 Hi, everybody. I'm Mark Coleman, your co-host today of Talking Tax here on Think Tech Hawaii. My co-host is Tom Yamachika, president of the Tax Foundation of Hawaii, and we have a special guest today, Russell Ryan. He's a chief financial officer and co-owner with his lovely wife of Hawaii Inn, which has two restaurants, one in Ako and the other one in Waipahu, and they serve mostly native Hawaiian foods. And the reason we're going to talk to him today is because he was hit with a big tax bill unexpectedly a year ago or so, and we're going to talk about why that happened and what we can do about it. He's one of many who were hit by this surprising request for money by the Tax Foundation of Hawaii, and it goes back to the COVID funding era when the federal government was in a state where passing out lots of money to help businesses that were affected by the lockdowns, by the COVID lockdowns. So Tom wrote an article about this very recently called Restaurants Getting Cooked, and that was about how these many restaurants were suddenly surprised by this big bill from the government, state government, and Tom, why don't you explain what was going on about that? Sure. Thanks for that great introduction. What we've got today is basically an audit program that was initiated by our state tax department. They are going after restaurants of all stripes. They go in small ones, medium-sized ones, and the key factor in that is that they took advantage of a program from the federal government called the Restaurant Revitalization Fund, or RRF. You may recall that in the earlier days of the pandemic and 2020 or so, the Feds came out with some different relief programs, including the Paycheck Protection Program, or PPP for short. So most businesses were able to take advantage of some monies from that program. And in 2021, when we had a new president, it was kind of deemed necessary to help a certain segment of the business population out, namely restaurants and, I guess, entertainment venues. So they had back two new programs in 2021 called RRF, which we just talked about, and the shuttered venue operators grant. So it has VOG, and this is for businesses that had to close down because of the pandemic, because they were closure orders. Now, what brings us to the problem today is our omnipresent general excise tax, which is pretty much levied on everything. And in 2020, when the first couple of programs came out, the Department of Taxation came up with some official guidance. This is what it looks like. If you can show the first slide, please. Yes, this is what's called TIR or Tax Inforation Release 2020-06 in a nice official document. It's, you know, many, many pages long, but let's kind of cut to the chase here and go right to the the section we need on page three. And let's zoom in on that a little bit. And it talks about general excise tax treatment. And it says, the general rule is that amounts received by a business that replace income are subject to GET. Thus grants or other programs that replace or supplement income are normally subject to GET. However, in light of the severity of the economic impact of the COVID-19 pandemic, GET will not be imposed on payments received under pandemic unemployment assistance. Luna Ma was forgiven under PPP, which we've talked about. And economic EIDL, I think, is, you were going to see disaster loans. That's right. Economic Injury Disaster Loan Programs. Right. I'm getting old here. I forgot what the I stands for. But these were all federal programs to lessen the injury from the economic impact of the pandemic. Of the lockdowns. Yeah. And the lockdowns associated with them. Okay. So this is kind of the rule book that we're playing with. So to see kind of how that unfolded. Well, let's kind of note that this particular official statement was issued in 2020. And that was before we had the RS and the SVOG pass because those were in 2021 when we had a new president. Right. So the guidance doesn't mention RRF. No, you can't. I mean, because it didn't exist yet. But some of the auditors kind of take that omission as saying, well, you know, we talked about PPP and EIDL. We didn't mention RF at all. Therefore, it must be taxable. And that's kind of how they have been hitting these different restaurants. And today we've got one example. And we have Russell here from Highway Inn to tell us about the on the ground impact of what that meant and how the industry is taking us. Really? What's been going on, Russell? Thanks, Mark and Tom for bringing this to everybody's attention. Really appreciate it. Thanks for that great explanation there. As you mentioned, you know, when they came out with that document, RRF didn't even exist. And in 2021, we applied for this additional funds and we received it. And according to the regulations, we spent the money because we were told we had to spend it all. Otherwise, we'd have to give it back. So we duly went ahead, got the money and spent the money in the economy. So all of the people on whom we spent the money, they paid their GT to the state. So they got a piece of that money that we gave to them. And our employees that benefited from the pay that we gave, they also paid state income tax. So we couldn't believe our eyes. And Mark, it was about a month ago, not a year ago that I opened this letter. Do you remember two and a half years ago when you got that money from the federal government? Now you owe us tax on that. We were astonished, of course, that we're