word “actual” to be “the person
who really delivers and hands over the accommodations to the
transient” would “render[] meaningless the second half of the
‘operator’ definition since it would be redundant of the first
half.”
b. The Director argues that all proceeds the OTCs received
from transients are subject to the TAT
The Director next examines the definition of the term
Gross Rental Proceeds to conclude that “the OTC does not get to
deduct the amount it pays the hotel pursuant to the OTC-Hotel
Contracts when determining the OTC’s TAT liability.” The
Director observes that the term “gross receipts” has been held
to mean “‘all receipts’ with no deductions, as opposed to ‘net
receipts,’” and the TAT applies to the compensation the OTCs
receive for the “furnishing of” transient accommodations.
The Director states that “HRS § 237D-2 currently
levies a 9.25% TAT ‘on the [Gross Rental Proceeds] derived from
furnishing transient accommodations.’” The Director contends
- 73 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
that--analogous to the legislature’s use of the expansive term
“involves” in the definition of “operator”--the use of the term
“derives” in the imposition of the tax is also expansive. The
Director reasons that the TAT “is imposed upon the gross
proceeds ‘derived’ from transient accommodations” and “[g]ross
proceeds would include the total price the transient pays the
OTCs for the right to occupy the room.”
Second, the Director argues that the “well-established
. . . pyramiding of taxes in Hawaiʻi” indicates that “the TAT
statute underscores that there can be two operators for a single
hotel stay.” The Director maintains that the TAT statute
“plainly and unambiguously imposes the tax on ‘every operator’
(not ‘the operator’) and defines operator as meaning ‘any
person’ (not ‘the person’) involved in the actual furnishing of
transient accommodations.” The Director contends that, in the
Assessed Transactions, “both the OTCs (under the second half of
the ‘operator’ definition) and the hotel (under the first half)
are operators,’ and each is independently subject to TAT.”
Lastly, the Director notes again that the TAT and GET
statutes are in pari materia and therefore the TAT “taxes
‘operators’ such as the OTCs for the ‘gross’ amounts they
receive from transients ‘without any deductions’ and regardless
of any tax payments remitted to the State by the hotels to
satisfy the hotels’ separate tax obligations.”
- 74 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
2. The OTCs’ arguments regarding the TAT Assessment
In response, the OTCs make the following arguments:
they are not operators of hotels, and therefore they are not
subject to the TAT; their compensation is not Gross Rental
Proceeds “derived from actually furnishing transient
accommodations” and thus not subject to the TAT; and ambiguities
in the TAT statute must be construed in their favor.
a. The OTCs argue they are not ‘operators’ of hotels
The OTCs contend that HRS § 237D-2 imposes the TAT
“only on ‘operators’ of hotels” engaged in a business “which
involves the actual furnishing of transient accommodation.” The
OTCs reason that “to be an ‘operator,’ one must be able to
transfer possession of hotel rooms to travelers, whether as one
who has . . . possession of [] the hotel . . ., or as one who
otherwise engages in a business that ‘involves the actual
furnishing’ of rooms.”
The OTCs contend that “actually furnishing”
accommodations means to “physically deliver possession of a
hotel room.” “[T]o actually furnish something means
considerably more than just furnishing. . . . It [i]s like in
the capacity of handing someone a key. [That person would be]
actually furnishing it.” The OTCs argue that this
interpretation of “operator” is confirmed by the definition of
“gross proceeds”: “by . . . expressly limiting TAT liability to
- 75 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
only the portion allocated to the operator, and not the portion
allocated to the travel agency.” The OTCs contend that they are
“‘travel agencies’ under Hawaiʻi law” and thus not subject to the
TAT.
The OTCs also maintain this interpretation of
“operator” is supported by the Department’s rules. The OTCs
assert that the rules specifically reject that term’s
“[a]pplication to travel agents.” The OTCs conclude that the
“TAT Statute and Rules both confirm that the ‘operator’ of a
transient accommodation must be one who physically possesses the
property.” The OTCs argue that because they are not operators,
they are not subject to the TAT. The OTCs contend they act
“only as an intermediary between the traveler and the hotel.”
b. The OTCs argue that the Director misinterprets the TAT
statute to improperly expand its scope
The OTCs contend that the Director misconstrues the
TAT statute to incorrectly extend its reach. First, the OTCs
argue that the Director improperly expands the TAT from being
assessable against “a business which involves the actual
furnishing of transient accommodations” to assess any business
that is involved in a process that leads to the furnishing of
transient accommodations by a third party. Second, the OTCs
argue the Director’s “notion of multiple operators,” is contrary
to “all governing authority.” Third, the OTCs dispute the
- 76 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Director’s reliance on statutes and court decisions from other
jurisdictions. Lastly, the OTCs conclude that there is no
evidence to establish that they actually furnish transient
accommodations.
