 Good morning, I'm Jay Fiedel. This is Stink Tech to 10 o'clock block. We're talking tax with Tom Yamachika this morning as we do on Thursdays at 10, every couple of weeks we learn so much. We need to learn tax because it affects us directly every single one of us. And it affects our state government as well. So today we're gonna talk about the gross exercise tax and yes, you can be affected by it even if it's a corporate obligation. New twists in the GET. It was Tom Yamachika. Welcome to the show Tom. Morning Jay, great to be here as usual. Yeah, and we always have happy talk, right? Well, it's scary talk sometimes but we do learn stuff. So I think that's a good thing. So we're gonna talk about a twist that people should not like in the way the GET is interpreted. Let's a moment about George Freitas. I don't know if you remember him. He was the director of the tax office back in the 70s actually from state went on, I think. And George's one mission in life was to make the gross exercise tax plenary and ubiquitous. No exceptions, no exceptions, no exemptions, no nothing. And that's his gift to us today. There are very few exceptions or exemptions to the gross exercise tax. It pervades our commerce in our lives and it is getting more expensive. So you can say it's a 4% plus tax and it's less than say New York which is 7% I think or more. But in fact, it's just as high because it covers so much including for example, drugs and food and all kinds of things that the New York tax and other taxes in the country don't cover. Yeah, I mean the GE tax is perversely fair in that it applies to almost everything. So it doesn't matter what sector of the economy you're in the tax is gonna apply. So like a lot of jurisdictions on the mainland they impose sales taxes and those don't usually affect services. So being an attorney or being a CPA there is good because you can earn services and escape tax on it but here you can't. Yeah, we're unique that way. I think we're unique around the whole country that way. So we do have the broadest tax bar none. New Mexico comes close with that. It's really not that close. Our coverage is far broader than New Mexico's. So it's... Yeah, and then we added something for Oahu. You know, I can't even remember why we added a special ticket for Oahu. Can you talk about what happened there? That's the county surcharge and we did it to build rail. And rail, that's a happy thought. Yeah, and that came in in I think the 2006 session and it was so good of an idea that the other counties wanted in too and most of them bought in except for Maui and then Maui wants to get in the action as well because their revenue picture is being squeezed for a number of reasons. One of which is the transient accommodations tax which previously was shared with the counties. A, has gone through the floor and B, what little is left has been shut off by Governor Ege in an emergency proclamation. Now people have to realize that even if there isn't a specific tax increase, there are so many ways that the state government can find more money and squeeze the taxpayers. It's endless and it's a search every single legislative session to squeeze the taxpayer just a little more without clearly indicating that the taxpayers being squeezed. This is very problematic in Hawaii. Yeah, and one more point before we get to the substance of our discussion is where does Hawaii stand on the total tax burden on the taxpayer as opposed to other states? No, we're way up there. It depends on the measure that's being used but either number one or in the top five in most of the measures I've seen in most of the studies I've seen. Yeah, and what's interesting is the legislature and for that matter, the governor's even though they may talk a good game about expanding the economy. The fact is that we have not expanded the economy into other sectors such as innovation and technology after all these years of talking about it. And if we did that, we'd have a greater tax base and therefore less of a need. And we would have the tax base to cover all state expenses or more state expenses. So what we're doing is we're not increasing the tax base and we're taking more out of each taxpayer. This is not a sustainable program going forward. Do you agree? Oh, yes. When you impose taxes, you put a break on the economy. The break that stops cars rather than break like a tree branch. And a break on the economy is not what we need. We need the gas. We need more economic activity in more sectors. And for that, we need to be creative and we have to develop the sectors. I mean, one sector that I think that has been focusing on is diversified agriculture. We're still limping along. Everybody has a good word about the benefits of diversified agriculture for our state. But if you look, you can see that it's not going anywhere or at least not anywhere fast. And the talk well exceeds the action. As an example of an area that could be very lucrative for the state because that would be additional economic activity and would help at existing tax rates. It would avoid the need to increase the tax rates or directly or indirectly and squeeze the taxpayer. This is the kind of visionary thing the legislature should be doing and talking, not more than talking about actually doing and focusing on over the years to come. We're an island state. We can't shrink our industrial sector, our economic sectors. We have to expand them and become in the process more self-reliant. Should I stop now, Tom? Are you done with your soapbox today? Yeah, I just had to tell you that, that's all. Okay. No, I totally agree. Let's talk about the gross exercise tax because whether people realize that or not it's regressive then it has a proportionately greater effect on the lower end of the economic spectrum so that if you're middle class or below you're paying a proportionately higher amount of money on the gross exercise tax than a rich person. Can you explain about regressive and progressive taxes? Sure, a regressive tax is one that's imposed regardless of the ability to pay it. So, GET and sales taxes in other states are pretty much the classic examples of regressive taxes. The more your state's government depends on regressive