 Welcome back to Think Tech. I'm Jay Feidel. This is Talking Tax, Talking Tax with Tom Yamachika. Today we're going to talk about if you think the tax agency here in Hawaii is that way. There's more. Welcome to the show, Tom. Thanks for having me on the show, Jay. Today we are going to be talking about the state on the other side of the pond, the big one, California, home of Hollyweird and all of those places around there. I can hardly wait. We have a pretty tough tax office. It's been tough on gross excise tax over the years. I remember I told you before, George Freitas swore that he was going to apply the gross excise tax to everything, and he did way back in the 50s and the 60s. And we thought it was tough. But there's good news. I love when you come up with good news, Tom. Well, sometimes there is good news. And this time the news is sometimes California is worse. And let me tell you a couple of stories, and that's why we're here. We have an agency in California that enforces their sales tax. It's now called the Department of Tax and Fee Administration, now known as CDTFA. Yeah, that's something you could talk to your spouse about at the dinner table and try to remember the acronym. Yeah. Well, the thing is California has two tax agencies. One for income tax and one for sales tax. So you think one tax agency is bad, we've got two of them, right? Yeah. So that's been the case since 2017. 2017, California had two different tax agencies called the Franchise Tax Board, which still exists today, and the Board of Equalization, which got split into a couple of things when being CDTFA. And when they created CDTFA, they got a new executive director, and he kind of like ran the agency for a few years, and now he is telling his people, let's not settle cases. Let's not settle cases. That's a prosecutorial mentality is what it is. That's right. I mean, it's basically scorched earth. We take no prisoners. The tax agency is right, and that's it. Is that appropriate in the matter of public policy? Of course not. I mean, law like anything else has its limits and its applications to fact. Sometimes the taxpayer has a good case. Sometimes the taxpayer doesn't have a good case. If the taxpayer doesn't have a good case, then yeah, it's appropriate that the tax agency win. But sometimes the employees in the tax agency, they're human too, and they overeat sometimes. Well, what I was thinking also is that not all taxpayers are the same. You can quote me on that. Some taxpayers, if you push them, they collapse, and they go out of business. They go bankrupt. They terminate their employees. What have you? And so you've got to take that into account when you lay a heavy assessment on somebody. Yeah. I mean, there are some who are darn crooks and the world's better off without them, but there are good taxpayers too who, for whatever reason, don't understand the tax law. And that's not rare. The tax law is complicated. And people who are in business. A couple of thoughts. We are hearing every day, we are hearing from the Department of Justice how important it is to enforce the law, you know, follow the facts, follow the law, do what has to be done. And presumably Jack Smith is going to do that with Donald Trump and his various indictments and trials coming up. Can you distinguish that from this? You know, somebody would argue, follow the facts, follow the law, and suck them. What's the difference between the criminal law as it applies in those Department of Justice proceedings and this, say the sales tax law in California? Well, I mean, tax law is fundamentally different. I mean, it's a civil, in most cases, it's a civil proceeding, which means nobody goes to jail. Okay. You know, there are tax crimes, and they get prosecuted like other crimes like evasion of tax or you know, willful failure to do this or willful failure to do that or lying under oath. You know, those are real crimes and those are prosecuted the same way as other crimes. Okay. But tax law, messes are usually civil in nature, which means they only involve the payment of money. You owe it, they want it, and that's how the dispute shakes out. What about the deterrence factor? You know, one of the things in the criminal law is to deter other people from doing the same thing as has been charged in the one case. But in the tax law, I suppose you could argue that you want everybody to respect the tax. You don't want them turning their back on the tax because then you have what are you going to call it, fiscal chaos. Well, yeah, of course. I mean, there's certainly merit to that. And good tax administrators will take a few high-profile cases and smack people because they want the public to know that the tax agency's got to be respected. They can't just blow it off because a lot of people do blow off the tax obligations. But ordering people on the civil side just to say, well, no, we've been winning in court enough so that we're basically invincible. So whatever the auditor says is right, there is no, and we will not settle. Strikes me that that can be very destructive because you have the audit that's disruptive or a given firm business. And then you have the unwillingness to settle. So it really doesn't go anywhere. And in terms of the humanity of it and the business considerations of it. And then you have, I guess, the tax agents