I know a service provider who recently completed (and sold out) a Living Social deal. In that deal, Living Social, via its website, for $50 sells a voucher for a service valued at $100 at retail. Living Social then, after the offering period for the deal ends, remits the $50 to the service provider with the agreement that the service provider will pay back half of that amount ($25) to Living Social for their marketing services. A credit card processing fee of $1 per voucher was also charged to the service provider. In the end, the service provider took in a net of around $24 and Living Social took in a net of $26. The service provider asked me how much GET he needs to pay.
At first, I thought the right outcome to be that the service provider should pay the 4% GET on the $24 he actually received from the transaction. However, a quick email to the DOTAX rules office showed that DOTAX would likely view the entire $50 received by the service provider as taxable gross receipts even though $26 of the $50 was to be immediately paid to Living Social which collected the $50 in the first place through its website. Perhaps Living Social has some clever tax lawyers on their side because they managed to pass on the brunt of the GET to the service provider.
I am not sure I agree with the opinion of the DOTAX rules office. Although the service provider comes into temporary possession of the $50, the service provider is contractually obligated to pay mroe than half of that to Living Social which collected the funds via its website. Perhaps deeper analysis would have led to a diferent answer from DOTAX but right now that email is our best indicator of how DOTAX would view this transaction.
No doubt this was the largest and most high profile tax case to come out of Hawaii in many years. The OTCs are potentially on the hook for taxes of $500 million or more!
The Hawaii tax appeal court ruled that online travel companies are not liable for transient accommodation taxes on their online hotel bookings. The court noted that online travel companies are similar in nature to travel agents that do not pay the transient accommodation tax on their sales. The result is that the court made a determination that the transient accommodations tax does NOT pyramid (i.e. multiple layers of tax on the same transaction) in the same way the GET does.
The parties will have another hearing in December 2012 to determine whether OTCs are liable for Hawaii GET on their Hawaii hotel bookings. I’d bet that they are liable at least on their profit margin and fees generated. This would be a GET scheme similar to how a travel agent is taxed on their commissions from the hotels and any fees charged to the customer. No doubt this could produce a tax bill in the tens of millions of dollars or more.
Click here for news coverage.
I wrote earlier that the Hawaii attorney general is seeking upwards of $500 million from online travel companies (OTCs) such as Expedia and Travelocity for unpaid transient accommodations and general excise taxes.
While the vast majority of courts nationwide have held that OTCs do not owe hotel taxes on their retail markup, the DC Superior Court has granted partial summary judgment that OTCs are liable for DC’s gross sales tax on their hotel room retail markups. For DC, this could mean an additional $6 million annual revenue plus another $200 million in back taxes, penalties, and interest.
The court reasoned that OTCs are considered taxable “vendors” under the DC gross sales tax law. No doubt the Hawaii attorney general will cite to this case in his briefs to the tax appeal court. However, its persuasive value may be limited as Hawaii taxes hotel “operators” and not necessarily hotel “vendors.”
On August 28, 2012, the Hawaii Tax Review Commission released its “Study of the Hawaii Tax System: Final Report” . While most of its findings were bland, it recommended the more controversial action of raising the GET from 4% to 4.5%:
Increase the GET rate to 4.5 percent
Hawaii’s GET rate is among the lowest in the country for states with this sort of broad-based consumption tax. While Hawaii has not raised its rate in over 35 years, over half of the states have raised this rate since 2000 – in many cases multiple times. Given the need to restore structural balance, an incremental increase in the GET rate is the logical method to improve the long-term financial outlook. While the GET is considered regressive, other recommended changes would reduce some of that impact.
Legislators on both sides of the aisle voiced their vehement opposition to this proposal in the report. Click here to read more. While increasing the GET seems to be dead on arrival, other proposals made in the report may get a legislative boost:
- Make permanent Act 105 (2011), which eliminated certain GET exemptions and deductions (i.e. for subcontracting and subleasing).
- Capping open ended tax credits such as the renewable energy and film tax credits with targeted grants and loan programs.
- Restoring the temporary increases on transient accommodation tax and rental cars, shifting the tax burden to tourists.
- Expand nexus.