c. The OTCs argue that a statutory definition of “travel
agent” confirms that they are not operators
In a separate argument as to why the OTCs are not
operators as that term is defined by the TAT, the OTCs contend a
statutory definition of “travel agent” confirms that they are
not operators. The OTCs claim that the record establishes that
the OTCs act as intermediaries. “[T]he TAT’s definition of
[Gross Rental Proceeds] expressly acknowledges that a ‘travel
agency’ remains a ‘travel agency’ when operating” on a
noncommissioned basis. Thus, the OTCs conclude that a travel
agency is not transformed into an operator.
d. The OTCs argue their income is not Gross Rental Proceeds
The OTCs state that the TAT can only be imposed on
Gross Rental Proceeds derived from furnishing transient
accommodations. The OTCs maintain that their compensation is
for their “online services” and not for the furnishing of
transient accommodations.
Additionally, the OTCs contend that the TAT is not a
“pyramiding tax.” The OTCs argue that the Director’s claim that
“the TAT is a pyramiding tax . . . fails to cite any authority
- 77 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
for that assertion . . . [and] rests on the bald assertion that
the TAT is modeled after the GET and the GET is considered a
pyramiding tax.” The OTCs argue the TAT statute expressly
applies to only one entity--the operator of the hotel that
actually furnishes the transient accommodations.
e. The OTCs argue ambiguities in the TAT statute must be
construed in their favor
Lastly, the OTCs argue that their construction of the
TAT is reasonable. Therefore, even if the Director’s
construction were also reasonable, “any ambiguity in a taxing
statute must be strictly construed against the taxing authority
and in favor of the taxpayer.”
D. Discussion of the TAT
The TAT is imposed by HRS Chapter 237D; HRS § 237-2
provides as follows:
(b) There is levied and shall be assessed and collected
each month a tax of:
. . .
(3) 7.25 per cent for the period beginning on January
1, 1999, and thereafter; on the gross rental or
gross rental proceeds derived from furnishing
transient accommodations.
(b) Every operator shall pay to the State the tax imposed
by subsection (a), as provided in this chapter.
- 78 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
HRS § 237D-2 (emphases added). Thus, the TAT is assessed on the
Gross Rental Proceeds43 derived from furnishing transient
accommodations and is payable by “operators.”
1. “Actual” within the definition of “operators” is ambiguous
The OTCs are liable for the TAT on Gross Rental
Proceeds derived from the Assessed Transactions if they are
“operators” under HRS § 237D-2(b). An “operator” is “any person
operating a transient accommodation, whether as owner or
proprietor or as lessee, sublessee, mortgagee in possession,
licensee, or otherwise, or engaging or continuing in any service
business which involves the actual furnishing of transient
accommodation.” HRS § 237D-1 (emphasis added).
Thus, the statute provides for two types of operators.
It is not disputed that the OTCs are not owners or proprietors
of any of the hotels in the Assessed Transactions, nor do the
43
“Gross Rental Proceeds” means
gross receipts, cash or accrued, of the taxpayer received
as compensation for the furnishing of transient
accommodations and the value proceeding or accruing from
the furnishing of such accommodations without any
deductions on account of the cost of property or services
sold, the cost of materials used, labor cost, taxes,
royalties, interest, discounts, or any other expenses
whatsoever. . . .
The words [Gross Rental Proceeds] shall not be construed to
include the amounts of taxes imposed by chapter 237 or this
chapter on operators of transient accommodations and passed
on, collected, and received from the consumer as part of
the receipts received as compensation for the furnishing of
transient accommodations.
HRS § 237D-1.
- 79 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
OTCs acts as lessee, sublessee, mortgagee in possession, or
licensee of any hotel. Therefore, the first statutory
definition of operator does not apply to the OTCs.
An operator may also be any person “engaging or
continuing in any service business which involves the actual
furnishing of transient accommodation.” Id. (emphasis added).
It is undisputed the OTCs are engaging or continuing in their
respective service businesses. Thus, the only remaining
question is whether, in the Assessed Transactions, the OTCs are
“involve[d] [in] the actual furnishing of transient
accommodation.” Id.
As relevant to the Assessed Transactions, “transient
accommodations” means:
the furnishing of a room, apartment, suite, or the like
which is customarily occupied by a transient for less than
one-hundred eighty consecutive days for each letting by a
hotel, apartment hotel, motel, condominium property regime
or apartment . . . that provides living quarters, sleeping,
or housekeeping accommodations, or other place in which
lodgings are regularly furnished to transients for
consideration.
Id. The parties do not dispute that the accommodations in the
Assessed Transactions are transient accommodations.
“Involve” means “to draw in as a participant: Engage,
Employ” or “to oblige, to become associated: Embroil, Entangle,
Implicate.” Webster’s, supra, at 1191. It also means “to
include as a necessary circumstance, condition, or consequence;
imply; entail.” The Random House College Dictionary 703 (rev.
