 But in help of, I said, I'm looking forward to this show. That's what I'm saying. I'm Jay Fidel. This is TinkTech Community Matters. Tom Yamachika, president of the Tax Foundation of Hawaii, joins us on a fairly regular basis to tell us what's going on in tax, especially state tax, but also federal tax as it affects us in the state. Welcome to the show, Tom. Thanks for having me on the show. We have four or five things we want to talk about. And the first thing is the Wayfair case. Everybody knows the Wayfair case. If you know what the Wayfair case is, raise your hand. If you know what Wayfair is, raise your hand. It's a pretty good internet site. And somehow it got to the Supreme Court about taxing internet sales in different states. What happened? Yeah, so there are a lot of internet sellers. We first, one of them. Amazon used to be the king of internet sellers, but for various reasons, they started collecting Hawaii tax as of April 2017. And the issue was, well, when do these people who don't have a physical presence in Hawaii have to collect our tax if they have Hawaii customers, for example? And the old rule had been that it's physical presence. So you don't have a store, you don't have people, you don't have property in the state. Freaking mortar. Right. So if you have none of the above, then you can make sales through the mail or over the internet or wherever it is, and you don't have to collect the recipient state's tax. You still have to answer to where you are, but in states where you don't have physical presence, you didn't have to collect our pay tax because the Supreme Court had been ruling that the states don't have power to tax you unless you have some physical presence in the state. That's up to the Wayfair case. Yeah, Wayfair overruled that. It overruled like 40 years of prior precedent and said, okay, we're not going to do that anymore. The internet age is here, folks, and people are going into states and they don't need a physical presence, so we're going to treat them like any other seller, basically. And so you've got—and the previous rule was in a way unfair to the bricks and mortar sellers who had employees, who had stores, who had a presence in the state that was helping the Lohu communities and stuff like that, and they were facing competition, sometimes very stiff competition, from these online sellers. As a matter of fact, I heard stories all the time about how in modern day people would go into a store, take a look at the merchandise, find something they like and then order it online and leave the store. Often. Yeah. But there was something Uji about it, wasn't there? I mean, it's like cutting the corner somehow. You go into the store, you search to find the item, then you order it online. You don't pay the tax. There's something Uji about it. You're bypassing something. I wouldn't say cheating, but you're doing something that's not entirely fair to the local brick and mortar store. Yeah. I mean, the law did provide that if you did that, you, as the buyer, were supposed to pay the 4% tax. Right. The use tax, and the use tax is the same in that context. It's 4%. That's right. But nobody ever paid, and the tax office never did anything to collect it. They do collect it on bigger consumers like businesses, but individuals like you and me almost no tax. Yeah. It was unenforced as far as consumers like you and me. Yeah. Yeah. And it wasn't just here. It was in pretty much every state that had a sales tax. Interesting. Okay. So what has changed that? I mean, can you say what the considerations were? Was it just a matter of catching up, knocking off a 40-year precedent, and saying, sort of recognizing that the internet is bigger than we thought, that it's no longer this strange animal that we don't fully understand. Now we understand it, and we're going to treat it like any other retailer, and it doesn't matter if it has brick and mortar in the state. Yeah. That's basically what it is, I think. What led them to do that? Was there any political consideration? Was there some kind of pressure on them? Some kind of argument made by some constituent industry, one kind or another, that made them go that path? Well, the states were clamoring for a number of years. They were losing out on revenue. They were the ones who had to strike the balance between their bricks and mortar retailers and their online competition. They wanted to get their revenue to fund their own governments, and they weren't getting it, and for the same reasons as we discussed, they had difficulty getting it out of their own people when there were customers, off these online sellers. The online sellers didn't pay tax. Yeah. So the problem is, in a state like Hawaii where we have a plenary GET gross exercise tax, it applies to everything, there are virtually no exceptions to it, and it has an effect of more than 4%, or 4.1% was a 7.1%, 2%, depending how you calculate it. And it has a regressive effect on people, and that means that the guys in the lower brackets are really paying a higher percentage of their disposable income than the guys in the higher brackets, and it is regressive in the sense that it takes a bigger bite, relatively speaking, out of the disadvantaged groups in our community. Yeah, that's a problem with sales tax, generally. Yeah. Right. Sales tax in general, yeah. But our sales tax is special, because there's no exceptions, no