 Okay, it's the one o'clock block. I'm Jay Fidel. This is Think Tech. I don't have to tell you any more than that, except that this is Talking Tax with Tom. And we're talking about, we're looking back at tax in the 2019 session from the vantage of the veto practice happening right now. That's right. Welcome back to the show, Tom. Thanks for having me back. As you mentioned, what happens at this point during the session is where the governor decides what to sign and what not to sign what to veto. Yesterday was a constitutional deadline date, and the deadline was called Notice of Intent to Veto. So what he did was he picked 20 bills out of the mass that he was sent. And he said, I might veto these. What we know is that any bill that's not on the list is going to become lost somehow, either with or without the governor's signature. But the 20 on the list are being considered for veto. Of the 20, there were three that were tax bills. One was involving the motion picture credit, which I'm sure not too many people have heard of except it supports things like Hawaii 50, Magnum PI, and whatever other productions may come here to shoot. What the legislation provided was that there's now a $35 million ruling cap, which is the maximum amount of credit. That's a cap. That's a total fund of tax credit. And the concern was that with two major TV series here that gets used up pretty quickly, there may not be enough for a major motion picture here like Pirates of the Caribbean or Jumanji or stuff like that. And so they wanted kind of more room in it. The bill would have increased the $35 million to $50 million. That's not possible now. The legislature has already spoken, right? What do you mean? Well, you say there are people who don't think that's enough money. Yes. What happens now in the veto practice? The governor can either sign this bill, which would increase the $35 to $50. He could veto it, which leaves it at $35. And then the legislature goes back and does its thing next session. So it won't be rolling back, it'll be either stepping forward a little bit or stepping sideways. So stepping to the side. Yeah. What are your expectations on this bill? I'm not entirely sure. The objection that the governor had was that part of the bill requires UH to convey some land to the High Technology Development Corporation. And he kind of didn't like the legislature interfering with the UH's independence like that. So that seems to be... Well, that's a rider in the film credit bill? Yes, it is. So how did that get in there? Nothing to do with the film credit at all. It's politics, of course. Wow. Okay. This is going to be a final exam. Yeah. Yeah, it had snuck in midway through the process at the legislature. How much land, how much value? I'm not sure. Well, that complicates it. Is that complicated for him? I guess it does. But it seems to be kind of off the main issue. Well, it's interesting because I remember a time when the film credit was a part of Act 221. Yeah. Act 221 included the film credit. And it was important. And the film office, a couple of the officials there were campaigning to have film credit to encourage filmmakers to come here, to encourage Hollywood to come here. What's interesting, though, is that the state policy has not actually incentivized local filmmakers. This is mostly about Hollywood. And I really wonder what their larger thinking could be, would be, might be, should have been over the last, what, 10 or 15 years to build a local film industry. I haven't done that. Well, it's certainly given people a lot more chances than they would have had if the major productions have not come here. That's true. One good thing is that these productions do come into town. They do spend money. They do take advantage of local talent, not only in front of the screen, but also in the back. We have catering. We have transportation. We have all kinds of other things that are necessary to make a production work. It reminds me of the hotel industry. So yes, the hotels hire a lot of local help. Everybody gets to make hospital corners and serve meals. But the profit on the hotel goes somewhere else. Hotels are often reeds, by the way. We should talk about that soon. So what happens is we don't really encourage local activities in either case. And it would be better, I think. And if you look at film, the film is produced. The film is invested in from the mainland. And the profits, if that movie, that serial takes off like a rocket. Let's assume 5.0. I don't know if they'd go out like a rocket. But if that makes a lot of money, the profit doesn't stay here. The profit goes there, just like the hotels. Well, but in the meantime, they're paying a lot of money to people here. True. But wouldn't it be better if we had that industry here? If we were a kind of junior Hollywood with our own producers, our own investors, our own directors, our own actors and staff and what have you. There are some people who are trying to do that. They've been planning a long time. Yep. Haven't gotten that far so far, but we can still try. Okay. What are we going to find out about David E. D. Gay's action on this particular film credit? I believe, first week of July, July 9, I want to say. Is that right? 