- 80 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
unabr. ed. 1979) [hereinafter Random House]. Thus, an entity is
“involved” in the “actual furnishing of transient
accommodations” if it is drawn in as a participant, or included
as a necessary circumstance, to the actual furnishing of
transient accommodations.
The term “furnish” means “to provide or supply with
what is needed, useful, or desirable: Equip.” Webster’s, supra,
at 923; see also Random House, supra, at 536 (defining “furnish”
as “to provide or supply”). In Hu Seong, this court held that
“the word ‘furnish’ is a comprehensive term and includes many
different ways by which an article may be supplied or delivered
by one person to and accepted by another.”44 20 Haw. at 671.
Thus, the TAT statute contemplates that the operator must engage
or continue in a service business that delivers or provides
transient accommodations.
It is plain that the OTCS are “involved” in
“furnishing” transient accommodations. That is, the OTCs are
both drawn in as participants and included as a necessary
circumstance in the Assessed Transactions, and they engage or
44
Hu Seong found that the term encompassed “supply,” “provide,”
“shipment” and “delivery,” “sale and delivery,” “provide for use,” “to give
away,” “to let one have,” “to sell,” “to find,” to “obtain or procure,” but
would not encompass “a sale without actual delivery.” Hu Seong, 20 Haw. at
671.
- 81 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
continue in a service business that delivers or provides
transient accommodations in the Assessed Transactions.
However, the TAT definition of operator also includes
the term “actual.” That is, the business must involve the
“actual furnishing of transient accommodation.” HRS § 237D-1
(emphasis added). “Actual” means “[e]xisting in fact, real.”
Black’s Law Dictionary, supra, at 42. “Existence in fact” and
“realness” would seem to be an inherent quality of being
involved in the furnishing of transient accommodations, but if
that were true, “actual” would be superfluous. “Actual” might
also imply some physical presence,45 but the entity operating the
physical premises is not dispositive. For example, the
Department’s rules would appear to continue to assess the TAT on
the owner-operator of the transient accommodation, even if a
management company directed the day-to-day operations from the
premises.46
45
Physical presence appears to be analogous to the use of the term
“actual” in a related statute; HRS § 486K-1 defines a “Hotelkeeper” or
“keeper” to includes “any individual, firm, or corporation actually operating
a hotel.” HRS § 486K-1 (1993) (emphasis added).
46
The Department’s rules that define “operator” provide the
following illustrations:
Example 1. Mr. Paul owns three apartment units and is
engaged in the activity of furnishing transient
accommodations. As owner and operator, Mr. Paul is liable
for the tax imposed by this chapter.
Example 2. The facts are the same as in Example 1, except
that Mr. Paul engages XYZ Corporation, a firm engaged in
the property management business, to manage and rent out
(continued. . .)
- 82 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Therefore, the term “actual” is ambiguous in the
context of the definition of operator.
2. Defining “actual”
This court presumes that every word of a statutory
definition has meaning and effect; therefore, we must look to
sources other than the plain meaning of the statute in order to
determine the meaning of “actual” within the definition of
operator. Camara v. Agsalud, 67 Haw. 212, 215-16, 685 P.2d 794,
797 (1984).
Where the words of a law are ambiguous, this court
examines the context in which the ambiguous words are placed,
and examines the reason and spirit of the law and the cause that
induced the legislature to enact it.47 HRS § 1-15; McKnight, 131
Hawaiʻi at 388, 319 P.3d at 307.
(. . .continued)
the apartment units. Although the apartments are managed
and rented out by XYZ Corporation, as the owner operator,
Mr. Paul is liable for the tax imposed by this chapter.
HAR § 18-237D-1-05(c) (effective 1988) (emphasis added).
47
It is recognized that “a cardinal rule of construction [is] that
a statute imposing taxes is to be construed strictly against the government
and in favor of the taxpayers and that no person and no property is to be
included within its scope unless placed there by clear language of the
statute.” In re Tax Appeal of Hawaiian Tel. Co., 61 Haw. 572, 578, 608 P.2d
383, 388 (1980). However, the rule of strict construction with regard to
taxing statutes is resorted to only “as an aid to construction when an
ambiguity or doubt is apparent on the face of the statute, and then only
after other possible extrinsic aids of construction available to resolve the
ambiguity have been exhausted.” Bishop Trust Co. v. Burns, 46 Haw. 375, 399-
400, 381 P.2d 687, 701 (1963). Based on our resolution of the meaning of
“actual,” we do not resort to the rule of strict construction with regard to
taxing statutes.