exemptions, not even drugs, nothing. And so it has an effect on us, maybe a bigger effect here than in another state, which has exemptions for various things, drugs, food, whatnot, yeah. I don't think the ledge is going to reduce the rate of the gross exercise tax, though. I don't think so. Now that they have this extra leverage, this is going to mean huge revenue for the state. Any idea how much? I think the last estimate I saw was like 16 million. So it's not that much, but it's more than a drop in the bucket. Okay, so where is the state now? You were telling me before that there was legislation in this 2018 session that dealt with the Wayfair case, and it was going to get a jump on it somehow. Right, because the Wayfair case involved the challenge to stop the coda law that basically said if you have 200 transactions or $100,000 in sales, we don't care if your physical presence or not, we're going to tax you. Okay, so we had a bill in this past legislative session to say, okay, 200 transactions or $100,000 in sales, basically saying the same thing as the South Dakota legislation did. That got signed into law very early, beginning I think Act 41. And so we were well positioned to take advantage of the Wayfair case if South Dakota won it, which they did. So it's all set. And you were saying that July 1 has gone into effect. That's this past July 1, 26 days ago. That's correct. So how am I going to see the change? How is it going to affect me? Where am I going to see this pop up at me? Probably if you have online purchases, you'll probably see state sales tax tacked onto your bill where you might not have seen it before. Like if you buy from Wayfair or you buy from Amazon or if you buy from a number of these other online shops that don't have physical stores here. And this is probably happening all over the country. Same kind of effect in 50 states because no state's going to turn down extra revenue. There are some states that don't have a sales tax at all. Those are the ones. Yeah, which one? Oregon. No sales tax. So that looks even better and better. Or Alaska. Or Alaska too. Yeah, interesting. They're like about half a dozen, I think. Maybe they'll reconsider for the extra revenue. It's low hanging fruit right now. But what about enforcement? So say Amazon, this is not the case, but say one of these sellers doesn't charge me the tax. How in the world is the state tax office right here, right down the block going to enforce that against Amazon or whatever other internet seller? Yeah, well, they'll go and audit them. How are they going to do that? Because Amazon headquarters are in Seattle, I think. Well, they can go places. They can get a judicial process. They can get a process and demand a record of all the sales that took place to buyers in Hawaii. Yeah. And then tax them. That's right. That's going to be interesting. That does happen. The office is an interesting spot here on this whole issue. I've been trying to do it for a while now. And it fell into its lap, essentially. Yeah, basically. So that's a real interesting new development in the state tax world. Okay, so that means that the action of the federal government in this case has increased state revenues and increased the tax burden on citizens of Hawaii in effect. Because they weren't paying it before. So at the same time, we had the Tax Reform Act passed in December of 2017, which reduced tax on the citizens of Hawaii and the citizens of the country. What's interesting is that that reduction in many aspects ends. It's not forever. The sales tax ruling is forever. Yeah, although in Congress right now, they're considering tax reform 2.0, which is what the news media now calls it. That would make a lot of these individual changes more permanent. Oh, well, that'd be a good thing. Then you have a reduction by the federal income tax and an increase by the action of the Wayfair Court. So maybe, I mean, I know it's not the same amount of money at all. But it's an interesting juxtaposition. In the one case, we're paying less. In the other case, we're paying more. Give us and take it away, right? The Lord give us and take it away. Well, let's talk about the SALT thing. In the Tax Reform Act, I don't know if this is up for further discussion in Congress, but in the SALT, in the state, was it tax deduction? The deduction in federal tax for the tax you pay in the state, right? There was a limitation of the deduction in the Tax Reform Act to $10,000. That's right. Okay. So what about that? Well, there were a few high-tax states with Democratic governors, almost exclusively, that didn't like that. And they sued. I think the lead state was New Jersey. I think New York and Connecticut also got involved. And there was one more state. Seven altogether, yeah. Something like that, but there was a coalition. Hawaii was not one of them. No, it wasn't. Hawaii, through Doug Chen, went to, well, Supreme Court on immigration matters in a group of states. But not on this. Not on this. It's interesting. So who would be offended by this? I mean, you'd have to be paying what? A lot of state income tax, right? To be limited by this $10,000 federal deduction limit. Right. So it would be somebody with a lot of money, am I right? That's true. Yeah, it would be people with more liability or people in higher-tax states. Yeah. So, and the argument is that this is what, unconstitutional? Yeah, that's what they're