In the Matter of the Tax Appeal of TRAVELOCITY.COM, L.P., Petitioners and Respondents/Appellees-Cross-Appellants,
DIRECTOR OF TAXATION, STATE OF HAWAI'I, Respondent and Petitioner/Appellant-Cross-Appellee
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APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (T.A. NO. 11-1-0021 AND CONSOLIDATED CASES: 11-1-0022, 11-1-0023, 11-1-0026, 11-1-0027, 11-1-0029, 11-1-0030, 11-1-0031, 11-1-0032, 11-1-0033, 12-1-0287, 12-1-0288, 12-1-0289, 12-1-0292, 12-1-0293, 12-1-0294, 12-1-0295, 12-1-0297, 12-1-0299, and 12-1-0300).
Paul Alston, Tina L. Colman, Pamela W. Bunn, Ronald I. Heller, for Travelocity.com, L.P., et al.
Hugh R. Jones, Girard D. Lau, Kimberly Tsumoto Guidry, Warren Price III, Kenneth T. Okamoto, Robert A. Marks, Gary Cruciani, Steven D. Wolens, for Director of Taxation, State of Hawai'i.
RECKTENWALD, C.J., NAKAYAMA, McKENNA, AND POLLACK, JJ., AND CIRCUIT JUDGE LEE, IN PLACE OF ACOBA, J., RECUSED.
[135 Hawai'i 92] POLLACK, J.
This case considers whether the General Excise Tax (GET) and the Transient Accommodations Tax (TAT) are assessable on the relevant income of commercial entities operating under business models that were not expressly considered by the legislature when the applicable GET and TAT statutes were originally enacted. The Director of Taxation, State of Hawai'i (Director) retroactively assessed ten online travel companies for unpaid GET and TAT for periods beginning between 1999 and 2001 and continuing until 2011, plus applicable penalties.
The online travel companies appealed the assessments to the Tax Appeal Court (tax court), and the assessments were consolidated into the present case. Both the online travel companies and the Director moved for summary judgment. The tax court ruled in favor of the Director with regard to the assessment of the GET (GET Assessments), with penalties and interest, but ruled in favor of the online travel companies with regard to the assessment of the TAT (TAT Assessments).  That disposition was reflected in the tax court's Final Judgment Disposing of All Issues and Claims of All Parties (Final Judgment), [135 Hawai'i 93] from which the online travel companies and the Director seek review.
We affirm the Final Judgment in part and vacate in part in regard to the GET Assessments, affirm in regard to the TAT Assessments, and remand the case to the tax court for further proceedings consistent with this opinion.
In early 2011 and 2012, the Director made multiple retroactive assessments against Expedia, Inc.; Hotels.com, L.P.; Hotwire, Inc.; Travelocity.com LP; Site59.COM, LLC; Orbitz, LLC; Trip Network, Inc.; Internetwork Publishing Corp.; priceline.com, Inc.; and Travelweb LLC (collectively the Online Travel Companies or OTCs, sometimes individually OTC). The OTCs appealed the 2011 and 2012 assessments to the tax court and the appeals were consolidated. All the non-dismissed assessments are consolidated in the present case, and the amounts that would be subject to the GET and TAT Assessments are stipulated.
As noted, the Director and the OTCs both moved for summary judgment, resulting in the Final Judgment. The Final Judgment was filed " pursuant to and consistent with" eight underlying orders. In the Director's appeal, the Director identifies as error the tax court's grant of summary judgment in favor of the OTCs in regard to the TAT Assessments, the denial of summary judgment in favor of the Director on the TAT Assessments, and the denial of the Director's motion for reconsideration.
In their cross-appeal, the OTCs identify the following as error: the tax court's grant of summary judgment in favor of the Director in regard to the GET Assessments, the court's denial of reconsideration of that grant, and the court's affirmance of penalties on the GET Assessments.
This opinion will first provide the factual background common to both appeals. Following the background, the discussion will then address the separate appeals: the cross-appeal by the OTCs in regard to the GET Assessments, followed by the appeal by the Director in regard to the TAT Assessments.
A. The Assessed Transactions
The OTCs are organizations doing business with Hawai'i hotel guests (transients) and Hawai'i hotels. They operate websites where transients can research their destinations, [135 Hawai'i 94] compare travel options, and make reservations with third-party travel suppliers such as airlines, car rental companies, and hotels. The OTCs do not own any hotels.