like, what? How did that happen? And of course, with the passage of time, I found Tom obviously on this because we're pretty disgruntled about it because we were told at the time that there would be tax due on this. And of course, coming right now in this time of the year and when it came as well, we're being asked to pull this money out of just our operating income today. And of course, we're a small company, but we have budgets, we have all of that stuff. And we were never ever made aware in order to budget for this particular tax which came along. And the thing which I find interesting looking at how they've done it is the same replacing revenue. And somehow this RRF grant is being seen to be replacing revenue as opposed to paying costs like the PPP and the IDL was. So I don't know how suddenly this one grant that's essentially the same thing is suddenly deemed as being revenue replacement as opposed to costs. I mean, also that's something that Tom brought up in his article, I believe, that was the excuse that we haven't talked about until you just brought it up, that the prior programs had to do it meeting costs. And then this one, they considered it to be replacing revenue. And so therefore they are assuming it doesn't have to be exempt. Yeah, that happened when one of our local news channels broke the story on this development with the interview to another Kailua rest tract who was being zapped with the same issue. And they said, oh my god, we we got PPP funds. They said it wasn't taxable. And now we get one year later additional monies from the federal government for RF. What's the difference? The state spokesperson on that particular program came up and said, well, PPP was replacement costs. But I'm not really sure they were aware. But under the RF federal program, you have to spend the money on approved proved items, you know, that the things that the federal government approves. If you don't, you have to give the money back. So I don't see how how different that is being. So now properly, so it should be exempt under the spirit of that letter. Right. The only the only the only difference I was aware of having been the one that did all paperwork on all of these alphabet soup of grants was with the RF. It was based upon revenue decline during sort of one reference period to another. And the others were based on cost decline or costs that you experienced in that reference period. And that was only the initial amount of the grant, right? Yeah, well, that was just a means of calculating how much again, trying to get a ballpark on who owned what because, you know, a small little restaurant is gonna have less than a than a big restaurant. And we all know in the restaurant business revenue pretty much equals costs because of our profit margins. So skinny, you know, between zero to 5%, you know, 5% being a once in a blue moon profit margin that you get in this business. So revenue is equal to cost. So there is pretty much is pretty much the same thing. And there's no logic in my mind as to why using, you know, a quick revenue calculation that is is is very, very easy to observe. I mean, revenues much more easy to observe than cost, because, you know, we all know from accounting that, you know, costs, the costs can be, you know, paid in one period, but accrued in another, or you have depreciation or amortization, you have, you have payment plans, it's really hard to determine what cost is it exactly in what period. But revenue is unambiguous. It was like, Yeah, did you make, you know, $20,000 in this month in revenue? Yes, I did, you know, whereas, you know, costs are a little harder to pin down. So I don't, you know, because the speed with which this came out, we literally had to think about five or six days to come up with our revenue numbers. And it was impossible to do that with costs. So in so in my mind, the revenue number was just a very quick and dirty way of getting getting the size of getting that number, which was, you know, essentially, as I mentioned, proxy for costs, because of the low profit margins. And I don't think there was any intention on the people who came up with this RF grant that it was, it should be treated anything differently than any of the other grounds. How did they react when you brought this up? So, you know, did they should go, Oh, yeah, well, what was their excuse to you? Oh, well, we were still in process. The only information that I've gotten back from our accountant is, is, you know, they respectfully disagree with opposition, essentially, though. And well, just for the record, Jonathan Helton with the ground street Institute, which I work for as well, I'm the managing editor over there. He checked with the small business administration, and apparently more than 1,100 Hawaii based businesses received RF grants for a total of $416.2 million. And at the excess rate, the excise tax rate of 4.4%, not counting county surcharges, the state realized about $16.6 million by taxing the locally distributed RF grants. And so that was an average of about, well, that's what they want. $14,500 in that per restaurant on average. I don't know where you fit in on that one, Tom, but, but that's a lot of money. And considering how, how everybody was so, you know, knocked over by the COVID lockdowns, you would have thought that they might have let that one go. But I guess not. So, yeah, and it's all, it's all back assessments. It's all back assessments. The assessment is going to be made for, for