saying. Can you explain that to me slowly? Well, I don't understand, you know, the state's arguments to be frank with you. This is a good reason for Hawaii not to have joined the seven plaintiffs in that case. Yeah, but they're saying stuff like it's an infringement on states' rights and, you know, disrupting the economy and throwing the budgets of the states into kilter, you know. And I'm thinking to myself, you know, what does this have to do with the constitutionality of a deduction? You know, deductions are what is given by legislative grace, you know. Can we get through this in 1916 with the validation of the income tax? Yeah. I mean, the states were putting in the argument, well, you know, here are some statements by the, you know, the framers of the 16th Amendment or, you know, stuff like that. I mean, very, very old historical records which have, I don't know, questionable relevance today. Well, you know, the people opposing us, I guess that's the Republicans who passed the Tax Reform Act in the first place, saying this case has zero to no chance of succeeding. And that's my reaction, zero to no chance of succeeding. Tom, what is your reaction? Pretty much the similar. Pretty much similar. I mean, when we commented about, you know, this type of argument, our comment was, it won't work. When it was a nice try, it won't work. Well, it'll be interesting to follow up and see what the court says. I mean, slam dunk been, you know, been there, done that, forget it. That's Tom Yamachika. He's president of the Tax Foundation of Hawaii. And we're talking about some interesting tax issues that have come up and that are pending regarding state tax and also state tax as regards federal tax. We'll be right back after this short break. I'm Richard Concepcion, the host of Hispanic Hawaii. You can watch my show every other Tuesday at 2 p.m. We will bring you entertainment, educational, and also we'll tell you what is happening right here within our community. Think Tech Hawaii, Aloha. And Aloha. My name is Calvin Griffin, the host of Hawaiian Uniform. And every Friday at 11 o'clock here on Think Tech Hawaii, we bring you the latest in what's happening within the military community. And we also invite your response to things that's happening here. For those of you who haven't seen the program before, again, we invite your participation. We're here to give information, not disinformation. And we always enjoy a response from the public. Join us here, Hawaiian Uniform. Fridays, 11 a.m. here on Think Tech Hawaii, Aloha. Hi, I'm Ethan Allen, host on Think Tech Hawaii of Pacific Partnerships in Education. Every other Tuesday afternoon at 3 p.m. I hope you'll join us as we explore the value, the accomplishments, and the challenges of education here in the Pacific Islands. Okay, we're back. This is so exciting today. Tax Foundation of Hawaii. Tom Yamachika, president. Okay, we're talking about these various bills. And one of them was so interesting is the resort fee bill. And this was a bill that would have added a substantial additional tax on anything having to do with the resort. A hotel, retail in the hotel, services in the hotel. Yeah, basically what the bill said was that they would define resort fees as taxable. And a resort fee was defined in the bill as any charge to a transient for use of the hotel's property services or accommodations. Anything in the hotel. I mean, gee, I just came back from the Kona Coast, you know, and they try to keep you there in the hotel. They try to offer you services and goods and retail and occupy you all day long. They don't want you to even leave the front gate. And you're spending and spending, and that's the way hotels make Bing Bundle. Yeah, and right now it's subject to GET only, like if it's a meal, for example, or, you know, a spot treatment or something like that. But the TAT comes on the hotel itself. Yeah, the TAT is on the charge for lodging. Yeah. Okay, and the issue has become, well, when is, and a lot of hotels in Hawaii do charge resort fees. And the question is, is that also a charge for lodging? And the way the tax department had been applying it was, well, if it's mandatory, so you say you can't stay at the hotel without paying the resort fee, then it's a charge for lodging. But if it's optional, and if you can get it removed from your bill somehow by, you know, not spending the money. Not not going to the spa or not using internet or, you know, whatever that charge pays for, then it's optional and it's subject to GET only. But the bill would have said, well, all this stuff is a resort fee. So if there's a charge in your hotel fully for meals or internet or, you know, whatever else, it's taxable at 10.25% plus the GET. That's pretty stiff, isn't it? That's tough. That's tough. That's tough. And it's tough on, aside from the hotel owner and the small business, I mean, to go to the neighbor islands, a lot of the businesses in the hotels are local and small. They would have to pay that. And that would hurt them a lot, I think, because they're a lot of them are marginal, sorry. And then, you know, you get the reaction of the industries is, what is happening in Hawaii? Because it's unique, isn't it? You don't find it in other states, even expensive states, even expensive destination states. This is like adding insult to injury. And people are going to say, let's not book in Hawaii. They're on us. You