The OTCs sell room accommodations using a business model that involves two different types of contracts: in the first, the hotel grants the OTC the right to sell occupancy of a hotel room to a transient, and in the second, the right to occupy the hotel room is sold to the transient by the OTC. The Director's GET and TAT Assessments are on transactions made under this business model (Assessed Transactions).
1. The OTC-hotel contracts
In a contract between an OTC and a hotel, the hotel grants the OTC the right to offer room occupancy to the public out of the hotel's inventory. The hotel contractually delegates to the OTC numerous " day-to-day" responsibilities the hotel would otherwise perform itself, including the marketing, pricing, tax collecting, payment processing, legal contracting, accounting, and customer service functions. The OTCs maintain that they do not have the right or the ability to control or take possession of any hotel rooms; they do not buy, resell, or rent rooms or blocks of rooms; and they bear no risk if they fail to arrange room reservations at any hotel.
The OTC-hotel contract establishes the rate the hotel will charge the OTC for a room (net rate). The net rate is typically not a fixed amount, but floats, based on a discount from the hotel's " best available rate" offered to the public.
An OTC independently sets the price the transient is charged for the room based on the net rate under the OTC-hotel contract. That room price is made up of the net rate, plus two other elements set by the OTC: a " mark up" and a " service fee." The mark-up added to the net rate equals the " retail rate" the OTCs charge the transient for the room. In addition to the mark-up, the OTCs charge transients a service fee. The OTCs set the amount of the service fee.
2. The OTC-transient contracts
An OTC enters into a contract with a transient that reserves the transient's right to occupy a hotel room for a certain period of time. In the Assessed Transactions, transients obtain the right to occupy those hotel rooms by transacting with the OTCs rather than with the hotels themselves. The OTC-transient contract may also include terms and conditions of the hotel.
The OTC controls significant aspects of the relationship with the transient from the time the transient logs on to the OTC's website until the transient checks in at the hotel. For instance, it is typical that prior to check-in, the only contact the transient has regarding the hotel reservation is with the OTC. Prior to check-in, the transient is considered to be solely the OTC's customer. Once the transient accepts the OTC's contract terms, the OTC processes the credit card transaction as the merchant of record. The transient pre-pays the OTC in full when the right to occupy a hotel room for a certain period of time is reserved. The transient owes nothing to the hotel at check-in.
The OTC does not disclose the individual amount of the net rate, mark-up, service fee, or tax to the transient. In the invoice to the transient, the OTC combines the taxes and service fees into a single line item called " taxes and fees." Similarly, the OTC never discloses to the hotel the amount of the mark-up, service fee, or total price paid by the transient. Only the OTC knows all the [135 Hawai'i 95] individual amounts comprising the total price paid by the transient, including the net rate, markup, service fee, and taxes.
Upon completing the reservation, the OTC sends an invoice or email confirmation to the transient. The hotel does not confirm the reservation directly with the transient. The OTC has its own cancellation policies the transient must accept when the booking occurs. If the transient changes or cancels a reservation, the OTC handles the change or cancellation. After booking the reservation, the OTC provides continuing customer support to the transient. The OTCs bear the risk of loss from credit card fraud or bad debt.
In the Assessed Transactions, the OTCs collect the room charge and taxes from the transients and control the monies paid by the transients. The hotels contractually delegate to the OTCs the responsibility to collect all amounts, including taxes, from the transients. The OTCs thus collect all amounts from the transient at the time the transient makes the reservation with the OTC.
The hotel invoices the OTC for the hotel stay, typically after the transient has checked out. Pursuant to the hotel's invoice, the OTC pays the hotel the net rate and the tax (TAT and GET) that has been collected from the transient on the net rate. The OTC is not an occupant and does not obtain a right of hotel room occupancy. The transient is the occupant and obtains a right to room occupancy, but the transient is not a party to the payment of the net rate by the OTC to the hotel.
B. Contact between the parties and actions of the parties prior to the 2011 Assessments
The parties dispute the import and extent of prior knowledge and prior contacts of the parties in regard to the OTCs' potential tax liability for the GET and TAT on the Assessed Transactions. The actions and contacts of the parties prior to the 2011 Assessments that can be garnered from the record are included here.