9 to the 10, something like that. That's when we find out for sure what's signed and what's vetoed. We were talking about the REIT bill for real estate investment trust. That's also on the list. The concern expressed by the governor was that this might discourage solicitments. Yes, it did. So the idea is that REITs, offshore REITs, by definition, offshore REITs, wouldn't be... We do have one locally. Okay. All REITs then would be taxed as if they were Hawaii corporations. As if they were corporations, yes. That means that the REITs who don't ordinarily pay tax, that offshore REITs, I guess, don't pay Hawaii income tax, would then pay Hawaii income tax. REITs don't pay income tax. The individuals as a pass-through, the owners of the REIT, like a limited partnership, they pay tax and pass-through. That's the idea. Yeah. So one thing I heard about that is that if the bill is signed, it's not going to mean that much money to the state of Hawaii. You must know more about the numbers, but it's like 60 million would be the total benefit to the state of Hawaii out of the passage of the bill. Yeah. The Department of Taxation testified that revenue gain would be maybe three or four million for the first year and then 10 million in subsequent years. I guess they're premising that on the REITs having deductions that they could otherwise claim that they haven't because they don't pay tax, which I think is questionable anyway. But none of us have seen the Department's assumptions that went into that revenue estimate and the bill proponents claim that the revenue gain would be closer to 60 million. Yeah. That's what I'm right here. So we don't know because they're all predictions. You don't know what the tax returns are going to look like. That's the thing. It's theoretical at this point. So you've got REITs that are local, as you mentioned. Yes. You've got developer organizations that are not REITs local. They say they want the playing field to be leveled. They say they're at a disadvantage because they have to pay tax where offshore REITs don't pay state tax. And then you've got the offshore REITs. All these people swirling around the governor's desk now and each one trying to find a voice, trying to influence and persuade him about this bill. So what are the vectors and factors and influencers that are happening now with him? You're correct in that he's being pushed by two different sides. And now he has to weigh whose prediction is better and for what reason. The veto proponents are saying, well, we may discourage investment in Hawaii. We may have an economic downturn because of this. We may lose jobs, et cetera. There's a lot of maize in there. It sounds like a long shot because there's not that much money involved, as you just said. And also because I don't think it would, I don't think it would scare foreign investment off to you. I doubt it. Yeah. I mean, one reason why anybody buys into Hawaii properties or commercial properties is because they think they're going to make money off of it. On the capital gain, not on this kind of taxation we're talking about by taxing the lease. Well, I mean, certainly it's factored in, but I think the main thing that brings them here is the business case. And the business case is we have property, it's very valuable because lots of people want it. And renting on that property brings in lots of money. And furthermore, let's take the individual owner, the pass-through owner who's on the mainland. If the REIT pays tax in Hawaii, that reduces the amount of profit that he's taxed back in his home state on the mainland, right? That's correct. So this money is not, this profit is not being taxed twice, only once. Well, it depends on your interpretation of it. Some people think that taxing a corporation and taxing its dividends is double taxation already. And that's the model that Hawaii would follow if this bill passes, if it's signed into law. But that's kind of where that's at. And the last bill that was on the veto list was the one... So what's your prediction on the REIT bill? I have no idea. Nobody knows because it's in swirling activity right now. Definitely. Like you mentioned, there's lots of pushing on both sides where the balloon ends up at the end of the day. Is anybody's guess? Okay. And hardly wait until July 9th. Yep. Okay, what's the next one? And the third one is what we call the Airbnb bill. This is big. We should definitely spend some time on this. That's why I feel we ought to take a break and come back and roll up our sleeves and get into Airbnb because there's a lot of people who care about that a lot and it's very passionate. Lots and lots of noise, including right here on Think Tech. We'll be right back at this break and then you'll see Tom and me really get into it on Airbnb. Aloha, I'm Stan Osterman, a host here on Think Tech Hawaii, a digital media company serving the people of Hawaii. We provide a video platform for citizen journalists to raise public awareness here on the island. We are a Hawaii non-profit that depends on the generosity of its supporters to keep on going. We'd be grateful if you go to ThinkTechHawaii.com and make a donation to support us now. Mahalo. Hi, I'm Rusty Kamori, host of Beyond the Lines on Think Tech Hawaii. My show is based on my book also titled Beyond the Lines and it's about creating a superior culture of excellence, leadership and finding greatness. I interview guests who are successful in business, sports and life which is sure to inspire you in finding your greatness. Join me every Monday as we go Beyond the Lines at 11 a.m. Aloha. Living proof we got here that tax is really exciting. Talking tax with Tom, talking Airbnb tax with Tom. Okay, let's try to examine what happened here in the ledge and what's happening on the governor's desk. Okay, what we call the Airbnb bill is a bill that authorizes the platforms and like