- 83 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
a. Legislative intent of the TAT
The TAT was created by the legislature in 1986. See
1986 Haw. Sess. Laws. Act 340, § 1 at 758-64. The legislative
history indicates that the legislature enacted the TAT in order
to recompense the counties for infrastructure costs incurred by
tourists and visitors that are borne by the counties. The
Conference Committee Report on H.B. 2508-86, the bill enacting
the TAT, stated as follows: “It is the intent of your Committee
that a portion of such revenues be appropriated for the
promotion, stimulation and development of visitor assistance
programs which may include . . . grants to the counties for the
construction of recreational and other infrastructure to enhance
visitor satisfaction.” Conf. Comm. Rep. No. 70-86, 1986 House
Journal, at 962; No.66-86 1986 Senate Journal, at 765. The
legislature noted that the distribution of tax revenues
generated by the TAT would “assist the industry and the
counties.” S. Stand. Comm. Rep. No. 651-86, in 1986 Senate
Journal, at 1076.
Comments made by the legislators state this purpose
more clearly. “[W]e have provided as a direct result of
revenues to be realized by [the TAT], additional funds in the
budget for tourism promotion and grants-in-aid to the counties.”
1986 House Journal, at 828 (statement of Rep. Kiyabu). “The
bill that finally emerged from the Conference Committee would
- 84 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
provide money that can be made available to the counties to
improve tourist-related infrastructure.” 1986 House Journal, at
830 (statement of Rep. Pfiel).
Each year, more than a million visitors -- a population
equal to or greater than the number of residents in Hawaii
-- use our roads, our parks, our water, and every other
public facility and service, and in my estimation, without
paying their “fair share” of the cost. . . . In effect,
only half of those making demands on government services
are paying the taxes which make those services possible.
Simply, that has not been fair.
1986 House Journal, at 828 (statement of Rep. Kamaliʻi) (emphasis
added). The legislature reconfirmed this purpose in 1990:48
Your Committee also notes that tourism is the largest
industry in Hawaii, and many of the burdens imposed by
tourism falls on the counties. Increased pressures of the
visitor industry mean greater demands on county services.
Many of the costs of providing, maintaining, and upgrading
police and fire protection, parks, beaches, water, roads,
sewage systems, and other tourism related infrastructure
are being borne by the counties.
Upon further consideration, your Committee has amended this
bill in order to share the TAT revenues with the counties.
Conf. Comm. Rep. No. 207, 1990 House Journal, at 845, 1990
Senate Journal, at 845-46 (emphasis added). Thus, the
legislature determined the cost borne by the counties should be
recovered by a tax imposed on tourists:
Since 1959 when Hawaii became a state of our union we have
had the people of the State of Hawaii carry the burden in
making improvements for the infrastructure of all the
counties through real property taxes, state income taxes,
other revenue measures that tax the people of the State of
48
See 1990 Haw. Sess. Laws Act 185, §§ 1-4, at 394-96. Act 185
amended HRS Chapter 237D to provide for an exact percentage distribution to
the Counties and amended the requirements for returns and payments. These
amendments are not relevant to the current discussion. Act 185 also amended
the definition of Gross Rental Proceeds to exclude the imposition of the TAT
itself, as discussed, infra.
- 85 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Hawaii and the people of this state have carried the burden
of improving the State of Hawaii in every area so that we
can allow our visitors who come to Hawaii to enjoy the
amenities that we now have at the present time. And we
pledge to continue to improve our infrastructure our
amenities so that more people can come to Hawaii.
The 5 percent is the additional tax we are considering for
the rooms. I believe that this is a fair burden of taxes
that must be shouldered by our visitors who visit the State
of Hawaii.
. . .
I think it is fair for the visitors to help shoulder the
burden with the rest of the people of the state. The
people of the state have given us a message that now is the
time to levy a room tax of some kind . . . .
1986 Senate Journal, at 654-55 (statement of Sen. Yamasaki)
(emphases added).
The mechanism that the legislature determined would be
most appropriate was referred to as a “hotel room tax.” See
1986 House Journal, at 826 (statement of Rep. Ikeda) (referring
to the TAT as a “hotel room tax”); id. at 828 (statement of Rep.
Kamaliʻi) (same); id. at 830 (statement of Rep. Pfiel) (same);
id. at 830 (statement of Rep. Isbell) (“[I]t should be very
clear that it is the room itself that has a 5% charge to the
tourist . . . .”); see also 1986 Senate Journal, at 652, 658
(statements of Sen. Soares) (referring to a “hotel room tax” and
a “tourist tax”); id. at 655 (statement of Sen. Yamasaki)
(referring to “the additional tax we are considering for the
rooms”); id. at 655-58 (statements of Sens. Kawasaki and Cobb)
(referring to a “tourist tax”); id. at 657 (statement of Sen.
Abercrombie) (referring to “a hotel room tax, a tourist tax”).