Attorney-client privilege logs in the record indicate some OTCs were in discussions with their counsel regarding " excise tax," " hotel occupancy taxes," and " state tax accrual" from 2001.
The record contains an email dated April 7, 2004, from an ostensible employee of the State of Hawai'i to a person apparently involved in the state government of Florida that indicated that Hawai'i could not " impose our TAT on an internet company's retained portion of payment for a hotel rental." 
In June 2006, the record indicates that members of the Department of Taxation (Department) convened an internal meeting to discuss the issue of taxing OTCs.
In March 2007, employees of the Department met with a representative from one of the OTCs. A member of the Department testified that the conclusion reached at the meeting was " the Department was not going to pursue a case at that time," and that conclusion was " probably communicated" to the OTCs' representative. A declaration by the OTCs' representative confirms that the meeting took place. The representative testified that he was informed that " we were certainly not subject to TAT" but " we may be subject to a GET or use tax." Testimony by former Department Director Kurt Kawafuchi (Director Kawafuchi) does not contradict this assessment of the meeting and suggests that the Department may have invited a request for a private letter ruling that the OTCs did not owe the TAT. The OTCs did not request such a ruling.
In 2008, the Department began investigating the potential assessment of the GET and TAT against the OTCs. In May 2008, the Director sent information requests to the OTCs for transactional data.
[135 Hawai'i 96] In July 2008, a meeting was held involving the Governor's office and representatives from the Department and the OTCs. Another meeting involving representatives of the OTCs and the Department's outside counsel took place in August 2008. On August 21, 2008, the OTCs were apparently informed that the Department's requests for transactional data were on hold pending a request to the OTCs for information regarding tax litigation in other jurisdictions. The OTCs were informed that the Director's review of the litigation materials would take some time and that there was no expectation for the OTCs to provide the transactional data as long as the OTCs were in discussion with the Department.
In 2008, however, the matter was dropped. Director Kawafuchi testified that the matter ultimately was elevated to the Governor's level and the " Governor decided not to pursue a case." The OTCs' representative declared he spoke with Director Kawafuchi in November 2008 and was informed that the TAT inquiry would not go forward. The OTCs' representative also declared that it was communicated to him that " the recommendation that the Department not go forward was unanimous among members of [the Department] leadership team" and that the Governor " had decided that the State would not pursue the [TAT] matter against the OTCs." The representative further declared that the Department would " get back" to him regarding a possible GET audit but that the Department " never contacted" him.
In a letter dated October 9, 2009, the Attorney General of the State of Hawai'i (Attorney General) responded to a request from the Senate President and the Speaker of the House relating to OTCs and the Hawai'i GET and TAT (2009 Attorney General Letter). The letter stated that the Department " determined that it did not wish to pursue and would not support litigation against the OTCs." The reasons provided in the letter for that determination were that the TAT " did not apply to [OTCs] because the OTCs are not operators" and the GET " would probably also not be applicable due to the sourcing of the income outside of Hawaii." " In addition, the [Department] believed it may have had substantial litigation hazards in showing that the majority of OTCs had sufficient presence in Hawaii to establish substantial nexus as a prerequisite to the imposition of state taxes."
Director Kawafuchi, who was copied on the letter, testified that he did not write the letter and could not remember if he reviewed it before it went out. Director Kawafuchi testified that he disagreed with the letter's conclusion that the Department may have difficulty proving that the OTCs had sufficient presence in Hawai'i to establish constitutional nexus; he testified that the OTCs " have nexus in the State of Hawaii."
On October 13, 2009, the Rules Office of the Department prepared a memorandum to file that concluded that the OTCs were not subject to the TAT because they are not operators and the Department was not likely to succeed in assessing the OTCs for the GET because current Hawai'i nexus and sourcing laws are uncertain.
The Director suggests that some of the conclusions generated by the Department between 2007 and 2009 were due to misrepresentations by the OTCs. The voluminous sealed records that provide factual support for the Director's assessment of the Assessed Transactions were not available to the Director when the Department initially considered taxing the OTCs in 2007 through 2009. The implication from the Director is that the Department's current position is the result of the information that was gathered during pretrial discovery relating to this case.