the year 2021. Yeah. And the money's already in the economy. We, we spent it as we were advised to do. Yeah. And on, and we, we spent that money and that GT is in the economy. So they've already received the tax from, yeah. So you heard operating under the idea that, I mean, if you had known you would have to pay 4% on the money we're bringing in from, from the grants, you would have put that aside probably. Yeah, absolutely. Yeah. And he's put it aside and then been like, okay, well, I got to deal with this. That's all on top of the income tax we already spent on it. Well, apparently Gary, who's the, the tax director's name, Gary, Gary Suganuma. Yeah, apparently he, he, you probably know this. I mean, I'm sure you know this, but he apparently has the power to unilaterally say, okay, we won't, you know, we'll, we'll give you a refund. That's what you're seeking right now. Well, it was actually Gary's predecessor, Isaac Choi, in that position who came out with that tax information release that we were talking about earlier. It's an official document, people can rely on it. Right. So, but Gary could extend the spirit of that unilaterally to these RRF grants. And I think, I think he already did. If he wanted to revoke it, he could have done so by now. But doesn't, but what I'm saying is, can he authorize reimbursements or refunds on those tax payments that? Yeah, he can, he can just tell his, tell his auditors, you know, let's end this. Let's, let's apply the same principle to RF and SVOG, which I think is what they should do. Yeah. He said, yeah, he could do that. He could, he could just issue new tax information release stating that what he's to see from the SVOG and RF programs are exempt from the exercise tax, boom, just like that. But barring him doing that, then what? Legislature? Well, yeah, I mean, one of the issues that I guess they may be dealing with is that there is no statutory exemption for this. Okay. So, so he may feel himself compelled to tax it in the absence of authorization from the legislature. Well, that didn't stop his predecessor. Oh, yeah. And it may have been, it may have been kind of a factor of or influenced by the fact that in 2020, our legislature wasn't in session. They only, you know, met for maybe a few weeks and then said, well, we're locking down the Capitol too. That's a good point. Well, does that rise to the level of an executive, like an emergency executive ordered was, did you really have the power to do that even for those other programs? I think he did. You know, if the if it's an executive decision, they have the power to figure out what laws they're going to enforce and what laws are not going to enforce. It's like, you know, cops don't have to arrest everybody they see you walking. Well, yeah, that's good. Yeah, that's a good point. What would you like to see, Russell? Well, I mean, I mean, you know, purely from, you know, a cashflow perspective, you know, we, we don't, we actually haven't paid it. So I can say we just got the bill a month ago. I know several people have been getting these letters previously to me, and there's going to be obviously other restaurants getting it. Oh, right. So it's not a refund yet. It's just like, I'll read with me, but for others, they have paid. I know a couple other people have taken the position, my, the amount's small enough that I'll pay it and then, and then deal with it another day. But you're given our location in an Ococo location because, you know, by public location didn't, didn't receive a significant amount. But our Ococo location did because obviously, we're right here in town. And that one had a major drop off in revenue in the 80% region during, during this time. And of course, you know, we still had to pay our, we started to pay our landlord and our banks and our employees and all that sort of stuff. So, so we started to pay all that. We started paying our cash. So, so the money I'd, I'd literally like not to have paid at me. And even more so, because just this past week, minimum wage just went up too. Yeah. And without going off a tangent on minimum wage. They, the restaurant business, you know, it's unfortunate, the gross misunderstanding of how minimum wage works in the actual business because of our servers are paid minimum wage, but they pull in about between 50 and 90,000 a year, but they make minimum wage. So we're, we're increasing their pay at the expense of, you know, the people, you know, the back house people who are making 17, 18 an hour already. So we have to go pay the people who are already making the most money, more money for the minimum wage. So it's gross. So not only is, not only I don't want to pay that I'm also suffering about an increase of 45% cost on labor. As a result of this most recent, this missing minimum wage. So even more so now, do I not want to have to come out of pocket for this money? Because we're still adjusting to the new realities of, you know, 5% higher costs. And as I mentioned earlier, our profit margin is, you know, 0 to 5% in any particular period. So the minimum wage increase has just evaporated our profit margin for the whole of 2024. So we have to raise prices and so on and so forth. So And then you got inflation, which nobody has any control of around here. Exactly. So, you know, so now to have our own in a city tax department coming off the rest of something, which we view as, you know, as you guys have articulated is just, you know, on the face of it, just, you