These proposals build upon and tweak what has already passed the legislature and could provide added revenue and reduced tax expenditures with limited political backlash.
Of course, any Hawaii tax debate would not be complete without a discussion of gambling. Not surprisingly, the report declined to endorse gambling as a source of added tax revenue. Chinatown underground game rooms aside, Winner’z Zone has been operating “legal” casinos all over Honolulu for quite a while now.
While Hawaii may be an expensive business travel destination, Hawaii’s taxes on travel appear to be a mitigating factor. The Global Business Travel Association Foundation has released its annual rankings of 50 top travel destinations based on daily taxes on things such as hotel stays, restaurants, and car rentals. Chicago taxes travelers the most at $40.31 per day while Honolulu taxes travelers a mere $24.38 per day. The lowest tax city for travelers is Fort Lauderdale at $22.21 per day.
In Honolulu the taxes on travelers are primarily the 4% general excise tax on most purchases including at restaurants plus the 1/2% Honolulu County Surcharge, the 9.25% transient accommodations tax on hotel stays, and $3 per day surcharge on car rentals (down from $7.50 per day prior to June 30, 2012). Tobacco, Liquor, and Fuel taxes could also add to the total visitor tax burden.
Read NBC News’ coverage of the report by clicking here.
“Beginning September 15, 2012, a new law takes effect (Stats. 2011, ch. 313 (AB 155) that expands the types of out-of-state retailers required to register with the California State Board of Equalization (BOE) and requires them to begin collecting and remitting use tax on sales of tangible personal property to California consumers. The law applies to out-of-state retailers that have substantial nexus with California consumers. This includes any out-of-state retailer that has sold more than $1 million to California consumers in the past year and has had more than $10,000 in sales referred by an affiliate operating in California.”
Fortunately, for now, Amazon and other out of state retailers need not collect Hawaii use tax. So far Hawaii lawmakers have been unable or unwilling to impose the taxes on out of state retailers such as Amazon. However, comments made at a recent Hawaii State Bar Association Tax Section meeting by Johnell Nakamura, of Cades Schutte, former Hawaii Department of Taxation Rules Officer, suggested that there were some in the Department that feel that Hawaii should tax out of state retailers based on an “economic nexus” theory such that physical nexus with the state would no longer be required. Current Rules Officer at the Department, Kevin Wakayama, did not dispute that statement, although it was unclear as to his true stance on the issue.
Honolulu’s elevated rail project appears to be at serious risk. Last week, the Hawaii Supreme Court ruled that the Honolulu rail project must complete an archeological survey of Native Hawaiian burial sites along the proposed rail’s path. This ruling has essentially halted construction until such a survey is completed. Another lawsuit pending in federal district court may also halt construction of the rail.
Honolulu Rail’s most formidable foe, former Hawaii Governor Ben Cayetano, is the favorite to win the upcoming general election for Honolulu Mayor. While public opinion also appears against rail 57% want it stopped vs. 34% in favor, Hawaii’s most powerful political figure, Sen. Daniel Inouye, is one of the few remaining advocates (still firmly in power) of continuing the rail project.
In 2005, the Hawaii legislature and the Honolulu City Council imposed a 1/2 percent GET county surcharge to pay for the rail system. For nearly 5 years, the people and businesses of Honolulu (including a lot of tourists!) have been paying this surcharge to fund the Honolulu rail project, bringing in revenue of more than $900 million. The total cost of the project is expected to be $5.2 billion with the federal government paying $1.55 billion. Soon to be ex-Mayor Peter Carlisle has reported that 50% of the rail contracts have already been entered into and about 25% of the GET revenue has already been collected.
So what happens to all this money if the Honolulu rail project is killed? Act 247 (2005), which authorizes the county surcharge, requires that the revenues be used for a “mass transit project” and cannot be used to build or repaid roads or to support a public transportation system in place prior to July 12, 2005. In place of rail, Cayetano has proposed a Bus Rapid Transit system which could possibly satisfy this requirement; however, it sounds similar to TheBus system that was in existence prior to July 12, 2005. If an alternative “mass transit project” can’t be implemented, it appears likely that the legislature will need to amend Act 247 to allow for more uses of the county surcharge revenues which, by then, will exceed $1 billion.