- 86 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
The legislative history indicates that the “hotel room
tax” was not a tax on the hotels, but instead, was a mechanism
to tax visitors by assessing the cost of their hotel room to
correlate to costs associated with visitor use of infrastructure
and county services.
i. Intent is reflected in the structure chosen for the tax
The intent of the legislature to tax transient
visitors through the mechanism of a hotel room tax is reflected
in the structure of the tax that was developed. The TAT was
originally proposed not as a separate tax, but as a special rate
and application of the GET. See H. Stand. Comm. Rep. No. 586-
86, 1986 House Journal, at 1260, 1261 (proposing to amend
HRS § 237-13(6) to apply a nine percent GET on “the gross
proceeds of sale or gross income received”). Critically, the
proposal was later changed to a separate tax, styled as the TAT.
See H.B. 2805-86 H.D.1, S.D.1, 13th Leg., Reg. Sess. (1986).
The reason given for the change from a special
application of the GET to a separate TAT was to protect the
hotel industry from excessive taxation. The committee report
for H.B. 2805-06 H.D.1, S.D.1 states as follows:
The purpose of this bill is to provide for a general excise
tax on transient accommodations of 9 per cent, and to amend
the provisions concerning the application of the general
excise tax to reimbursements.
Your Committee agrees with the Committee on Finance of the
House of Representatives that the time has come to impose a
tax on transient accommodations; however, it does not agree
that the rate should be as high as 9 per cent, nor that the
- 87 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
vehicle for imposing the tax should be the general excise
tax but instead should be a separate tax.
The reason for a separate tax on transient accommodations
is to lessen the income loss of transient accommodation
operators. Presently, under the general excise tax, if a
person prices an item at $100, the person generally charges
$104 in order to pass on the 4 per cent general excise tax.
However, the general excise tax is on gross collections,
which means the person must pay 4 per cent on $104, or
$4.16. This means that for every $100 transaction a person
loses 16 cents. If the general excise tax itself was
increased to 8 per cent, then on a $100 price, the person
would charge $108, pay taxes on $108 or $8.64 in taxes, and
lose 64 cents. By creating a new transient accommodations
tax at a 4 per cent rate and providing that the general
excise tax passed on and collected is not included in the
gross proceeds which are taxed under this tax and similarly
providing that the gross proceeds subject to the general
excise tax do not include collections under the new tax,
the amount of the loss is reduced to 32 cents per $100—
total tax paid of $8.32 composed of the general excise tax
of $4.16 and the transient accommodations tax of $4.16. The
savings under the two tax system to the industry is
appreciable for businesses making thousands of dollars a
year. In this manner, the State is able to tax the
industry for the benefit of the State, while at the same
time minimizing the impact of the tax on the industry.
S. Stand. Comm. Rep. No. 651-86, 1986 Senate Journal, at 1076
(emphases added); see also Conf. Comm. Rep. No. 70-86, 1986
House Journal, at 961-62, 1986 Senate Journal, at 764-65
(echoing much of the same language). Thus, the legislative
history of the TAT indicates the intent to “minimiz[e] the
impact of the tax” on the hotel and visitor industries. S.
Stand. Comm. Rep. No. 651-86, 1986 Senate Journal, at 1076.
Comments during debate on the measure reinforce this
conclusion. “This bill imposes a separate tax of 5% on tourist
accommodations charges. In this way, the tax does not fall on
the corporate hotel industry or pyramid in its collection. It
- 88 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
is a simple and clean tax.” 1986 House Journal, at 828
(statement of Rep. Kamaliʻi) (emphasis added).
ii. Subsequent amendments indicate that the TAT is effectively
a tax on net rental proceeds
The legislative history of the amendments indicates
the legislature’s continuing focus to minimize the impact of the
tax on Hawaiʻi visitors and the hotel industry.
The TAT, originally enacted in 1986, 1986 Haw. Sess.
Laws. Act 340, § 1 at 758-63, was amended to include the TAT
Apportioning Provision in 1988. See 1988 Haw. Sess. Laws Act
241, § 2 at 424-25. The legislature did not provide explicit
statements explaining its intent in enacting the TAT
Apportioning Provision. However, the GET and TAT Apportioning
Provisions, although passed in different bills, were passed in
the same session of the Hawaiʻi legislature. See 1988 Haw. Sess
Laws Act 167, § 1 at 292-93 (amending the GET); Act 241, § 2 at
424-25 (amending the TAT).
The Committee reports for Act 241, amending the TAT,
indicate that the “application of the [TAT] is presently
patterned after the [GET].” H. Stand. Comm. Rep. No. 198, 1987
House Journal, at 1178. Similarly, when the legislature amended
the GET to include the GET Apportioning Provision codified at
HRS § 237-18(g), the senate committee stated, “Your Committee
finds that this bill provides equitable treatment for operators
- 89 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
of transient accommodations under the general excise tax law.”
