Pitfalls in Tax Appeals

by Tom Yamachika, President, Tax Foundation Hawaii

People sometimes get into a disagreement with the Department of Taxation over the amount of tax they owe, or whether they owe tax at all. 

To solve these disputes, there is a tax appeal process.  To help taxpayers understand this process, the Department typically sends two documents to taxpayers who they are auditing:  Tax Information Release 2002-01, and the Hawaii Taxpayer Bill of Rights.  “Taxpayers have a right to information regarding procedures for appealing a tax assessment or a denial of a claim for refund,” the TBOR says. 

But it doesn’t say anything about accurate information.

When filing an appeal with the Tax Appeal Court, for example, TIR 2002-01 says that a taxpayer filing the appeal must deliver a copy of the notice of appeal “to the tax assessor.”  Doing that, however, can and will doom your appeal.  The law was amended in 2007 to state that the Director of Taxation must be served, and a 2010 Intermediate Court of Appeals case, Aregger v. State of Hawaii, Department of Taxation, held that the Tax Appeal Court must toss out the case if the copy of the Notice of Appeal wasn’t sent specifically to the Director.  The TBOR, which was last amended in 2022, does list an acceptable address to which the Notice of Appeal may be mailed.  TIR 2002-1, issued in 2002, does not reflect these developments.

“Come on now,” I hear the Department saying.  “The TIR was from 2002.  It’s more than twenty years old.  No taxpayer should believe everything it says.”

“But then why are you sending it to taxpayers under audit?” I want to reply.  “Is it too much to ask that the information that you are sending out be correct?”

Another area in which the Department’s communications fall short is in its description of “Payment Under Protest.”  The century-old law governing such payments says that if a taxpayer and the Department have a dispute over whether a particular tax is due, the taxpayer can pay the tax with a note saying that the tax is paid under protest and then sue within 30 days.  The TBOR says, “In lieu of filing an appeal, or [if no appeal was filed on time,] the taxpayer may pay the disputed tax assessment under written protest and seek to recover the taxes by filing an action….” 

What this description does not address is whether an “assessment” is required.  If, for example, cruise ship companies have a problem with paying the newly enacted TAT on cabin accommodations, can they pay tax and file suit, or do they have to wait for the Department to audit and assess, which could be years later?  A 2000 Hawaii Supreme Court case, Grace Business Development Corp. v. Kamikawa, says that a “formal decision” of the Department is needed; without that, there is no “dispute” with the Department, and the lawsuit must be dismissed.  Which means that the State keeps the money paid under protest, even if the taxpayer’s position was legally right.  In the 2024 Hawaii Supreme Court case Hawaiian Airlines, Inc. v. Department of Taxation, the Department argued that the TBOR and TIR 2002-01 were accurate but the court said, “We agree that the Department’s communications were confusing.”

To the Department:  It’s been 23 years since TIR 2002-01.  Please update the information if you are going to send it to taxpayers being audited.  And to taxpayers:  Please don’t believe everything the Department sends you…unless you are willing to take the risk that you are going to get a nasty surprise when it is too late to fix the situation.