C. Standards of review
This court reviews an award of summary judgment de novo, under the same standards applied by the trial court. Therefore, " summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, [135 Hawai'i 97] and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fujimoto v. Au, 95 Hawai'i 116, 136, 19 P.3d 699, 719 (2001) (alteration omitted) (quoting Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw. 85, 104, 839 P.2d 10, 22 (1992)).
Where the appeal is from the Tax Appeal Court, it is well settled that, in reviewing the findings of fact, " a presumption arises favoring its actions which should not be overturned without good and sufficient reason. The appellant has the burden of showing that the decision of the Tax Appeal Court was 'clearly erroneous.'" Weinberg v. City & County of Honolulu, 82 Haw. 317, 322, 922 P.2d 371, 377 (1996); see Kamikawa v. United Parcel Serv., Inc., 88 Hawai'i 336, 338, 966 P.2d 648, 650 (1998). When the facts are undisputed and the sole question is one of law, the decision of the Tax Appeal Court is reviewed " under the right/wrong standard." Kamikawa, 88 Hawai'i at 338, 966 P.2d at 650 (quoting Weinberg, 82 Hawai'i at 322, 922 P.2d at 377).
III. DISCUSSION OF THE GET ASSESSMENTS
The GET is imposed by Hawai'i Revised Statutes (" HRS" ) Chapter 237; HRS § 237-13 provides as follows:
There is hereby levied and shall be assessed and collected annually privilege taxes against persons on account of their business and other activities in the State measured by the application of rates against values of products, gross proceeds of sales, or gross income, whichever is specified, as follows:
. . .
(6) Tax on service business.
(A) Upon every person engaging or continuing within the State in any service business or calling including professional services not otherwise specifically taxed under this chapter, there is likewise hereby levied and shall be assessed and collected a tax equal to four per cent of the gross income of the business . . . .
HRS § 237-13 (Supp. 1999) (emphases added). A service business " includes all activities engaged in for other persons for a consideration which involve the rendering of a service, including professional services, as distinguished from the sale of tangible property or the production and sale of tangible property." HRS § 237-7 (Supp. 1999) (emphasis added). Gross income includes rental income. HRS § 237-3 (1993). Thus, the GET is imposed on the gross income derived from the sale of services or rental income resulting from all services activities that occur within the state.
B. The tax court's statements regarding the GET
At the summary judgment hearing, the tax court found that the GET applied to gross income resulting from the Assessed Transactions and granted the Director's motion for summary judgment as to the assessment of [135 Hawai'i 98] the tax. The tax court found that the GET is a tax upon the privilege of engaging in business activity in this state. The tax court reasoned that the Director may levy the GET upon " the privilege of engaging in a very lucrative business activity that exists and thrives upon Hawaiian transient accommodations."
The court next considered whether the OTCs' GET liability would be affected by HRS § 237-18(g) (GET Apportioning Provision). The GET Apportioning Provision states:
Where transient accommodations are furnished through arrangements made by a travel agency or tour packager at noncommissioned negotiated contract rates and the gross income is divided between the operator of transient accommodations on the one hand and the travel agency or tour packager on the other hand, the tax imposed by this chapter shall apply to each such person with respect to such person's respective portion of the proceeds, and no more.
HRS § 237-18(g) (1993) (emphasis added). Applicability of the GET Apportioning Provision to the Assessed Transactions would result in the OTCs and the hotels each being responsible for GET assessment upon their respective portion of the proceeds, rather than the liability of the OTCs being based upon the entire proceeds paid by the transient to the OTCs.
The tax court found that the OTCs' revenues from the Assessed Transactions are combined and collected in a single payment that includes the net rate, services charges, mark-up, and taxes, and the court also found that the OTCs only remit to the hotel a portion of the payment after retaining a mark-up and a service fee. The court ruled that " if there is an increase or expansion of the cost so there is a markup or some other cost that is added to a particular product," then the entire amount becomes subject to the GET. Accordingly, the court determined that the entire payment from the transient customer to the OTC is subject to the GET. Thus, the tax court concluded that the Assessed Transactions did not fall within the GET Apportioning Provision.
Consequently, the tax court granted summary judgment in favor of the Director in regard to the GET Assessments and the application of statutory interest. The tax court filed a minute order that explained the court's rationale in affirming the Director's determination that both a " failure to file" and a " failure to pay" penalty applied to the GET Assessments.