and lawyers and the defense lawyers. There's no role for them. No role for them. Assessment equals you've got to pay. And so you are actually making a lot of people, sorry to say, irrelevant when you say we don't settle assessments. We just, we enforce them, period. And the result is, if you're, say, for example, a tax lawyer and you think you have a good defense position, forget about it. No, you just put it in a different place. I mean, the agency won't settle so we go to court. Yeah, go to court. Everything gets tried. Yeah, which is kind of tough on the court system. But it's also expensive. It's bad enough that you that that's that's that's the thing, you know, tax agencies have tremendous advantages when litigating in court and elsewhere. Why? The agency is before the is before the court system all the time. Okay. And they do this stuff every day. So they have the experience, they have the relationships with the court and their staff. Right. And individual taxpayers, of course, you know, they don't the agency also doesn't have to pay attorneys by the hour to do the litigating. There are people who are employed just like you and me and that's what they do for a living. They get they get paid a certain salary a month to work for, in our case, the Attorney General's office. And that's what they do. So, you know, when you and I litigate tax case, we always have to consider what the costs are going to be. The agency really doesn't. Yeah, true. And if it is the minimus, I mean, relative to the cost of defending it, you know, if it's a an assessment of X dollars, but it's going to cost five X to actually defend it, we lose a draw that enters into the calculus of the taxpayer and the taxpayer's lawyer, who is likely to say, look, you know, there's no point in defending this. They got they got legions of people out there who are experienced, who have relationship with the courts and all that dedicated to, you know, to prosecuting this. And, you know, I have to learn any defense tax lawyer has to learn for the different cases is a learning curve. And you're going to have to pay my time. And so why don't you settle even if you think you have a good case? It's like copying a plea, isn't it? Well, yeah, it's a little bit worse because I shouldn't say settle. The settle doesn't really come up in that scenario. Why don't you just pay the tax? Yeah, it's not it's not settlement. It's basically you you pay what they say you won't. And I've advised clients to do just that. I mean, somebody comes to me, you know, with a $3,000 tax, but I think this is unfair and unjust. I say, pay it. They go, what? I go, it's going to cost you at least $5,000 to eliminate this darn thing. And that's, you know, that's assuming you win. If you lose this $5,000 plus whatever you got to pay. Yeah, a lot of civil actions. If you defend, you have some kind of claim for the cost of defense, but not in a tax case. If you if you lose, you you you bear your own your own fees. And if you win, you'll bear your own fees. You don't get any relief at all. Nobody is going to pay your share of the fees. It's terrible. So this now you're talking about the sales tax agency in California, right? Are you also talking about other tax agencies like the income tax agency you mentioned? And I suppose there are other ones too? Well, yeah, I'm particularly talking about the sales tax agency in California, because they've been linked by some, you know, with some very interesting stories too. There was an actual case. And the taxpayers name is Starbucks International. No relation to Starbucks. They don't sell coffee. They sell hookah, which is 16% tobacco. They paid, they paid the tax on tobacco and filed refund claims because the way they read the statute is that the tax didn't apply to products with a tobacco content less than 50%. Of course, hookahs tobacco content is about 16%. So the taxpayer went through a multi-year audit, after which a hearing was held before a panel of three administrative law judges. The panel held for the taxpayer granted the refund in full. The agency's, that's not right. So it's the agency petition for re-hearing. One more year of litigation followed regarding the petition. And the case was then heard by another panel of three administrative law judges. They also held for the taxpayer granted the taxpayers refund claims in full. Do the agency pay it? No. They said, well, we need to re-audit the taxpayer based on newly raised issues. That's retribution, Tom. That's also, that's also illegal, I think. The agency had eight years to make its case and went to the mat and lost fair and square twice. And I think they have no idea how hard it is on a taxpayer to do business while they're litigating a tax case, especially if it's a smaller operation, because with a smaller operation, you don't have a general counsel's office. You don't have a tax counsel's office. You may have a bookkeeper, but the person the person who has to get involved in the decisions and so forth that go into a tax litigation is somebody in middle to upper management. It actually sounds like bad faith. It does sound like bad faith, but there are probably laws in California like there are here saying that a tax agency can do what it wants and the tort law doesn't apply to them. You know, I'm reminded of Cyrus Vance, who was the district