know, completely different from that prior treatment of similar monies. But you've challenged that or you've asked them to reconsider or what have you done about that? Yes. Well, actually, that's how I know Tom, because I reached out to Tom about it. And Tom, what's your, what's your position now on what where do you think it should go from here? Um, I mean, what have been, you know, I do, you know, in my day job, but represent some clients, including, including highway and and including highway including highway and Russell's company. And our our position for the record is this is unfair. You can't do this tax department. And if you don't do it, we'll take you to court. Is there any precedent for something like this? Is this happening around the country anywhere else in other states? We, we are not aware of any state that's taxing RF except us. Wow. That's, that's amazing. I mean, most, most states have sales tax. And, and RF has a grant is not something you sell. How would that work if you had a sales tax? How would have that have worked for a company like highway and what would that process have been in terms of putting aside money for it to cover the sales tax or whatever? They wouldn't even have to worry about that, right? No. Um, sales tax normally doesn't apply to stuff like that. It applies to like, of course, the meals that they sell. And, and the, and the, you know, would put a charge on the, on the register to, to cover the sales tax collected and remitted to the state collect the state wants it. Um, that's, that's what they do in the sales tax states. They do that here to collect the GT. Um, like pretty much any other business does. So there's, there's not, not a whole lot of, a lot of difference in terms of the tax on the revenue from, you know, customer meals, but there's some about, about the, the other program that's getting taxed. Um, the SBOG one, um, I'm told that, um, from the figures I have here, they, they, they, that, that amounted to, uh, $144 million in Hawaii that they, that they hand it out. Uh, on 78 companies, like, uh, Polynesian Cultural Center, that kind of, like those kind of companies such as Robert's Holding, Robert Hawaii, PC Services, and that amounted to, uh, meaning the average company was about 101 million point eight, 1.8 million. And so their average bill was 73,800. Have you heard anything from these people, um, complaining about their latest surprise in the mail? Um, so far no, but have you heard anything Russell about SBOG? No, no, I haven't. I went, they're just like eating it. Perhaps we ought to look into that for a future episode. Yes. Maybe they haven't been able to, haven't had a letter yet. Yeah. Maybe they're just don't, maybe they haven't been audited yet. Right. Maybe they're going after the restaurants first. But Russell, how would this, how is this going to affect you? I mean, is this going to run you out of business or will it? I mean, I'm just going to have to borrow money to pay it, um, or go on a payment plan and, and pay it if, if we lose and we were forced to pay it. Um, but again, I could say it just means that we just basically operate in the back or, you know, break even for the next, you know, six, six months. Well, I want to say we have to obviously adjust our, adjust our back accounts, but from a cash flow perspective, we're just going to have to borrow to, um, you know, which is going to cost money as well in today's high interest rate environment in order to get enough working capital to be able to, you know, carry on. So yeah, had this, had this happened, you know, not at this time, uh, there may be, you know, by the time we've adjusted prices, you know, given the new reality of all the inflation and the wage increases I was talking about, um, you know, all restaurants who are very concerned about, um, you know, the cash position and what's going to happen to the demand with increased prices in 2024. And this is just another, another unnecessary, um, hurdle we have to, we have to, um, cross. That's done right. It's only good to put us out of business, but it's definitely going to hurt. Well, that's good news. As we know Hawaii's not known for being a business friendly state and, and a failure to back down on this issue would kind of cement that reputation. I'm just so, I read, just so our viewers out there know, um, why highway in, uh, like I said, does serve, uh, it does cater to native Hawaiian, uh, tastes and they ship food to people all over the country. Uh, Mike, I don't know if you want to show that, that, that slide, uh, about their business, but, uh, let's give a plug for you to see, you know, how to make people help here. Yeah, that's some of our vacuum sealed, uh, callua pig and la laos there. Yeah. Yeah. Stuff that people are not, the Hawaiian community on the mainland, anyone who has, uh, sweet feelings for home sweet home, um, uh, as we come to a close, is there anything else you'd like to say? No, we just, uh, hope that, uh, our lawmakers and our people in, you know, the powers that we do is the right thing. Yeah, absolutely. Well, thank you everybody. Uh, I'm Mark Coleman with the co-host and with the grassroots as to Tom Yamachika, Tox Foundation Hawaii, and Russell Ryan, CFO for, uh, Highway Inn, wonderful restaurant there in Waibara and Kakaako. And, uh, if you like this program, please hit like and subscribe to think taika why stay tuned for following programs and we'll see you next time, hopefully two weeks from now. Aloha.