SUBJECT: INCOME, GENERAL EXCISE, ADMINISTRATION, Withholding of Tax by Persons Claiming Film Credit, Elimination of Reasonable Basis Defense for Overclaiming Credits
BILL NUMBER: HB 1982 HD 2
INTRODUCED BY: House Committee on Finance
EXECUTIVE SUMMARY: Requires every person making payment to a loan-out company and claiming the film tax credit to withhold payments to loan-out companies. Prohibits the defense of erroneous claim for a refund or credit if the claim for refund was generated by a tax credit and sets the penalty for such case to ten per cent. Requires the report by DBEDT to include the dollar amount claimed, name of the company, and name of the qualified production of the taxpayer. Requires qualified taxpayers to withhold a certain amount and remit that amount. Amends the use of the tax administration special fund. Authorizes the department of taxation to establish four full-time equivalent tax auditor positions. We do not recommend passage of the penalty enhancements, which would apply to other credits as well. We also have suggested technical amendments.
SYNOPSIS: Adds a new section to chapter 235, HRS, requiring every person claiming a credit under section 235-17, HRS, to withhold 10% of all payments to loan-out companies for services performed in Hawaii and to remit the withholding to the Department of Taxation within 30 days from the date of payment.
Amends section 231-36.8, HRS, to impose a penalty at a reduced rate of 10% for erroneous claims for refund or credit that are generated by a tax credit, and to provide that the penalty is applied whether or not the taxpayer had a reasonable basis in law for making the claim.
Amends section 235-1, HRS, by adding a new definition of “loan-out company” as a wholly-owned entity formed on behalf of a person that serves as a separate entity that constitutes the person’s means of entering a contact with a third party for the purpose of providing services to the third party.
Amends section 235-17, HRS, to add a provision requiring each qualified production to withhold an amount equal to 4.5% of qualified production costs; provided that the amount withheld shall be remitted to the department of taxation to the credit of the general excise tax account of the loan-out company to whom the qualified production costs were paid or will be paid. The amount withheld shall be remitted no later than thirty calendar days after the qualified production costs are paid or incurred. Taxpayers who fail to comply with this subsection shall be subject to the applicable interest and penalties pursuant to chapter 231 and section 235-104.
Makes additional technical and conforming amendments.
EFFECTIVE DATE: July 1, 2050
Withholding Income Tax for Payments to Loan-Out Companies: Apparently, this provision is meant to collect tax at the source because employees of loan-out companies have not been following the requirement to file an income tax return.
Elimination of Reasonable Basis Defense to Penalty for Erroneous Credit Claim: Because the tax laws are complex and often subject to interpretation, we do not believe a “strict liability” penalty of this type is appropriate. Such a penalty would penalize “innocent mistakes where the excessive amount is the result of inadvertence, mathematical error, or where otherwise defined as innocent.” It also should be kept in mind that this penalty enhancement applies to claims for all tax credits, not just the motion picture, digital media, and film production income tax credit pursuant to section 235-17, HRS, This could be particularly harsh as applied to lower-income families who attempted to but made mistakes in claiming welfare-type credits like the Earned Income Tax Credit (section 235-55.75, HRS), the Food/Excise Tax Credit (section 235-55.85, HRS), the credit for household and dependent care services (section 235-55.6, HRS), or the credit for low-income household renters (section 235-55.7, HRS).
General Excise Tax Withholding: We do not recommend that withholding of general excise tax be contained in an income tax section; it would be difficult or impossible for practitioners to find. Instead, we recommend amendment of section 237-44, HRS, which now requires withholding of general excise tax in the “entertainment business,” and which contains the necessary trust fund and derivative liability language. For example:
SECTION __. Section 237-44, Hawaii Revised Statutes, \is amended to read as follows:
“§237-44 Entertainment business; loan-out companies. (a) As used in this section:
“Admission” means the amount paid for admission to any place, including admission by season ticket or subscription, and also includes the amount paid for seats and tables, reserved or otherwise, and other similar accommodations.
“Cabaret” means any roof garden, cabaret, or other similar place furnishing a public performance, by or for any patron or guest who is entitled to be present during any portion of the performance, including any room in any hotel, restaurant, hall, or other public place where music and dancing privileges or any other entertainment are afforded the patrons in connection with the serving or selling of food, refreshment, or merchandise.
“Loan-out company” means the same as in section 235-1.
“Transient taxpayer” refers to any person subject to the tax imposed by this chapter who has no permanent place of business in the State.
(b) Every person receiving admissions for any circus, carnival, or any other place whatsoever at which a transient taxpayer is engaged in business (whether or not further admissions are charged inside the place, such further admissions, if any, being also subject to this section), shall set aside from the admissions and hold in trust for the State five per cent of the admissions, or such lesser amount as the department of taxation shall approve as sufficient, to guarantee payment of the tax levied by this chapter on the transient taxpayer. The amount so required to be set aside from the admissions shall be deposited with the department promptly upon collection thereof, from time to time, for deposit by it in a special trust fund in the treasury of the State, there to remain until refunded upon voucher of the department, or until applied to the payment of the taxes guaranteed thereby with the consent of the person making the deposit, or until deposited in court pursuant to chapter 655 or the rules of court. The department may bring an action to obtain an adjudication of its right to apply the guarantee fund in payment of taxes and may deposit the fund in court to await the results of the adjudication, or may be sued by an interested person seeking to obtain the adjudication and may be ordered to make such deposit in court, notwithstanding that the department asserts a claim against the fund.
(c) If any person fails to deposit promptly the guarantee fund required by this section, the department may distrain upon the admissions or any bank account or other asset in which the same can be found, for the purpose of obtaining and depositing in the treasury the required guarantee fund.
(d) Whenever a transient taxpayer is engaged in business at any place for which admissions are charged, or at any cabaret whether or not admissions are charged, or whenever a loan-out company is engaged for services performed or to be performed within the State, the person engaging the transient taxpayer or loan-out company shall collect from the transient taxpayer, by withholding or otherwise, the tax levied by this chapter on the transient taxpayer, shall hold the tax in trust for the State, and shall return and pay over the tax to the proper collecting officer of the State in the manner and at the time required by this chapter, for the account of the transient taxpayer. If the person fails to do so, the person shall be liable to pay to the State the amount of the tax levied by this chapter on the transient taxpayer, together with penalties and interest as provided by law. The amount of the liability may be collected from the guarantee fund, if any, or may be assessed against and collected from the person so becoming liable in the same manner as if the tax had been levied upon the person.