taxes, the more you are hitting the poor disproportionately because you will find that as you just mentioned the poor will wind up paying more as a proportion of their income in taxes than the rich and as a policy matter some people think that's not good. Regressive taxes are taxes that are pegged on the ability to pay pretty much the only example that we have is the net income tax. So, our net income tax has tax brackets and you pay more than what you make. A few years ago my wife and I went to, I think it was Oregon, it was Portland and we went into a Best Buy store there and I bought something and I'm looking at the price and the total price charged against my credit card and there was no tax, it was just the price. And I felt liberated, it was very attractive to be able to buy just the price. And I'm saying to myself, what it shows you is that we're all used to the gross excise tax but it is clearly an economic burden on everyone. When you start adding 4.712 to everything you buy it really becomes oppressive and you only realize that when you don't have to pay it. Freedom at last. All right, well, welcome to Oregon. Oregon doesn't have a sales tax, they do have income tax and it's up there. Yeah, okay, but I don't reside in Oregon so I don't have to pay income tax there. Well, good for you. Thank you. So anyway, let's get on with it. Talk about the gross excise tax in this session or at least the gross excise tax as it relates to people who are officers of corporations that for one reason- Actually, you don't have to be an officer. A signatory, a bank signatory. You can be a payroll clerk, you can be an AP clerk, right? As long as you have the ability to make payments and this is something that we all know from payroll tax if you are running a company and you pay workers payroll tax and the IRS has to give them credit for that tax on their return but you don't actually pay the tax to the government then the government gets fairly perturbed because of course their money's been stolen and they can collect that money against any responsible person in the company and responsible person means anybody who has checks on it already. Well, it's easy enough to determine that. What you got to do is look at some checks. Well, it's not that easy to determine and then let me tell you why. As you probably have figured out from the title of this episode we've got the same thing on our general excise tax. So if you have the power to pay a particular state, you know, GE tax debt and you don't pay it and you pay somebody else willfully and there's a willfulness element in there, okay? Then you can be on the hook for that general excise tax payment out of your personal assets. You can come take your house, okay? And it's gonna get worse, okay? As I'm gonna explain, okay? So it's like I said, it's like payroll tax. If you're working for a company and you have the ability to decide who gets paid and who doesn't and you willfully prefer another creditor over the state when you have a state tax debt owing. Well, doesn't that mean that you simply choose to pay another creditor? That's willful right there. That's willful right there. Okay. But that's an element that has to be proved and that's kind of one thing that is kind of different between theory and practice or what the law says and what the actual practice is. The actual practice is when you have a corporate entity or any kind of entity and it has a tax debt, it's unpaid, it goes to collection and the collection tries to find anybody who is associated with that account in terms of officers, directors, payroll clerks, anybody who can sign checks. And the current practice is to send some or a few of them what's called the notice of personal liability. And what that means is, okay, this corporation knows a million dollars in general excise tax. It's now your debt and you have to pay it from your own personal assets. Well, what about all of the other officers and directors of the company? I don't know, we're coming to you. We take your money first. If you have any money left, you can go after anybody else in the company you like for contribution, but we're taking your money first. And that's what the law of contribution says when there's a joint and several tax debt or any kind of debt, which is joint and several liability, the creditor can come after anybody. Get satisfied. Let me ask this though. Is there so many wrinkles here? Do they, the test here is whether you, whether you willfully intentionally fail to pay those you paid other creditors. Yeah, that's, that's my point. The department doesn't even ask that. They just go to whoever's on the officer director list and whoever is on the check signing list and they go, you pay. So the corporation could have, I mean, this is really interesting, the corporation could have a million dollars in the bank. It could have usually it doesn't, but theoretically it could have a million dollars in the bank. They don't care. They're going after you anyway. It's a great leverage point, isn't it? Oh yeah. You know, if the, if the corporation did in fact have a million dollars in the bank, then unless they owe like, you know, 20 million to everybody else, it then becomes a question of, well, can't they write a check to the, to the state? And in some situations they can, since some situations they can't, like for example, if the corporation had declared bankruptcy, then there are, you know, ordering rules and, and, you know, there are different steps according to bankruptcy to figure out, you know, who's going to get paid. Okay. Well, to cut to the quick, you can get a letter in the mail, whether it's properly, you know, it's the result of a proper analysis or not. And it'll say, Tom, your corporation owes gross sex tax. And we're, we're including you. We're going to make you liable for that corporate tax. This would not apply. This would not apply to income tax. We're not applied to payroll tax. Just gross excess tax. Am I right? It would apply to payroll tax. But that, that is, you know, kind of a separate, separate topic, but other taxes it would not apply to know. Okay. So here you get this letter and it says we have just converted your corporate gross excise tax to personal, a personal obligation of Tom Yamachiko. Right. So now, and now you have, you know, you wake up one morning and get that letter. And now you have your options. What are your options? And the questions are what the option, what are your options? Right. Okay. Normal taxpayers. When they get a notice of assessment from the state, they can go to court. They can appeal to the, the board of review. They can appeal internally within the department and they don't have to pay. No, for your first appeal, you don't have to, you don't have to pay the outstanding balance. Okay. And this is so because you have the right to, the taxpayer has the right to appeal. Within 90 days of an assessment. Within 30 days of an assessment. 