a lot of people who rent out either the whole home or part of it, they advertise somehow, so people can find them if they want to travel here and stay someplace other than a hotel. So you have these different online platforms, Airbnb, VRBO, Flipkey, Omoe, lots of them like that. The one that sticks in people's mind for some reason, I don't know why, is Airbnb which I think is the second biggest platform here. I'm not sure which one the first is, but what I heard is this again. What is big, a lot of people are involved. Yeah. And for them it's very important. It is. What the bill would do is it would allow the platform to collect and pay over or actually would require the platform to collect and pay over the GE tax and the transient accommodations tax. That's Airbnb, use the platform, yeah. That's one of them, yes. Because, yeah, and make no mistake, the tax is already owed. You know, you rent out of a transification rental, you get some income, you owe the tax. You as the property owner or whoever is deciding to rent this place out. Some people pay it, some people don't. And in a way to get better enforcement of this, that's why they're wanting to have these platforms who handle money anyway. Sure. Because they're the accounting agent for the whole transaction. Right. They collect the rent, so to speak. They do. When the people from out of state book the rental, they book it on the platform and that person's money goes to the platform. The platform takes its cut and then whatever's left over goes to the renter. Okay. So all the bill is trying to do is to intercept this money flow and bring some of it to the state, which is supposed to happen anyway because the owner's supposed to pay it. But some people do, some people don't. That's the problem. Well, it's a problem in this sense. Let me just digress for a moment. So you say it's a platform and it doesn't have to be Airbnb. It could be some other platform, too. Suppose it's a small time Airbnb. They have 50 units all around. And the owner, he says, oh, great. Airbnb small time is going to collect this and turn it over to the state. But Airbnb small time goes bankrupt. Airbnb doesn't for some reason collect it or turn it over to the state. They leave. They don't do it. So what does that do for the owner who expected that they would? Good question because that fact pattern really hasn't come up. There would be, I think, personal liability on the... Part of the owner. It would be his problem. Well, yeah. That and the platform's owner. The owners. Yes. Except they might not be here. Yeah. I mean, it would take some effort to go find them and shake them up a bit. Anyway, so go ahead. You were describing how this works. Right. So all this is basically a withholding mechanism. Okay. The counties are upset because they want to, at least so they say, enforce their zoning ordinances on, hey, you know, people are not supposed to be doing transit vacation rentals in this area anyway. And the reason why the governor is hitting the pause button on this bill is because Honolulu just passed what's it called Bill 89. Yeah. That basically says if you advertise a TVR, it's not a Waikiki or some other resort area that TVR is allowed in and you don't put down a permit number, then you can get fined up to like $10,000 a day. That's a lot. It's a lot of money. For most people. Okay. So he's reluctant to actually sign this into law. In fact, he's thinking about a veto on this because it taxes, activities, income, which is illegal to start with. Right. And Consul Chair Ron Menor came out with a statement asking the governor to veto it. Because of that Bill 89? Yeah. That it's inconsistent with their enforcement scheme. Can we talk about Al Capone for a minute? Sure. Al Capone did a lot of illegal things. Okay. But the federal government with the effort of the FBI, we still have one, yeah. And the IRS. And the, thank you, and the IRS. They nailed them on its failure to pay tax for illegal activities. Not all of them were illegal. Some of them arguably were not illegal, but a lot of them were illegal, graft, corruption, what have you, prostitution, alcohol. But the fact of the matter is, whether it's legal or not, you got to pay tax on it. Right. It's still income. Right. So it doesn't apply here. It does. The governor should not be dissuaded from signing the Airbnb bill because in some counties this activity is illegal. The fact is, it's still income to the owner. It's still taxable. So why not sign the bill? Yeah. I mean, to me, it's two different issues. The issue of whether the owner can legally rent the place in the first place is different from whether the owner, having done so, owes tax on it. Because if the owner rents it, it got money for it, the owner owes tax whether it's legal or not. It's the same thing as the Al Capone analogy, isn't it? Yeah. So, you know, I don't understand the politics here. Maybe I do a little. So on one hand, you've got the people who don't want B&Bs next to them. On the other hand, you've got the politics of people who do want to do B&Bs. And then you've got Airbnb and the other platforms. Oh, no. And there's another more fundamental reason. They want money. Yes. Now, remember, this bill in the Senate, it got defeated on a floor vote. But then the Ways and Means chair turned around and said, okay, I got 15 bills for you guys' projects that you want. None of these are going to get funded unless this Airbnb bill passes. Horse trade. Yeah, it was actually a little bit more blatant than that. Okay, a blatant horse