United States: Legislative Changes To GET And TAT Taxes That May Affect Your Business

On September 5, 2017, the Hawaii State Legislature enacted S.B. 4, making changes to  both the General Excise Tax ("GET") and the Transient Accommodation Tax ("TAT") laws,  primarily to provide an additional source of funding for Honolulu's beleaguered rail project. These changes may impact  filing practices of certain taxpayers. It is important that taxpayers report income at the correct time and at the correct  rate during the period of transition from the old law to the new law, because returns filed immediately before and after  the new law becomes effective are ripe for audit.

What are the impacts of S.B. 4 on the TAT law?

Beginning on January 1, 2018, the state-wide TAT rate will increase from 9.25% to 10.25% of the rental value of a transient accommodation. During the transition, hotels and vacation rental owners must accurately determine whether they are required to report and pay the TAT at the old 9.25% rate or the new 10.25% rate. The TAT must be reported and the tax paid based on the rate that is applicable when income is "recognized." Thus, correct reporting depends  on whether a taxpayer reports income using the cash method of accounting or the accrual method of accounting.

Most individual taxpayers file their tax returns on a cash basis. Under the cash method of accounting, income is  recognized when it is received, even if the income is only a "deposit" or is later refunded. Under the accrual method, income is recognized when it is earned (such as when a guest makes a non-refundable booking), even if the funds  are not collected from a guest until a later date.

A similar issue arose in 2005, when the City and County of Honolulu first enacted its GET surcharge to pay for the  rail project. The surcharge increased the GET rate for Honolulu taxpayers by 0.5%, and taxpayers were uncertain  about the timing and rate for GET filings surrounding the transition. The Hawaii Department of Taxation issued Announcement No. 2006-17, which provided guidance about GET reporting to cash and accrual method taxpayers. The directives in the 2006 announcement will likely apply analogously to the impending increase in the TAT rate, so  taxpayers can and should look to the 2006 announcement for further guidance.

What are the impacts of S.B. 4 on the GET law?

Although any of the counties could have adopted a surcharge when the GET rates were last amended, the City  and County of Honolulu was the only county to do so. S.B. 4 allows the City and County of Honolulu to extend the  surcharge an additional three years, through December 31, 2030. It also allows counties that do not currently have a GET surcharge another opportunity to establish a new surcharge. The current base rate for the GET is 4.0% across  the state. For business activities in the City and County of Honolulu, the additional surcharge is 0.5%, for a total  GET rate of 4.5%.

The other counties had until January 1, 2018 to enact appropriate legislation. Only Kauai County adopted a GET  surcharge, raising the GET tax rate in that county to 4.5%. Businesses subject to GET in Kauai County will need to ensure correct reporting for the transition period, but businesses operating in the other counties can continue filing  their GET returns as they had been before S.B. 4 became law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.