attorney of, I think, Manhattan. And not too long after 2008, he prosecuted only one company for we want to call it fiscal violations that were connected, he thought, to the 2008 financial debacle. And it happened to be a Chinese company. It was called Abacus Banking or Abacus Federal Savings Alone. You can actually look it up. And this was a Chinese family in Chinatown. The guy was an octogenarian. He had been a lawyer years before. And he said to his family, we're not going to take this. You know, you have Wall Street, which was involved up through its neck in 2008 in the scandal down there at that time. And they want a very small neighborhood community Chinese bank. And the claim was that some employee unbeknownst to management violated some kind of reporting requirement. And the family was a large Chinese family. They got together and they did two things. They defended it all, everything from start to finish. And the other thing is they made a movie out of it in real time while it was happening. And there is a movie. It's called Abacus Federal Savings Alone. And they did. They won in front of a jury. And Cyrus Vance was really, really embarrassed. It was not to his credit or his career. Suffice to say that sometimes government could be overreaching. In that case, the decision even to prosecute was wrong. And the decision to put this company on the ropes for years almost break them. It's a good thing that they won. It's also a good thing that the family was a large Chinese family. He's good together. All I'm saying is that if you find government is overbearing on you, there's not a whole lot you can do. This is the exception, not the rule in the case of what happens here. So, and I really, I'd be very sympathetic to the Chinese family in that case and to, you know, any small business here in Hawaii, which felt that it was being made an example of that it was retribution involved and bad faith in terms of the government agency, whether it be the tax department or anybody else. And I think that somebody ought to say something about the sales tax organization in California. This is not the American way. We care about each other, right? We don't want to break people's backs. That's the sign of, you know, overbearing government, even autocracy, rather than the notion of caring for each other. You come out with feeling good for them that in this country also, you know, you bring your family together, you fight and you can actually stop the government from taking advantage this way. And you can make some money as well. Selling the movie. That's right. Well, I don't know if they made that much money on the movie. The fact is they spent millions in defending themselves, millions, you know, and they didn't really have the millions. They had to get everybody to chip in. So anyway, so comparing that with Hawaii, what do we have in Hawaii? Do we have the Aloha spirit when it comes to these assessments? Well, according to what I had heard from the prior administration, no. Okay. I mean, what I had been hearing, you know, from some insiders is that the prior tax director took a hard line similar to what CDTFA did. Or it did similar to what CDTFA does now. Okay. And would routinely reject settlements that were recommended to the department by the Attorney General's office. But that supposedly changed when the administration changed because the gentleman who now runs the tax department, of course, used to run the Attorney General's tax division. So he was kind of on the receiving end of the decisions not to settle. So he's, A, got a big backlog, and B, he's saying, Well, look, as long as we can reach an agreement on what the proper way is going forward, then yeah, let's settle, let's settle the back years. Well, you know, I think it's up to, you know, senior management, like the governor, to actually create an environment where people feel that the government is being fair with them. And don't do that. You know, then you lose public confidence and public confidence is everything. You know, during the first, well, during the Trump administration, he was using the Internal Revenue Service for his own purposes. He was going after his enemies and having the Internal Revenue Service, you know, ordering the Internal Revenue Service to audit them and assess them and all that. And that happens in an autocracy. It happens with, you know, a senior executive who has the power to do that and abuses the power. This is a really critical thing because if people, you know, become aware that the senior leadership is using tax agencies, or on the flip side, the senior leadership is not insisting that tax agencies express some care and concern about businesses and citizens in the community, or worse, you know, that they take bad faith positions about them, this really loses public confidence. Yeah, or if, as was reported some years back, you know, some senator calls it the tax agency and says, oh, you know, hey, my friend, as a problem, can you make it go away? You know, there have been reports that things like that have been happening. I don't dispute that they were true. Yeah, here, you're talking about here, and I have heard similar stories on both sides of the coin, where, for example, the auditor knew the party being audited and gave a pass, or the auditor knew the party being audited and gave