trade. Yeah. One guy changed his mind. That's all they needed it. Politics. Yeah, it was defeated in a 12-12-1 tie. One person changed his mind, passed 13-12. Amazing. Amazing. Okay, I'm going to ask you for a wraparound characterization of this legislation. So the question is Airbnb sounds like the 800-pound gorilla. They have a lot of clout. They have a lot of campaign contributions. They have a lot of money and influence in this community. And a lot of clients and constituents. Shouldn't they be ruling the day politically? What is happening politically on the governor's desk, on the Airbnb bill? Just like in the other bill, the governor is being pushed from two sides. There's the one cap that says, hey, we don't need this in our neighborhood, like the North Shore people, for example. So get these guys the heck out. You don't need to facilitate this. So veto it. And the people in the Senate, among others, are saying, well, we need the money. We're not getting it now. This will help bring the money in the door. And it will. And it sure will. The huge income involved in this business. Yeah, it brought money in from the multi-level marketing industry, and it'll do the same for this one. We haven't really mentioned the hotels yet. It seems to me the hotels have a position, an opinion, and we're trying to influence the governor also. Because they don't want the Airbnb's. They don't want these platform rentals, because that undermines their business as hotels. It's the same market, isn't it? Well, that's what the hotel workers union says. They don't want this to undermine their business and their workers' welfare. Some of the hotels earlier in the session were claiming, well, we don't really care, because it's a different market. The people who want to stay in these bed and breakfasts, they don't want hotels in the first place. So either for that type of person, it's either they come to a B&B, or they don't come. So it's just a different market segment. Interesting. We may need more study on this. Maybe that's what he's going to do. Just to be sure, intent to veto doesn't mean he's going to veto it. He just means he's going to take a little bit more time and possibly veto it. But he needs to act by July 9th. So those are the ones where he has expressed an inclination to veto. There's a lot more, isn't there? There's a lot more tax bills pending in the ledge out of the result of the ledge this session. Can you name some? Sure. There's a bill, Senate Bill 1360, that requires partnerships, estates, and trusts to withhold taxes on the income of non-resident partners and beneficiaries. That one's going to become law. That hasn't been the case in the past. And that passed. It passed and it's going to become law. It's going to become law. There's a should prepare industry tax credit bill that was pushed by one particular company in the industry, Senate Bill 972. That's going to become law. There is going to be a $50 annual vehicle registration surcharge fee for electric vehicles and alternative fuel vehicles because they don't pay enough fuel tax, I guess. That's Senate Bill 409. So this will impose a tax on electric vehicles? That's right. I thought we were trying to encourage electric vehicles. Think again. Think again. Yeah, we need that revenue. State policy is not so clear on this. That's right. There's also a bill to establish a state highway enforcement program, which basically says that if you get caught parking on a state highway, it's $200 more in addition to what you otherwise would get fined. Parking? Parking. Parking, like park your car. Park your car on a state highway. On a state highway. That includes a lot of roads, though. That's not just a freeway. I don't think it includes the freeway because the freeway is federal. It has to be a state highway. So you get a parking ticket plus you get this, what did you say, $200? $200 parking violation surcharge. Why do I feel surcharge? Why do I feel that's in order to raise money also? It's very little to do with incentivizing good behavior or clearing the roads. It's only to raise money. I think it's a problem on Kauai. I don't know why it's a problem everywhere else, but that's what's going to happen. We talked earlier about the marketplace facilitator bill that has already become law. The estate taxes for Hawaii net taxable estate is valued at over $10 million. That went up as well. That already has become law. The transit accommodations tax is being imposed on mandatory resort fees. That's a little bit different from the bill that was passed in vetoed last year. Same grade, just the applicability then. A similar bill was passed in vetoed last year, but they fixed the problem. That's already law. There's a lot more stuff. How would you characterize this session in terms of state tax, issues, improvements, policy, unimprovements, as the case may be? My assessment is basically nothing major happened, which is always a good thing. Because if something major happens, it's usually bad. Bad for taxpayers. No man's life, no man or woman's life or property is safe while the legislature is in session. Maybe they heard the message on that. Possibly, possibly. Well, there will be time for us to get together again, Tom, after he makes his vetoes, and maybe with regard to the effect of the Tax Reform Act of 2017 going forward. So let's plan to get together a few weeks again and look back more at this session in these vetoes and more at the Federal Tax Reform Act. I stress the word reform. I guess you did, yeah. Thank you, Tom Yamachika. Thank you, Jay.