know, they're trying to squeeze us too much. Right? Yeah. So the governor did veto the bill. And the Holy Logic and Tourist Association was very pleased. And I guess that's perhaps one reason why they endorsed him for reelection. You know, one thing that struck me, though, is that it got through the legislature. It was a bill that was really over the top. I mean, you could see that the minute it was introduced. It was a bill that was a finger in the eye kind of bill, call it. How did it get through? You know, there were several versions of the language as it went through. Like, you know, House changed it, Senate changed it, House changed it back, Senate changed it back. So it was tough to keep your finger on exactly what version was going through. Okay. So I think some people may have thought, well, you know, it was their version and it was okay, where in fact it was the other version, which was not okay. Okay. It slipped through at the end. It slipped through. 10.5. Wow. So let me ask you this hypothetical question. Nobody in the state has better qualified to answer this question, Tom. Suppose I made it 2.5. You think it would have got through that way? I don't know, man. You mean changing the entire transient accommodations tax? No, no, no, the extra tax, the resort fee tax. What was the percentage of it? No, it was the question of whether to slap TAT on it or not. Okay. Yeah. It wasn't just another 2.5. It was like... Okay, okay. So yeah, it's hard to see. You have to mix and match and all that, yeah. Anyway, okay. So you think it could have been written in a way to get through? Oh, yeah. No, I think there were several versions of the bill that looked a lot like the Department of Taxation's current enforcement position, which I described mandatory and so forth. They could have expanded that a little bit. Those were okay. But they expanded it a little bit instead of a lot. They wouldn't have had so much resistance, huh? Hard to say. Yeah. I don't think it's going to come up again, do you? We don't know. We don't know. I think it always pushed the TAT, though. Yeah. It's always going to get resistance. It's been pushed a lot in the past several years. I think it was just a few years ago. Five years ago, it was like seven and a quarter. Then it went to eight. Then it went to nine. And now it's at 10 and a quarter. That's a lot. That's a lot. Yeah. We shouldn't kill the goose that laid the golden egg. We shouldn't bite the hand that feeds us. I was telling you I went to the neighbor islands a couple weeks ago and I realized that the hotels and all the businesses around the hotels are the economy, at least in Kona. Without the tourists there, without those hotels, they really wouldn't have much of a future. It's everything. If we bite that hand for some reason, any reason, including climate change, those assets go away. Yeah. That's always the danger. There's supply and demand and there's the concept of people voiding with their feet. They don't have to come here. Yeah. And the other factor is there are other places that are vying for our position on the priorities. That's right. And they can build hotels too. And as our hotels get older, our infrastructure gets older. And these competing destinations already have the hotels. Yeah. I agree. Yeah. So something to be watched and the legislature should be careful. I'm glad the governor was careful anyway this time. It does go in his favor, I think, that he beat up that bill. Okay. The last item we need to discuss is the constitutional amendment coming up in November proposed by the HSTA. What about the new watch doggy? Oh. Remember the title of this segment? Yeah. It's a watch dog. Okay. Tax Foundation of Hawaii, watch dog. The new Hawaii tax watch doggy. That is the, and you know, you can see, especially with those glasses, how sharp they are. Oh yeah. They're not taking wooden nickels from anyone. Not at all. It's got to be high quality kibble at least. Did you describe where this is and what this is and why this is? Yeah. We have a new Twitter account for the Tax Foundation of Hawaii so people can kind of get more up to speed on where we are at the moment. And it's at Hawaii tax. And this is our homepage on Twitter. So, you know, it doesn't have the think-tack-holy little on Twitter, but everything else is there. You like that. Thanks. This is not your dog or dogs, is it? No comment. Okay. No comment. You can make your own mind up about that. Yeah. But we thought that we needed a, you know, a voice, you know, behind the Tax Foundation and, you know, we're supposed to be a watch dog so we got ourselves a watch doggy. You know, you could put a barking sound behind that, behind the Twitter page. I don't know how to do that. I'll record it for you after the show. No, thank you. Let's take a look at your regular website so we can make the comparison of a conservative Tax Foundation of Hawaii and the Watchdog Tax Foundation. That's, that's your, what is that now? That's your regular website. And it shows that we have an annual lunch coming up on Tuesday, September 4th, so hopefully people can make it to that. And it has other things like what we are, what we do, and a brief history behind the Foundation in case anybody needs it. Worth looking at. And the address is? TfHawaii.org. Okay. All right. Now can we talk about the amendment in November? Sure. Okay, so the HSTA pushed this thing, I