a hard time. You know, professionalism in tax procedure, tax policy, tax enforcement is everything, because you have to assume the world is watching what you do. Yeah, it's very, very important, I think, especially because what a tax agency does is it takes money from people. And you have to have this done in a clear and transparent process with, you know, opportunities for due process, or people will get, you know, there'll be an erosion of confidence in government, like you mentioned. So, in Hawaii, is there anybody looking at this? Is there any legislative committee, for example, that would look at this? Is the state auditor, does he look at this? Had there been, you know... The state auditor has his own problems. What about the appellate process? You alluded to that a little while ago, in the Starbuzz case, how they appealed and they called for a new hearing. How about in Hawaii? If a taxpayer feels, say it's gross excise, but it could be anything, I suppose, we should talk about it one at a time. Taxpayer feels that the gross excise assessment is wrong. What are his options? What can he do? How far can he go? Up to the Supreme Court of Hawaii, at least in theory. There are specific procedures for challenging tax assessments, so those have to be followed, but if the procedures are followed correctly, you can go to a board of review, which is like administrative hearing. You can go to tax appeal court, which is like any other regular court. From a court judgment, you can go up the chain to our Intermediate Court of Appeals and then maybe our Supreme Court, if the issue is juicy enough. There's a tip there. How successful are taxpayers who appeal? They win sometimes. What about income tax? Same procedure? What about real property tax? That goes through the counties. Real property tax is a county matter, so there are comparable review levels on the county government. If you have a dispute, you can go to tax appeal court like anybody else, and there are several disputes that did go to tax appeal court, which I'm familiar with. At the foundation, we weighed in with Amicus Curia briefs and some of them. Is the media watching this? Is the media reporting on it? It seems to me that if a given taxpayer is having a hard time from the tax office or for that matter, California, one remedy would be to make it public. One remedy would be to complain in public. Is that happening? Is the media covering that? Not really. I don't think so. I think it's up to organizations like ours to get the real heavy cases out there into the media's eye and hopefully educate the public about what goes on. It strikes me that most taxpayers who face an assessment, particularly a hard one, are not going to be all that interested in going public because if it's a business, well, it's a business or a personal assessment either way, they would really rather not have the whole community know about it because it's just like law in general and even criminal law. You don't look so good, do you? People make assumption, the community makes the assumption that he's not paying his tax, he's a scoff law of some kind. Even if he wins, he's done something wrong and undermines his reputation in the community. I think a lot of people would come to that conclusion and say, I'll just either pay the tax or I'll do this quietly. I would prefer not to have it covered in the media, don't you think? Yeah, and most of these proceedings are not public. Court proceedings, of course, are public. Border review proceedings, I believe, are public just to a degree, a very small degree, but they haven't really been publicized. I remember back in the day, there would be people, you'd like to call them interested citizens, but they were more like gossip mongers who would appear in the courts of Hawaii for entertainment and they would watch everything in sort of a shot and froid approach and see people win, lose or draw on these cases and that's how they would spend their day. And if it were possible for that same kind of gossip kind of person and mentality to appear in a tax setting and sit there and enjoy the shot and froid of it, they would. And it's not healthy. Yeah, it's theoretically possible, but it's tough because a lot of times the hearings that go on before tax court are like motion hearings and more often than, I mean, sometimes the judge rules from the bench, sometimes he doesn't. Yeah, right. So there's no real mileage in it. Yes, it's like being watching the last episode in a season and have a cliffhanger there and you never know the answer. Just more frustrating than anything else. That's right. Do we need reform on this on either the, I don't know, attitudinal issues you're describing or on the procedural appeal issues? Well, I think the procedural appeal issues can be cleaned up. There are some nuances that even more experienced practitioners might not be aware of and they can be traps in certain cases. I've experienced that. And yeah, I think that's probably what needs to be cleaned up. Well, from your point of view, which is not necessarily the community point of view, but as far as you know, is the community, does the community feel confident in the tax system of Hawaii? Are they comfortable with it or are they grumble about it? Most people don't really care about it. They don't really care about it. They just