30 days. And that is for federal appeal court. Yeah. You can go to tax. You haven't paid the tax ordinarily. You have 30 days to go to the tax appeal court. And make your case and the tax appeal court is a special court. Just for tax appeals. Where does the border review sit in all of that? Can you file an appeal to the, the border review, the tax border review instead? Yeah. Yes. So it's, it's one of two. The border review is like the people's court of, of taxes. It's at least in theory. Staffed by, you know, five people like you and me. And then. You need three to have a quorum. And then those three people will hear and determine your case. Subject of the right to go to. Tax appeal court. If either party loses. And one, one party will lose. That party has the right to appeal further to. To tax appeal court. Okay. So it's a, it's a brand new appeal. The de novo, as it were. From the border review. Now don't just stand a good chance of winning at the border review. After all their citizen officials. Just like you and me. And they may be sympathetic to taxpayers perhaps more. Than the, than the tax appeal court. Actually, in practice, that that's not the case. In practice. What you have is, you know, when you, when you have your border review hearing. You have your tax assessor on one side. And they, and they know the law cold. And it's not a tax pay. The, the, the person who normally represents the taxpayer. Usually. Is a CPA who does mostly federal work. Or a. An attorney who doesn't do much tax. And. Typically what happens is the assessor walks all over. Okay. All right. Putting that aside then. So what's. What's the best choice if you get nailed with one of these letters one morning. Well, here's the problem. The problem is that. A normal taxpayer has the right to appeal within 30 days after assessment. You get one of these letters and the different, and the tax department has been saying, well, that's not an assessment. So you have no right to appeal. The only thing you can do. Is pay off the tax. You have to pay off the tax debt. And sue for a refund. You go to, you go to go to tax appeal court. You sue for a refund. But. That, you know, presupposes. That you have the ability to pay. And can pay the entire tax debt. Of a company. Which, you know, sometimes it happens. If you're just a regular payroll clerk. That's probably not going to happen. Especially if the tax liabilities and, you know, in seven, you know, seven or eight figures. That's beyond the capability of most people. Let me go back one step though. And so if, if, if the tax office has assessed the corporation, I guess the same rules would apply to a lot of LLC and all that. If, if the tax office is assessed. You care the corporation can. Appear to the corporation. You need to know how an appeal immediately. So if there is a basis for appeal. Then the corporation should certainly. Make that appeal within that 30 day period. Because that avoids. Tell me how that works. Does that avoid the possibility? If you win, that avoids the possibility. The practicalities of it are most corporations in that situation are belly up, okay, they have no money. So they can't pay anything, they can't pay lawyers, you know, to go to court and fight this. They're just kind of getting out of the notch. We're trying to. They're, you know, they'll jillians of other creditors in addition to the into the tax office, which is probably why they got into that problem in the first place. And there isn't there isn't any money to go around and, you know, the corporation decided, hey, let's let's keep the lights on. Or let's keep the phone service so we can try to make more money and and we know what's the what's the tax office going to do as well this is what's going to happen. So what about going bankrupt, if the corporation goes bankrupt, does that slow this process down and make it less likely the clerk is going to get nailed. It's going to take away the debt of the corporation. Personal liability is a separate independent debt. So the clerk is still on the hook clerk still on the hook. Okay, so what you've described a pretty awful picture, the corporation which you know is an employer essentially of the clerk and the clerk is just a clerk. He's not necessarily an officer director stockholder of the corporation. He gets nailed. He doesn't have the money almost by definition, the corporation as you say is not doesn't have the money either. So now, what does the clerk do. Well, most most clerks in that situation wouldn't be able to do anything. The department would then, you know, go and clean their bank account. Take whatever assets they have, but a lien in their house. And, you know, if the clerk saying well you know I really wasn't responsible for this, you know, this is just what I was ordered to do. I didn't have a choice in the matter. Well, you know, you got to prove it. Supposedly can prove it. Supposedly can show look I was just that gave me a instructions to pay these certain other creditors. Well, you have no place to say that you see because if they're if they're saying, you don't have appeal rights, unless you unless you prepay the tax, you don't have appeal rights. So we're going to go in and drain your bank account. Period. practical day to day I mean aren't they going to talk to him. Aren't they going to satisfy themselves that this is fair. I mean, I think you're dreaming. Thank you. Okay, so there's a policy point on this. And my, my understanding is that the tax office has