S. Stand. Comm. Rep. No., 914, in 1987 Senate Journal, at 1286.
The GET Apportioning Provision expressly references the TAT
Apportioning Provision: “As used in this subsection, the words
‘transient accommodations’ and ‘operator’ shall be defined in
the same manner as they are defined in section 237D-1.” HRS
§ 237-18(g).
Based on the similar construction of the GET and TAT
Apportioning Provisions, enactment by the same legislature, and
recognition by the legislature of the parallels between the two,
it is clear that the legislature consciously crafted the two
provisions in conjunction with one another. Accordingly, the
same purpose is attributed to the TAT Apportioning Provision as
was expressed by the legislature in its concurrent enactment of
the GET Apportioning Provision: to protect the hotel and visitor
industry from the TAT being unfairly assessed on grossed up
revenues.
In addition to adding the TAT Apportioning Provision,
Act 241 also specified that the Gross Rental Proceeds exclude
amounts charged for the GET. See 1988 Haw. Sess. Laws. Act 241,
§ 2 at 424. The exclusion of the GET from Gross Rental Proceeds
was intended to prevent additional taxation on the privilege of
doing business in Hawaiʻi.
- 90 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
Your Committee believes that the charge for doing business
in Hawaii is already imposed under the [GET] which is a tax
on gross proceeds. It is already acknowledged that the
[TAT] is an additional tax imposed on a particular type of
activity. Therefore, your Committee feels that the
transient accommodations tax should not be imposed on the
basis of the room charge plus any amount passed-on due to
the . . . tax.
H. Stand. Comm. Rep. No. 198, 1987 House Journal, at 1178
(emphasis added).
The definition of Gross Rental Proceeds was further
amended in 1990 to specify that it excludes any amount collected
for the TAT. See 1990 Haw. Sess. Laws. Act 185, §3 at 395. The
Department objected to the exclusion of the TAT collected from
the transient in calculating the TAT because of what the
Department perceived as a transformation of the TAT into a tax
on net room rate.
[S]ection 3 of [the bill] provides that the words “gross
rental” or “gross rental proceeds” shall not be construed
to include the transient accommodations tax imposed upon
and passed on by operators of transient accommodations to
occupants thereof. This provision is contrary to the
definition of such words provided under section 2 of [the
bill]. The proposal changes the entire concept of the
[TAT] from that of a tax on gross rentals to a tax on net
rentals. It is clear from the committee reports of the
1986 Legislature that it meant to tax any passed-on tax as
gross income. This provision should be deleted.
Department Testimony on S.B. No. 1712, S.D. 3, H.D. 1, Relating
to Transient Accommodations (March 31, 1982) (emphasis added).
By enacting the 1988 and 1990 amendments to the
definition of Gross Rental Proceeds, the legislature indicated
that the TAT was not merely assessed on a gross room rate. By
creating a TAT Apportioning Provision, the legislature made it
- 91 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
clear that, where a travel agency or tour packager had made the
room arrangements for the transient, the TAT was not to be
charged on the gross rate paid by the transient but only on the
Gross Rental Proceeds allocated to or distributed to the
operator. Further, the GET and the TAT were expressly excluded
from the TAT calculation. Taken together, the amendments
indicate that the TAT is a tax to be paid by the transient based
only on the cost attributed to the hotel room that is allocated
to the operator. That is, the TAT was to be based on a room
rate paid by the transient and allocated to the operator, less
any amount distributed to a travel agency or tour packager, and
excluding any GET or TAT. Thus, notwithstanding that the
nomenclature for the assessable proceeds--“Gross Rental” or
“Gross Rental Proceeds”--remained unchanged, the statutory
definition excludes certain amounts.
With the intention of the legislature in mind, we turn
to the TAT Apportioning Provision to determine how its operation
might instruct this court’s interpretation of “actual” within
the definition of “operator.”
b. In context with the intent of the legislature, the TAT
Apportioning Provision helps to define “operator”
The exclusions contained within the definition of
Gross Rental Proceeds include the TAT Apportioning Provision:
Where transient accommodations are furnished through
arrangements made by a travel agency or tour packager at
noncommissionable negotiated contract rates and the gross
- 92 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
income is divided between the operator of transient
accommodations on the one hand and the travel agency or
tour packager on the other hand, [Gross Rental Proceeds] to
the operator means only the respective portion allocated or
distributed to the operator, and no more.
HRS § 237D-1 (emphasis added). The elements of the TAT
Apportioning Provision are nearly identical to the elements of
the GET Apportioning Provision of HRS § 237-18(g).49 As in the
GET, the operation of the TAT Apportioning Provision requires
the involvement of two entities: an “operator of transient
accommodations on the one hand and the travel agency or tour
packager on the other hand.” Thus, a single entity cannot fill
both the role of operator of transient accommodations “on the
one hand” and the travel agency or tour packager “on the other
hand.”