As to the failure to file a tax return, the tax court found that the OTCs did not introduce any evidence that Hawai'i law or Department guidance failed to put them on notice that they were required to file GET returns and no evidence that any OTC taxpayer was advised by a tax advisor or attorney that it was not required to file a return.
Second, the court found that the OTCs failed to demonstrate a subjective belief that they did not need to file GET returns and also failed to introduce any evidence into the record that any OTC was aware that the Department agreed that the OTCs were not required to file GET returns. To the contrary, the court noted that an OTC attorney testified that former tax Director Kurt Kawafuchi indicated that the OTCs may have GET liability. As such, the court found that " the [OTCs] are charged with the same knowledge as their [attorney]."
Third, the court found no evidence that the OTCs were aware of the 2009 Attorney General Letter. Accordingly, the court affirmed the Director's assessment of the failure to file penalty.
The tax court next discussed its affirmance of the Director's assessment of the failure to pay penalty. The tax court rejected the OTCs' argument that the Director was personally required to make an affirmative finding [135 Hawai'i 99] of negligence or intentional disregard of the law in order to apply the failure to pay penalty. The tax court found that it was sufficient that the Director delegated the responsibility of making such a finding and that such delegation was evident in the fact that the penalty was assessed.
C. The parties' GET arguments on appeal
The OTCs appeal the tax court's grant of summary judgment in favor of the Director on the issue of the OTCs' liability for the GET, the court's denial of reconsideration of that grant, and the court's affirmance of penalties on the GET Assessments.
1. The OTCs' arguments regarding the GET Assessments
The OTCs argue that the GET only applies to revenue generating activities within the State of Hawai'i and their activities do not occur in Hawai'i; that their services are not used or consumed in Hawai'i; that if the GET applies to the Assessed Transactions, then the GET Apportioning Provision also applies; and that rules of statutory interpretation indicate that any ambiguity in the GET Apportioning Provision must be construed in their favor.
a. The OTCs argue the GET applies only to revenue-generating activities performed " in the State"
The OTCs argue that the Assessed Transactions are not subject to the GET tax because the GET applies only to revenue-generating business activities performed " in the State" and their activities do not occur within Hawai'i. The OTCs contend that the " in the State" limitation within the GET refers to the " physical, geographical location" where " the particular activity" that generates income is performed. The OTCs further contend that " this Court never has held an out-of-state business liable for GET on income generated by activity performed outside of the territorial limits of Hawai'i."
The OTCs cite first to this court's decision in In re Tax Appeal of Grayco Land Escrow, Ltd., 57 Haw. 436, 449, 559 P.2d 264, 266 (1977), for the holding that the GET " is measured . . . by the income realized by the particular activity engaged in by the taxpayer within the state." The OTCs next point to In re Tax Appeal of Baker & Taylor, Inc., 103 Haw. 359, 82 P.3d 804 (2004), in which the OTCs maintain that this court held a " mainland company liable for GET on books it sold and delivered to customers in Hawai'i." Third, the OTCs contend that In re Tax Appeal of Heftel Broadcasting Honolulu, Inc., 57 Haw. 175, 554 P.2d 242 (1976), upheld the assessment of the GET against a mainland company that rented films to a Hawai'i broadcaster because " the presence and rental of CBS' films in Hawai'i constituted 'economic activity' sufficient to meet the 'instate business activity' requirement of the statute." Lastly, the OTCs rely on In re Tax Appeal of Subway Real Estate Corp. v. Director of Taxation, 110 Hawai'i 25, 39, 129 P.3d 528, 542 (2006), in which a mainland company was held liable for the GET on its activities of " 'signing and maintaining the leases and subleases for each Subway shop' in Hawai'i, from which it derived economic benefit."
Particularly, as to service businesses, the OTCs argue that in each case, this court has held that the GET applies only to services the putative taxpayer has performed " in the State." The OTCs contend that in Ramsay Travel, Inc. v. Kondo, 53 Haw. 419, 495 P.2d 1172 (1972), this court upheld the imposition of the GET on travel agencies because their business activity was conducted exclusively within the State of Hawai'i and the agencies were physically in Hawai'i. The OTCs argue that in HC& D Moving & Storage Co. v. Yamane, 48 Haw. 486, 405 P.2d 382 (1965), this court upheld the GET against a Hawai'i taxpayer, noting that the taxpayer's activities were " performed entirely and solely within the State."
