Hawaii Tax Changes - October 2024

Week Of 10.14.2024

Hawaii Issues Guidance on Payments Made by Film Production Companies to Payroll Service Providers

The Hawaii Department of Taxation issued a tax information release providing guidance on the imposition and calculation of the general excise tax (GET) to payroll service providers hired by film production companies operating in Hawaii, application of the GET exemption for professional employer organizations (PEOs), and whether payments made by a production company to a payroll service provider can be claimed as qualified production costs for the motion picture, digital media, and film production income tax credit. (Hawaii Tax Information Release No. 2024-04, 10/10/2024.)

Imposition and calculation. The payroll service company is subject to GET on all amounts received from a film production company, including wages, salaries, and employment benefits, unless there is a statutory exemption.

PEO exemption. A PEO is any person that is a party to a professional employer agreement with a client company and whose covered employees perform services on a long-term, rather than temporary or project-specific basis. The term does not include temporary help services, staff leasing, or other similar arrangements. A film production payroll service provider may qualify for the PEO exemption, if the provider: meets the statutory definition of PEO; is registered with the Department of Labor and Industrial Relations as a PEO; and has a written contract with the client company (i.e., production company). A valid exemption allows a PEO to exempt receipts that it disburses to covered employees of a client company. PEO receipts from a client company that are not disbursed to covered employees of the client company are not exempt. Businesses that are not registered with the Department of Labor and Industrial Relations cannot claim the PEO exemption for amounts disbursed to client companies' employees.

Passing on GET. The "passing on" of GET in a transaction between payroll service providers and production company is not legally required, but is a contractual matter. Businesses, including payroll service providers, that are ineligible for the PEO exemption may "pass on" GET up to the amount assessed on all receipts from a production company, including taxable amounts intended for disbursement to the third parties. PEOs claiming the exemption may only "pass on" GET assessed on taxable income.

Film credit claims. Film credit claims may consider payments to either payroll service companies of PEOs as "qualified production costs" if the payments are subject to GET at the highest tax rate, or Hawaii state income tax if the costs are not subject to GET. Payments to payroll service companies or PEOs that are entirely subject to GET are qualified production costs for film credit purposes. Amounts disbursed to employees through a payroll service company or a PEO claiming a GET exemption may be claimed as qualified production costs if payments to the employees are subject to Hawaii income tax.

Week Of 10.07.2024

Hawaii Property Tax—Hawaii County adopts agricultural and tax classification ordinances.

Hawaii County has adopted ordinances 24-72 (Bill No. 188) and 24-73 (Bill No. 189), effective 10/02/2024, changing the   sunset date of the nondedicated agricultural use program from January 1, 2028, to January 1, 2029. The time for property owners to apply for an alternative program is extended from September 1, 2025, to September 1, 2026. The definition of "community food sustainability use" is clarified to include pasture for food production, and "diversified agriculture" to mean a blend of agricultural activities while transitioning from one category to the other during the term of the dedication or on a continuous and regular basis. Properties under the community food sustainability use assessment and short-term agricultural use dedication, which are also used as an owner's primary residence, are added to the homeowner tax classification.

Hawaii Property Tax—Hawaii County adopts housing ordinance.

Hawaii County has adopted ordinance 24-70 (Bill No. 123), effective 09/30/2024, to repeal the definition of "Ohana dwelling" and add a new definition of "accessory dwelling unit," which means a structure or portion thereof designed and used for single-family residential purposes as permitted, and which can be detached from or attached to an existing residence, to be used for single family occupancy and containing one kitchen. Accessory dwelling units are eligible for a one-time property tax credit, of up to $1,000, for installation of a solar water heater.

Hawaii Property Tax—Hawaii County adopts ordinance creating long-term rental property classification.

Hawaii County has adopted ordinance 24-69 (Bill No. 104), effective 01/01/2026, providing a voluntary tax incentive to increase available housing in the rental market by creating a new long-term rental real property tax classification. "Long-term rental" means property occupied under a signed lease for six consecutive months or more to the same tenant(s). No long-term rental classification will be granted unless the claimant annually files with the Department of Finance, and each claim must include a signed lease or excise tax return, or both. Claims will be accepted from January 1 through December 31 for the next applicable tax year. Failure of the property owner to maintain a lease for at least six consecutive months to the same tenant will breach the classification, as will any use of the property as a vacation rental. Upon breach of the classification, the tax assessment will be canceled retroactive to the date of classification, but not for more than the current year. All difference in taxes paid, and those that would have been due in the higher classification, will be payable with a 10% penalty.

Hawaii Property Tax—Kauai County in Hawaii amends ordinance on real property classification.

Kauai County has enacted Ordinance No. 1162 (Bill No. 2925), effective July 31, 2024 (released October 2024), which provides that the "owner-occupied class" for real property tax rate classifications includes residential leases of state-owned property. The beneficial tax rate and assessment cap currently applied to property used for long-term affordable housing will be applicable to residential leases of state-owned property. Residential leases of state-owned property means leases or revocable permits issued by the State of Hawaii for a residential dwelling occupied as a principal home.

Hawaii Sales & Use Taxes—Hawaii Supreme Court allows airline to proceed with excise tax refund request.

The Hawaii Supreme Court remanded a case to tax court after determining that a notice of proposed assessment constitutes a "formal administrative decision," permitting the taxpayer's general excise tax (GET) refund request to proceed. The airline taxpayer was contractually obligated to indemnify its manufacturer on the sale of maintenance parts, which the manufacturer believed to be tax exempt under an aircraft maintenance exemption. The manufacturer's auditor disagreed via email, and issued a notice of proposed assessment, which the taxpayer paid under protest. The intermediate court affirmed the tax court's dismissal of the case holding that the email between the Department and the manufacturer did not constitute "adverse ruling" or a "final agency decision" to create an actual dispute as required for a payment under protest, while not considering the assessment. The court held that a notice of proposed assessment is a formal administrative decision that constitutes a tax assessment; therefore, the taxpayer's refund request may proceed. (Hawaiian Airlines, Inc. v. Dept. of Taxation, Hawaii S. Ct., Dkt. No. SCWC-22-0000349, 10/07/2024.)

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