However, the TAT Apportioning Provision differs from
the GET Apportioning Provision in a crucial aspect. The GET
Apportioning Provision provides that “the tax imposed by this
chapter shall apply to each such person with respect to such
person’s respective portion of the proceeds, and no more.” HRS
§ 237-18(g) (emphasis added). That is, the GET Apportioning
Provision divides the taxable base into two portions and holds
“each” responsible party liable for their respective portion.
49
In the elements of the GET and TAT Apportioning Provisions, the
only difference is that the GET Apportioning Provision refers to
“noncommissioned” negotiated contract rates, whereas the TAT Apportioning
Provision uses the term “noncommissionable.” Based on the analysis to
follow, any difference in the meaning of the two terms is not relevant.
- 93 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
In contrast, the TAT Apportioning Provision defines
the tax amount as “only the respective portion allocated or
distributed to the operator, and no more.”50 HRS § 237D-1
(emphasis added). Thus, the TAT Apportioning Provision takes
the gross amount paid by a transient and divides it into two
portions: one assessable under the TAT, and one that is not. As
a result, whereas the GET Apportioning Provision holds both
parties liable for the GET, the TAT Apportioning Provision
provides that only the operator is liable for the TAT.
If the OTCs are operators, the OTCs cannot apply the
TAT Apportioning Provision to split their Gross Rental Proceeds
with the hotels. This is because neither party has asserted the
hotels are travel agents or tour packagers; thus, the hotels
cannot fill the role of “travel agent or tour packager on the
50
The GET Apportioning Provision provides as follows:
Where . . . the gross income is divided between the
operator of transient accommodations on the one hand and
the travel agency or tour packager on the other hand, the
tax imposed by this chapter shall apply to each such person
with respect to such person’s respective portion of the
proceeds, and no more.
HRS § 237-18(g) (emphasis added). The TAT Apportioning Provision
provides as follows:
Where . . . the gross income is divided between the
operator of transient accommodations on the one hand and
the travel agency or tour packager on the other hand,
[Gross Rental Proceeds] to the operator means only the
respective portion allocated or distributed to the
operator, and no more.
HRS § 237D-1 (emphasis added).
- 94 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
other hand.” Hence, if an OTC is considered the “operator . . .
on the one hand,” then there is no legitimate entity to fill the
position of “travel agency . . . on the other hand.”
As stated by the Director, “Where there is no ‘travel
agent’ in the transaction, as is the case in the [Assessed
Transactions], the [TAT Apportioning Provision] does not apply.”
Because the elements of the TAT Apportioning Provision would not
have been satisfied if the OTCs are operators, then the Assessed
Transactions would not fall within the TAT Apportioning
Provision. Accordingly, the entire amount paid to an OTC by a
transient would be Gross Rental Proceeds subject to the TAT,
except for the taxes already included.51
The parties do not dispute that the hotels owe the TAT
on their Gross Rental Proceeds that derive from furnishing the
transient accommodations in the Assessed Transactions.52 Thus,
if the meaning of “actual” within the definition of “operator”
encompasses the OTCs, then the TAT would be assessed twice:
51
As noted, the legislature enacted the TAT Apportioning Provision
to protect operators who do not know the actual cost of the room charged to
the transient. Here, the OTCs have actual knowledge of the cost charged to
the transient; thus, the application of the TAT Apportioning Provision by an
OTC would be inappropriate. Thus, application of the TAT Apportioning
Provision to define the Gross Rental Proceeds of an OTC would also be
contrary to the intent of the legislature for this additional reason.
52
As stated by the Director, “Because they act as “operators” in
[Assessed Transactions], the OTCs owe TAT on “gross rental proceeds . . .
without any deductions.” So too does the hotel on its “gross rental proceeds
. . . without any deductions” that it receives from the OTCs pursuant to the
OTC-hotel Contracts.” (Emphasis added).
- 95 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
first, against the OTCs based on the room rate plus the mark-up
and service charges, and second, against the hotel on the net
rate collected for the room.
The legislature determined that visitors should be
assessed to pay for providing, maintaining, and upgrading county
infrastructure and services. The primary justification for the
TAT was to enable the visitor to pay to the state their “fair
share” of the costs incurred by the county for providing
infrastructure and services. 1986 House Journal, at 828
(statement of Rep. Kamaliʻi). The mechanism the legislature
created for that purpose was a tax based on the transient’s cost
of the hotel room, limited to the proceeds allocated to the
operator, to be remitted to the State by the transient’s hotel.
The TAT was designed to charge the visitor through the
assessment against the cost of the hotel room; therefore, to
more than double the TAT assessment would be contrary to the
intent of the legislature that correlated the tax to the hotel
room use. Plainly, the impact of a tourist’s use of county
infrastructure and services does not vary upon whether the room
is booked through the OTC or through the hotel directly; the
legislature did not intend that the TAT should be applied once
or twice depending on the method the transient selected to
reserve accommodations.