[135 Hawai'i 100] In further support of their argument, the OTCs refer to the Department's rules, which impose the GET on business and other activities of " every person engaging or continuing within the State in any service business." (Quoting Hawai'i Administrative Rules (HAR) § 18-237-13-06.05(b)(1)).
The OTCs also cite to Tax Information Releases (TIRs), guidance documents issued by the Department, in support of their argument that " in the State" is a physical and geographic limitation. The OTCs claim that the TIRs make clear that a travel agency performing its services outside Hawai'i is not liable for the GET, even when the arranged travel occurs within Hawai'i. The OTCs assert that their argument is further supported by a 1965 State Attorney General Opinion (1965 AG Opinion).
The OTCs argue that, by " concluding that the GET reaches activities both in the State and outside the State, the Tax Court stripped the 'in the State' limitation of any meaning, improperly rendering it mere surplusage" and unconstitutionally vague. The OTCs further contend that interpreting a vaguely constructed statute in favor of creating liability would violate the principle that statutes imposing taxes must be construed in favor of the taxpayer.
b. The OTCs argue that their services are not " used or consumed" in Hawai'i
As an independent reason that the Assessed Transactions are not subject to the GET, the OTCs assert that the tax court erred in upholding application of the GET on services that are not used or consumed in Hawai'i, citing an exception for services exported out of the state under HRS § 237-29.53(a) and referencing the " Conformity to Constitution, Etc.," an exception established by HRS § 237-22(b). The OTCs assert that their services are not consumed in Hawai'i, but rather, in whatever out-of-state location the transient is located at the time of purchase.
c. The OTCs argue that if the GET applies to the Assessed Transactions, the GET Apportioning Provision also applies
The OTCs maintain that the GET Apportioning Provision was intended to eliminate the effect of " pyramiding" in certain circumstances. The OTCs assert that the GET Apportioning Provision " avoids multiple taxation on the same gross proceeds" when travel agents and tour packagers arrange room reservations on a noncommissioned basis. Thus, the OTCs contend that even if they are liable for the GET, they are liable only for their " respective portion of the proceeds, and no more," because they are travel agents using noncommissioned negotiated contract rates. (Quoting the GET Apportioning Provision). The OTCs claim that the 1965 AG Opinion and the Department's documentation--including TIR 91-8, Announcement No. 2011-27, and published Department instructions for filing a GET return-- confirm that even in-state travel agencies operating under the merchant model are liable for the GET only to their mark-up and no more.
The OTCs assert that although " travel agent" is not defined by the GET statute, they fall " squarely" within the definition of " travel agent" under HRS § 468L-1 as they act as " an intermediary between a person seeking to purchase travel services and any person seeking to sell travel services." Further, the OTCs maintain that they " have held themselves out as" and are " understood by the industry to be" travel agencies. The [135 Hawai'i 101] OTCs also contend that the transactions between the OTCs and the hotels are noncommissioned, and the rates at which hotels allow OTCs to arrange room reservations are negotiated between the hotels and the OTCs. Thus, the OTCs conclude that the Assessed Transactions fall within the GET Apportioning Provision.
The OTCs contest the tax court's two stated reasons for non-applicability of the GET Apportioning Provision. First, the OTCs note that the " GET Statute expressly contains the anti-pyramiding provision, which necessarily means it applies in the general excise tax arena." Second, the fact that the travel agency adds its own margin and service fee to the contractual net rate does not render the GET Apportioning Provision inapplicable. The OTCs maintain that the tax court's ruling is " contrary to the plain language of the Statute and the Department's own guidance and improperly renders the anti-pyramiding provision a nullity."
d. The OTCs argue that any ambiguity in the GET Apportioning Provision must be resolved in their favor
The OTCs contend if the applicability of the GET Apportioning Provision is ambiguous, " where there are competing reasonable constructions, the resulting ambiguity must be strictly construed against the taxing authority and in favor of the asserted taxpayer."