kind of like live their lives and hope not to be ensnared by the system. If it's somebody like me, I just pay my taxes and live my life and hope that it doesn't turn around to bite me. What about beyond California? I mean, what about the mainland in general? Are people happy with the tax system? What about other states, too? Do they have the same kind of hard nose, nose settlement, take no prisoners approach? Or is California, should we generous? California is kind of an outlier in that respect. I think most states that you go to will have, will settle cases. On the facts and circumstances of your individual case. Yeah, if you just look at it, say through my eyes or through the eyes of an ordinary citizen, you want the person on the other side of the table to have some human care and concern about you and your business. And to make, you know, a credibility determination as to whether you're telling the truth or you're involved in an effort to scam the government or your business is in effort to scam the public. That would also enter into my analysis of this. And so I feel that that is part of our democracy. And I feel that if we take a hard nose and, you know, no prisoners approach on this, we are actually deteriorating public confidence. And I think one of the things that could make has made this country great. It's not the corruption of knowing the tax order or, you know, your kid goes to the same school as his kid, that sort of thing. But it's that we are all in this together. It is a social framework, a social mesh around the country. And the leadership has really got to get to reinforce that, as I mentioned before, to make sure that the people in the tax office, whatever tax office, whatever state have a little care and concern about their fellow human beings, that should demark this society from all of the society. I'm not sure that it does anymore. But I think it's, you know, it's logically possible. Yeah, no, I think there are people in our tax agency, as well as CDTFA who do care. And it's just a question then of whether their opinions will carry the day. Let's assume they do care. Let's assume they care at every tax agency at every level. Do we still need the tax foundation of Hawaii? Well, I think so. Because where we get the tax foundation come in are primarily, you know, at the legislative phase when laws are being considered. And those are more policy considerations rather than execution issues. Did I say execution? Yeah, yeah. Yeah, sometimes it feels like that. Attitudinal thing that I'm talking about, about being kind to your neighbor, caring about, you know, the community and looking through to the human side of things. Then what I get is that the legislature has to have the same attitude, don't you think? It's tough for, you know, legislators who have varying degrees of background to be experts in every subject that comes before them. There are, you know, maybe a handful who know a lot about tax law, but only a handful. So, a lot of times what they're doing is they're either following other people or they're, you know, going along with the policy arguments that are being set forth by, you know, this advocate or that advocate. And that's fair. I mean, you have a discussion, you air the pros and the cons. You have the experts bring the, you know, the layman's version of the cases for and against the bill to the legislators, which is what they're supposed to do. That's what the legislative testimony is for. And then they make a policy call. I'd like to close with a story, Tom. When I went to school for tax, we, we studied section 1245 of the internal revenue code. Section 1245 allows for accelerated depreciation of elevators and escalators. So, somebody in the last row, the last seat, raised his hand and said, Professor, Professor, why does section 1245 exist? And we were all naive not to know the answer up front. Why is it that section 1245 allows for accelerated depreciation of elevators and escalators? And he said, look, I'm going to tell you something you should always remember. It's not a matter of rational policy. This was the elevator and escalator lobby. And they caused us to be adopted. And it's part of American law right now, American tax law. And it's not the only provision that came into being on that basis. Always remember that, boys and girls. And so it wasn't a matter of trying to find good policy. It wasn't a matter of caring for your fellow citizen or helping American business. It was a matter of expressing the wishes of a specific agenda in the economic landscape, special interests. Never forget that discussion. Your comments on that, Tom? Undeniably true. Even the even the general tax policy discussions get mixed with ideology. The red states want this, the blue states want that. And sometimes they meet in the middle somewhere. Yeah. And so the art form is meeting in the middle, so it doesn't hurt the society. And sometimes meeting in the middle does hurt the society. So, you know, this is a very nuanced area of discussion. Tom Yamachika, president of the Tax Foundation of Hawaii, thank you so much for this discussion. And thank you for having me on the show. Aloha. We do, please click the like and subscribe button on YouTube. You can also follow us on Facebook, Instagram and LinkedIn. Check out our website, thinktecawaii.com. Mahalo.