- 96 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
As stated, the legislature repeatedly demonstrated its
intent to minimize the impact of the TAT on the tourist industry
by taking the following steps: establishing the TAT in 1986 as a
separate tax from the GET; amending the law in 1988 to include
the TAT Apportioning Provision that assessed only the operator
and not the travel agency or packager; excluded the GET from the
definition of Gross Rental Proceeds so that the TAT would not be
calculated based upon an amount that included the GET; and
amending the TAT again in 1990 to ensure that the amount due was
not calculated based on an amount that included the TAT charged.
Together, the legislative history of the TAT demonstrates clear
intent to preserve the TAT as a “simple and clean tax” that does
not “fall on the corporate hotel industry or pyramid in its
collection.” 1986 House Journal, at 828 (statement of Rep.
Kamaliʻi).
Considering that the legislature intended the TAT to
be a tax upon the transient, assessed on the cost of a hotel
room, and collected through the mechanism of the operator, it is
clear that the legislature did not intend that the TAT would be
assessed in full on multiple operators.
Thus, defining “actual” to mean “[e]xisting in fact”
or “real,” Black’s Law Dictionary, supra, at 42, would result in
double application of the TAT, contrary to the intent of the
legislature. Consequently, the legislature must have intended a
- 97 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
different meaning for the term. See McKnight, 131 Hawaiʻi at
388, 319 P.3d at 307 (“[W]e must read statutory language in the
context of the entire statute and construe it in a manner
consistent with its purpose.” (quoting State v. Wells, 78 Hawaiʻi
373, 376, 894 P.2d 70, 73 (1995)).
c. “Actual” indicates a single “operator”
Based on the continuing intent of the legislature to
tax visitors for their use of county infrastructure and services
by assessing the cost of transient accommodations that is
allocated to the operator, to utilize the hotels as the vehicle
for collecting that tax, and to minimize the impact of the TAT
on the hotel and visitor industry, only a single taxable event
as to the TAT occurs when a transient accommodation is furnished
to a visitor. It follows then, that a single operator is
associated with the furnishing of transient accommodations.
Applying the principle of pari materia, “actual” as part of
“actually furnish,” within the definition of operator, indicates
a single entity as fulfilling this role. Thus, an operator may
be an “owner or proprietor or as lessee, sublessee, mortgagee in
possession, licensee, or otherwise” or, if such person is not
present, then the operator may be a person “engaging or
continuing in any service business which involves the actual
furnishing of transient accommodation[s].” See HRS § 237D-1.
The definition of operator in HRS § 237D-1 does not contemplate
- 98 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
or allow for multiple operators when a transient accommodation
is furnished.
Here, the hotels in the Assessed Transactions are
acknowledged by all parties to be an operator within the meaning
of the use of that term as provided by HRS § 237D-1; thus, for
purposes of the TAT Assessments, only the hotels are operators
in the Assessed Transactions. Therefore, the OTCs are not
operators and the TAT is not applicable to the OTCs in the
Assessed Transactions.53
E. Penalties on the TAT Assessments
As we find that the OTCs are not operators, the
determination of the tax court as to the TAT is affirmed, and
the applicability of the penalties to the TAT Assessments is not
presented.
V. CONCLUSION
The Final Judgment is affirmed in part and vacated in
part, in accordance with the following:
(1) The Order Granting in Part and Continuing in
Part [Director’s] Motion for Partial Summary
Judgment on [GET] Assessments, filed
February 8, 2013, is affirmed in regard to
the application of the GET and vacated in
light of the application of the GET
Apportioning Provision; the matter is
remanded to the tax court for recalculation;
and
53
In light of this conclusion, we do not specifically address the
Director’s fourth point of error. See supra note 4.
- 99 -
***FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER***
(2) The Order Granting [Director’s] Motion for
Partial Summary Judgment on [GET] Assessments;
Schedules 1-4, filed August 15, 2013, is affirmed
in regard to the application of the failure to
file and failure to pay penalties and vacated in
light of the application of the GET Apportioning
Provision; the matter is remanded to the tax
court for recalculation.
The Final Judgment is affirmed in all remaining
aspects, and the case is remanded to the tax court for further
proceedings consistent with this opinion.
Paul Alston /s/ Mark E. Recktenwald
Tina L. Colman
Pamela W. Bunn /s/ Paula A. Nakayama
Ronald I. Heller
for Travelocity.com, L.P., /s/ Sabrina S. McKenna
et al.
/s/ Richard W. Pollack
Hugh R. Jones /s/ Randal K.O. Lee
Girard D. Lau
Kimberly Tsumoto Guidry
Warren Price III
Kenneth T. Okamoto
Robert A. Marks
Gary Cruciani
Steven D. Wolens
for Director of Taxation,
State of Hawaiʻi
- 100 -