guess it pushed it through the ledge. The ledge actually approved it. And this would change the way financing the school's work. What does it provide in substance? Okay, so it's, it's a ballot measure. So it has to be approved by the electorate. But if it does, it would give the legislature power to impose a surcharge, you know, like how the county's imposed a surcharge on the GET. It would allow the state to impose a surcharge on the real property tax. Okay. The counties hate it. Okay, because it's kind of monkeying with their exclusive source of revenue and their number one source of revenue. Yeah, right now the state pays over those expenses out of the general fund. So this would impose the obligation on them to raise property taxes. And as everybody knows, there's nothing people hate more than increases in property tax. I don't think it would go over well now. So every county would have a hassle and every county would have a pushback on it. And they'd be obligated essentially to raise money this way. The surcharge wouldn't apply to all property. It would apply to investment property. Oh, not my house. Not necessarily. Do you live in your house? Oh, if it's a, okay, I got it. If it's I'm renting my house, then it would apply. Yeah, it would. Okay. And is there any uniform level of additional tax here or is the counties decide by themselves? No, it's the state that decides. Because again, this is an amendment that would give the state legislature power to enact the tax, set the rates, come up with any exemptions if any, thresholds over which the tax would apply or stuff like that. So the counties wouldn't have much say in any of this? They would have no say. No say? They would have no say. The state would use the real property tax mechanism to raise more money for the general fund or for the benefit of the schools, ostensibly. That's correct. So in reality from your experience, let's talk about the experience factor, how would this really work out? Okay. If it's passed and if the tax goes into effect, so let's say maybe half a billion dollars gets raised. Okay. Yes, that half a billion dollars has to go to education and would have to be spent. Accordingly, because it would be a special fund. There have been many situations. But what would happen to the two billion dollars that is now appropriated from the general fund to the DOE? Yeah. Okay. The Constitution amendment doesn't say anything about that. So the question, oh, that's a very good possibility and you have other priorities. So wouldn't the legislature be tempted or pressured or coerced to repurposing some of the two billion dollars that now goes to DOE? Fair chance that would happen actually. If you look at so many other special funds like that, take the barrel tax. The money was siphoned, may I use the term siphoned, siphoned off the barrel tax into all kinds of other things in lieu of the purposes for which the barrel tax was originally passed. The barrel tax as enacted was five cents per barrel of imported oil. And now it's a dollar five per barrel of imported oil or the BTU equivalent of any other fossil fuel. So five cents, dollar five, that's a little bit of a difference, isn't there? I was originally supposed to go for the development of clean energy and all this. Not at all. It was supposed to create a fund to clean up this place if we had an oil spill or a similar disaster to the Exxon Valdez, which at the time was... Has it remained that or has it become something else? It has mushroomed into something very, very different from what it originally was. The original purpose, stated purpose of the barrel tax was frustrated then. Yeah, and right now 60 cents of that dollar five goes to the general fund. There you go. Yeah, so... So the general rule would be, I mean, just out of experience that if the legislature can take money that was directed over here and put it in the general fund, it will do that as often as it possibly can. And that would happen with this HSTA amendment as well, wouldn't it? The likelihood is that that money would wind up at least substantially in the general fund. There is a good chance that that'll happen. I mean, special fund taxes have been raised before. That happened lots of times in our history. We have had lots of raids and stuff like, you know, ERS. We had many, many, many special funds raided. It's a go to the general fund. Yeah, I mean... And the amendment, the lines of the amendment, which is written already, would not prevent that. It could happen any session, any year. Not at all. Yeah. And there's no guarantee that the money raised will go to the schools. Because even though they're totally true and faithful and they send all the special fund money to the schools, well, what happens to the $2 billion in general fund money that's not going there? Sure. Yeah. Sure. It's likely. So that means, I mean, a guy like me, I wouldn't vote for that. I wouldn't vote for that because I can see that. It's really... We just want people to see the facts, you know? It's a distraction. Yeah. And does the tax foundation take position on this kind of thing? Are you taking position on this? No, we can't. Can we talk about you personally? Can we talk about how you would vote on it? No. We can't do that. We can't do that. But I'm telling you, right after the show is over, I'm going to ask him again. Tom Yamachika, thank you so much for coming down. Aloha.