taken a position to interpret the statute in a way that isn't necessarily fair. Can you talk about that. Yeah, I mean, I think, you know, when somebody, a government agency turns you from being a, you know, a person with good credit standing to one that was like a, you know, a bajillion dollars. I think that a person who is affected by that should at least have some due process rights. So, you have to be able to at least establish to somebody or something that oh, I was just a payroll clerk I was just following orders, somebody else made the decision. Or that, hey, the corporation never had the money in the first place we couldn't have, you know, we couldn't have paid the audit assessment once it came down. So, is this kind of thing actually happening. I mean, it's just, it's just a real problem where in real cases this this kind of thing is happening in a, and the clerk does get nailed and I guess he has to, you know, divest himself or file bankruptcy, and his life is changed. And the this topic is based on a real case where the tax foundation, which I, you know, which I'm the president of filed an amicus curia brief, you know, in a case that involved this, the case was settled. So we don't really know how it came out. But it does kind of present the danger and you know the state did in fact move to dismiss on the ground that well you know, tax appeal court. You have no subject matter jurisdiction. So a more fair result would be to offer the clerk the same remedies that the corporation would have had at the moment of the initial assessment. In other words, he could have. He should be entitled to file a notice of appeal to board review and the tax appeal court. The same rates that apply to the original tax pay. Okay, and the decision to say no to him that he cannot do that, that he must pay in full before he can file, get into court and file a claim for refund of what he paid. That's that's an administrative decision made by the tax office rather than by the legislature. Right by the tax office and the attorney generals. So how do you fix this, either by a victory in court or by putting clarifying language in the statute. All right, a change in the statute to make it fair. I guess the victory in court one really hangs me up. I, how do you have a victory in court if you can't go to court. Good question. I mean there are. There are extraordinary means to get into court if you if you think the court's not being fair. But those but those are kind of complicated and and you're tough to navigate expensive and they are expensive. Yeah. Yeah, for a guy who has no money. This is a this is a real problem. I'll put this in the context of COVID, you know, I don't know how things have been going in terms of this kind of corporate super, super assessment on people. How have things been going with these corporations who have failed and thus fail to pay for sexized tax during during COVID a lot of companies that are that have failed. And a failure may not be one day you close the doors that's it a failure may be a slow roll where the owners and managers tried to keep the thing going, you know, and in the process they had to make choices about what bills they would pay. How is how things going in the community these days. Right. I mean, people have to make difficult choices. And it just that in 2010 we adopted this law that says, well, and if you make this choice. You got to be prepared to pay for your own money. So that's that's, you know, where the title of this episode comes from. You are guaranteeing your corporations that So bring thought and that's what this is all about. You know, if you think this is fair. You know, you can go on your merry way if you don't think it's fair then maybe talk to your legislator or, or, you know, try to do something about it. In a corporation of an appropriate size, I guess the managers would not just to be fair to their, their employees, their clerks so to speak, they would sign the checks, they would not allow the clerk to be exposed this way. And if you were a clerk, you know, you might say to your manager or your, you know, officer director person in a small company. Look, would you mind signing these I'll prepare them but you sign them. I'm not going to sign them. It's much too much exposure for me. What about that kind of advice. I mean, it's going to be some negotiation between the managers and the, you know, people doing the work. But you need to understand, and a lot of people don't that that this guarantee of liability is part of the is part of the deal with you like it or not. Yeah, what are you going to do if you're the clerk and the manager tells you to sign a check. It's hard to say no I'm not going to do that because I don't believe in you believe you're going to cover me. Yeah, it's a very, very quick way to be shown the exit. Yeah. What's interesting though is last question. And we're out of here. What about a manager who doesn't sign checks what about a director or owner, you know who runs the company but doesn't sign checks. Could we have the odd result with this personal assessment can be made against the clerk, but not the people running the company could that happen here. I guess it could I mean the department can assess anybody at once. Anybody, anybody can grab some of the owners may be on the mainland or, or somewhere outside the country, and tough to acquire jurisdiction over them. So, so you take what you can find and you, and you, and you whack them. And then it's their problem to get, you know, their former bosses to contribute. Because they would have a claim against their former bosses wouldn't they. Yeah, they would. And so the question is, is that something you allow. You know, are you going to let the, you know, temporary inconvenience of the clerk. Go because, and then, then endanger the rest of the state, because you can't get your tax revenue. Well, on top of everything we have to be fair and ethical and moral and decent. And that's really the test here. But thank you for this discussion time. It's an interesting issue. It's a live issue. And I look forward to more discussions along the same lines. Thank you very much. In short, I'm going to get President tax foundation of Hawaii. Aloha.