2. The Director's arguments regarding the GET Assessments
In response, the Director argues the following: (1) because the OTCs conduct " business and other activities in the State," they are subject to the GET; (2) there is no legal authority for the OTCs' " consumed or used" test; (3) the OTCs are not subject to the GET Apportioning Provision; and (4) the assessed penalties are correct in all respects.
a. The Director argues that the OTCs do business " in the State" and are thus subject to the GET
The Director characterizes the GET as " a 'privilege tax' that is 'based on the fact that the party chose to engage in business activity within the state' and 'is justified on the ground that companies conducting business enjoy the protections and benefits given by the state.'" The Director contends that the GET statute is especially broad in scope, evincing an intention to tax virtually every economic activity imaginable and virtually all transactions with economic gain or benefit. The Director contends that this court had upheld the application of the GET in analogous circumstances, citing to Grayco, Subway, Heftel Broadcasting, and Baker & Taylor.
b. The Director argues the OTCs must pay GET on their gross income without any deduction
The Director contends the OTCs owe the GET on the total gross income from the Assessed Transactions without any deductions " whatsoever" because the OTCs have " independent GET obligations." (Quoting HRS § 237-3(a)). The Director argues that the GET Apportioning Provision does not apply to the OTCs because the provision requires three elements, " none of which are found in [the Assessed Transactions]."
First, the Director argues that the OTCs " are not functioning as travel agents" because they do not " act as  intermediar[ies]," but rather, act as direct sellers of Hawai'i hotel rooms to transients. The Director contends that under the OTC-hotel contracts, Hawai'i hotels grant the OTCs control over their inventory and the right to offer room occupancy to the public. " The contracts provide that the OTCs, not the hotels, control the relationship with the transients . . . ." Transients " obtain the right to occupy those hotel rooms by transacting with the OTCs rather than with the hotels." " The OTCs collect all amounts, including rent and taxes, from the transients when the transients make the reservation with the OTCs." The Director argues that the fact that the OTCs are registered as travel agents under HRS § 468L-2 and hold themselves out as online travel agencies does not prove that the OTCs function as travel agents in the Assessed Transactions.
[135 Hawai'i 102] Second, the Director argues that in the Assessed Transactions, the gross income is not divided. " Under the OTC-Hotel Contracts, OTCs pay hotels as they do any other creditor. The transient's payment to the OTCs is not 'pooled' or 'divided' with the hotel . . . ." The Director contends that " the OTCs do not divide income with hotels by virtue of paying the hotels for room occupancy later sold to transients." Thus, the Director concludes that " [r]ather than being in a legal relationship such as a partnership or joint venture where revenues are divided," the OTCs' relationship with the hotels is at " arm's length."
Third, the Director contends that the OTCs' income in the Assessed Transaction is not consistent with noncommissioned negotiated contract rates. The Director argues that the legislative history indicates that the GET Apportioning Provision " was added to address the legislature's concern that tour packages presented a unique problem in that it might be 'impossible' for the Director to determine what portion of the total package price is attributable to each travel component for tax purposes." The Director states that noncommissioned negotiated contract rates should only apply to agreements between a hotel and tour packager under which the hotel room price is set at a " fixed dollar amount" or a " sum certain." In contrast, the Director maintains that the OTC-hotel contracts involve room rates that are " 'floating' 'net rate' amounts" ; " the 'net rate' is a formula and the dollar amount fluctuates."
D. The parties' arguments regarding interest and penalties on the GET Assessments
The tax court affirmed the Director's assessment of a 25% " failure to file" penalty and a 25% " failure to pay" penalty, authorized under HRS § § 231-39(b)(1) and 231-39(b)(2)(A), respectively.
1. The OTCs' arguments regarding penalties
The OTCs argue that the failure to file penalty should not be imposed where the taxpayer proves its inaction was " due to reasonable cause and not due to neglect." The OTCs argue Hawai'i case law does not limit reasonable cause to reliance on advice of a competent accountant or attorney. Further, the OTCs cite to federal case law for the proposition that " where the law is unsettled or ambiguous, such that it does not give notice of the requirement to file a return, the circumstances of the case speak for themselves and there is reasonable cause for failure to file as a matter of law." The OTCs represent that because they " voluntarily approached the Department to discuss potential liability," and because the former Director and Attorney General advised them that the Department had concluded the OTCs likely were not liable for GET, they had reasonable cause to not file GET returns.
In regard to the failure to pay penalty, the OTCs argue that the failure to pay penalty requires an affirmative determination by the Director that the failure to pay was due to negligence or intentional disregard of rules. The OTCs contend that there is no evidence that the Director made such a determination. With no support in ...